America sits today at a dangerous divide â one where polarization is rife, constructive debate is absent, and labor disputes, unionization, and strikes have become not news but the norm. While The Fed debates further rate hikes, the UAW strikes remain serious and consequential. The longest SAG-AFTRA strike in the unionâs history just settled, and Hollywoodâs writers are returning to work after a 5-month contract battle. Clearly, workers are no longer satisfied with the status quo.
And there is evidence they shouldnât be. Recently released statistics from the U.S. Census Bureau show that median income in the U.S. (roughly 74K annually) is 4.7% lower than before the pandemic when adjusted for inflation. A new McKinsey study shows that nearly half of U.S. workers say they are actively underproductive at work, pointing to inadequate compensation as the number one reason. That U.S. Census report also shows that child poverty nearly doubled in the past year, leaving five million American children living in poverty. While analysts put much of the blame on the rollback of a child tax care credit extended during the pandemic, the fact remains that this number nearly doubled from a year ago and is the highest it has been since 2009. Sit with that a minute. Today, our country, widely known as the most prosperous in the world, is home to rampant and rising poverty.
The major culprit? Low wages and the Fedâs ever-present concern that pay increases should not outpace inflation.
I begin with the cautionary tale of a highly skilled machinist I spoke to twice for a monthly column I write. In 2019 and again in 2021, I listened to his struggle to keep his family afloat despite his specialized training in a profession both his father and grandfather held. He told me in no uncertain terms that the American system of valuing its workers was gone. When I spoke to him a few days ago, he told me workers want âan environment in which they are treated as important partners in an enterprise and not just disposable employees.â
The perception is that machines can do his work faster and cheaper. Yet most often, the machines are not programmed to do super precision work, which is this manâs specific training and unique skill. But heâs not respected or properly compensated for his years of practice, capability, and results. It is unfair and unjust for him and his family. Is this the best business and our society can do?
Letâs look at where this started. Over 40 years (from 1982 to 2020), America became the most economically unequal and immobile society in the developed world. For 40 years, wages have been at or below inflation. These flat wages impacted some 60% to 70% of America. The top 10% of American households own more than 70% of America’s assets. In 2019, pre-COVID, nearly 60% of Americans could not put food on the table or pay the rent most months. In 2022, more than 10% of Americans were forced to borrow from friends or family to meet basic needs.
That’s what happened to America when wages were at or often below inflation. This is the outcome of a tragic choice of shareholder primacy capitalism, which perverted the multi-stakeholder capitalism that built America as the dominant economic nation in the world from 1945 to 1982. In that period, America’s middle class was the largest economic force in the world. During this period, America’s bottom 90% grew at three times the rate of America’s top 1%. Tragically, America’s top 1% grew more than 170% for the last forty years, while the bottom 90% was basically flat.
Further, poor education is a significant factor caused by the low wage problem. Our public educational system is nothing short of disastrous, except in rich neighborhoods. Most Americans, 60 to 70%, live in relatively poor neighborhoods where low real estate taxes pay for public education. As a result, these neighborhoods have almost no available preschools, very few affordable kindergartens. By developed world standards, those kids are ranked in the bottom half of developed nations in terms of secondary school competence. At the same time, the top quartile of America’s kids has access to excellent preschool from the age of 3 and superior quality education compared to any nation in the world. Simply put, most of our nationâs children lack the opportunity to be the best they can be. Poor education discriminates against the children of the low-wage earner.
Our social instability, our undereducated, economically deprived group of citizens, are the victims of low-wage policies dictated by an exploitative, destructive version of capitalism.
The misunderstood wage dilemma is clear. Most wage levels can and should be seen as an investment, not just a cost. Yes, it is a real leverageable investment. Higher company wages should result in a quid pro quo contract. Only business employees drive a businessâs productivity and innovation not those in the C-Suite. Employees who are paid fairly and treated with dignity and respect drive both productivity increases and innovation. In other words, workers must create incremental value. A very measurable reality. In return, they should share in the incremental value produced. That’s the secret sauce of multiple-stakeholder capitalism, which optimizes wages and creates higher profits and greater long-term value for shareholders. Productivity increases and innovation are a must for businesses. Not living off inflation-driven price increases.
Wages can and must grow faster than inflation. That’s the only way America’s democracy can be sustained and the dreaded âsystemic riskâ reduced or eliminated. The Fed and Treasury must look squarely at the hidden cost of low wages. That kind of medicine, if the Fed continues to dish it out, will put society into a truly critical condition of societal instability and potential violence.
Multi-stakeholder capitalism and properly constructed wage increases need all our support. Both need to gain the Fedâs support. And all businesses must sign up. More good news. Most of America’s most successful companies quietly practice this version of capitalism today. This is not socialism. It’s the kind of business practice that guarantees that socialism will never, ever land.
America needs this superior version of capitalism and the solutions that are at hand. The Fed and the Treasury must heed the wake-up call and champion an economy where wages outpace inflation. Thatâs the fix America needs with ever greater urgency.