Dow Jones All Time High, But Wages Are Lower Than Ever


The financial markets keep lifting themselves higher and higher. The Dow Jones Industrial Average on Wednesday closed at 14,296.24, shattering the previous high water mark of 14,164 back in October of 2007. This is a stunning reversal from the lows seen during March of 2009; when the market was half as big due to losses from the financial crisis. Yet when walking away from the world of finance to the everyday economy troubling signs emerge. Productivity, a key economic indicator, fell along with wages. Productivity had an annual 1.9% drop, while wages fell 0.6% for the year.

Although Wall Street may seem like it is doing well, most Americans are far more pessimistic about the state of the economy. As recently as last February, a survey of Americans paints a picture of a morose populace with regards to any idea of recovery. 53% of Americans believe that the economy will either take 6 to 10 years or will not fully recover from the Great Recession. 60% go on to say that the recession fundamentally changed "normal economics conditions." Just how far apart is the situation on Main Street from that of Wall Street?

One of the most focused upon measure is the gap between wages and productivity. The Economic Policy Institute provided an overall graph of the data and the results are eye opening. Around 1978, productivity essentially decoupled itself from wage increases, a complete reversal of the trend seen since the end of World War II. Even during the "new economy" boom of the 1990s and early 2000s this trend does not reverse itself, with both wages and total compensation lagging far behind productivity growth. The trend was not limited to a specific sector of the economy, hitting college and high school educated workers along with private and public sector employees. 

  Another source of woe for ordinary Americans is the types of jobs they are taking. A report by the National Employment Law projects that while mid-wage jobs were 60% of recession losses, they have only made up 22% of the recovery's jobs. Meanwhile, the overwhelming majority of new jobs have been low-wage jobs, taking up 58% of the recovery's new jobs. Since the beginning of the 21st century employment in low-wage has actually increased by 8.7% while the mid-wage jobs has fallen by 7.3%, meaning that the good jobs deficit has increased since the last century. Wages have hit their lowest share of GDP with 43.5%, a new record.

Meanwhile, Wall Street has earned its highest profits in years. The U.S. banking industry recorded its highest earnings since the 2008 Financial Crisis in 2012 with $141.3 billion. Corporate profits have reached their highest share of the Gross Domestic Product since 1950 at 14.2%. A comparison of wages as a percentage of GDP with after tax corporate profits provides an illuminating look at the decoupling between wages and profits.

 (Federal Reserve Bank of St. Louis)

Many have argued that a rising economic tide will lift all boats. But when American workers see examples of corporations such as Caterpillar, who made record profits in 2012, demanding that wages be frozen for six years, it only adds to the disenchantment that the economy has fundamentally changed for the worse regarding workers. Many economists also agree. Erik Brynjolfsson, chair of the MIT Sloan Management Review (A Business Management Journal), has argued, "there is no economic law that says technological progress has to benefit everybody or even most people. Even as overall wealth increases, there can be, and usually will be, winners and losers. And the losers are not necessarily some small segment of the labor force like buggy whip manufacturers. In principle, they can be a majority or even 90% or more of the population."

So what does this mean for the difference between Wall Street and Main Street? It seems as though a new economic paradigm has arisen, where the previously sacrosanct axiom that wages and corporate profits would help each other up has fallen. The response from a political economy perspective will be wide a varied. Conservative economics will insist that we must cut taxes, regulation, and government programs to let lose the full forces of the market. Liberal economics will insist that this will lead to financial crises and volatile shocks and swings and those institutions should play a role of guiding the hand of the market from overcorrection. But a response will have to occur, as this trend does not show any signs of going away.