What's Changed Since 1960: Part 2

Quick Refresher: In previous posts we saw anecdotal evidence that in the late 1950s and early 1960s a skilled worker could support a family of five, providing a reasonable working class standard of living. It has been suggested that perhaps my father’s work as a machinist was not representative for the time. I can only respond with more anecdotal evidence.

My sister’s best friend was also my girlfriend during part of that time; many years later we married. She is one of three children and her father was a mechanic at a new car dealership. He had a penchant for Cadillacs and the family always had one. My future mother-in-law, like my mother, worked raising a family. The family’s standard of living was much like that of my family.

One of my best friends was my sister’s boyfriend for a time. He had three brothers and his mother kept busy caring for the clan. His father had a small family business doing repair work and maintenance on mobile homes. Again, his income was enough to provide a standard of living similar to ours. I have fond memories involving a mix of these families spending long weekends in rented cabins on one of many lakes in the area. I don’t think any of us felt “deprived”.

I’m open to evidence, hard or anecdotal, showing that these were exceptions and that a person with the willingness and an ability to learn a trade couldn’t provide a similar standard of living for their family during that period. Absent such evidence we’ll move forward to identify what has changed such that a family of five in the same situation (one skilled worker, working one job) is hard pressed to get by, let alone own a home, buy a new car or go on extended family vacations.

Moving Right Along: The last post zeroed in on the disparity between growth in worker productivity from 1960 to 2010 (as indicated by Gross Domestic Product) and the rate at which worker's wages have increased over the same period. To allow for the effect of inflation values are stated in constant (inflation adjusted) dollars representing purchasing power in 2010.

Let’s start with per employee productivity growth. As we saw in the previous post, this Bureau of Labor Statistics report shows that since 1960 productivity per worker has more than doubled from $45,970 to $103,229. This raised suspicion that worker compensation for what used to be “the middle class” has failed to keep pace with productivity growth.

To confirm that suspicion take a look at the minimum wage. In 1960 it was $1 per hour, which had buying power equivalent to $7.35 today. With the current minimum wage at $7.25, unskilled entry level workers are being paid slightly less than they were fifty years ago despite a doubling of overall worker productivity.

What about people like my father, my future father-in-law and my friend’s father? As we’ve seen my father earned what would be the equivalent of nearly $78,000 per year today. According to Salary.com, a master machinist (Machinist III) might expect to earn about $52,000 in the Tulsa area today. The picture is even worse for an auto mechanic. I don’t know what my future wife’s father earned back then, but today he would be trying to raise a family of five on less than $45,000 per year as a master auto mechanic.

For one more example, take a look at starting hourly pay for college graduates over the past thirty years as seen in the chart on the left. The inflation adjusted values show only a marginal increase overall and a sharp decrease over the past ten years.

The facts so far show that productivity has more than doubled in constant dollars since 1960. Yet minimum wage workers, blue collar workers and college grads are making less, in some cases significantly less than their counterparts a few decades ago. Where are the dollars that represent that increased productivity going?

Following the Money: If workers (the producers) have not seen the benefit of productivity gains, who has? In a 2008 study Carola Frydman offers this assessment using General Electric as a proxy for successful large corporations.

“First, the total real level of pay for GE’s top three managers increased at a slow rate of about two percent per year from the 1940s to the 1960s. ... From the 1970s to the present, the compensation of the three highest-paid officers at GE has grown at the significantly higher annual rate of eight percent.”

In other words while worker pay has been stagnant or has declined over the past forty years, top executives have seen their pay outstrip inflation by a huge margin. The table below, from page 69 of an earlier study by Frydman and Saks, confirms this trend.

Key values in this table are 1960 - 1969 50th percentile and 2000 - 2005 50th percentile. Adjusted to reflect 2010 buying power the expanded values are $940,000 for the decade of the 1960s and $4,660,000 for the early 2000 period. Simply put, while American productivity doubled median executive compensation increased more than four and a half times. The increase is less pronounced at the bottom and jumps to over TEN TIMES for companies where executives earn the most.  This while worker pay in constant dollars declined, often significantly.

To put this phenomena in terms of real life examples, let’s look at Johnson and Johnson and Ford Motors. Both companies are in more or less the same business now as they were then. In constant 2010 dollars the CEO of those companies were paid $3.55 million and $2.32 million respectively in 1970. Their modern counterparts earned $28.72 million and 26.52 million respectively in 2010. This raises some questions.

• Are modern corporate executives creating more U.S. jobs than executives did forty or fifty years ago?
• Do modern Executives at "to big to fail" companies routinely bring ten times more value to their organization than their counterparts did in the past?
• Are they worth hundreds of times as much as the average worker compared to multiples of 20 or 30 that prevailed in the past?
• Is the process of setting executive compensation rigged in favor of the executives?
• How do very profitable companies in Japan, Germany and other modern economies succeed while paying their executives a fraction of U.S. rates?

Given the obvious answers is it any wonder that workers, students and concerned citizens are taking to the streets in protest? Reasons to protest multiply as we look into how our government has been complicit in and supportive of this redistribution of wealth from working class Americans to a privileged few.

Had corporate America and our own government been content with the distribution of GDP as it was in 1960, the minimum wage today would be around $15 per hour ($31,350 per year). A skilled worker with a several years experience would earn, and pay taxes on, an annual income approaching $140,000. Half of all workers would be earning more than $70,000 per year Top executives at “too big to fail” corporations would be scraping by on a mere $5 or $6 million per year while the average S&P 500 CEO would have to make do with $1 or $2 million per year.

Such a redistribution of compensation would be an incredible boost to the economy. Instead of dollars piling up in offshore investment accounts or being spent to buy legislators and legislation, those dollars would be buying goods and services resulting in job creation based on increased demand.

Not the Whole Answer: It’s not fair to say that the current compensation gap is the only explanation as to why it takes multiple jobs to maintain a working class standard of living in today’s economy. Another factor is that the bar has been raised. There are few if any 1,100 square foot starter homes being built in America today. Today’s families eat out much more often, spend a lot more on interest payments and have been convinced that they must have a lot of things that would have been considered “luxuries” fifty years ago. In other words $70,000 dollars today doesn’t go as far as the 1960 equivalent $9,530 because the target standard of living is now higher. Of course IF the effect of doubling the GDP were reflected in worker’s paychecks, they would easily meet and exceed the present standard.

Finally, to confirm that people much brighter than I have arrived at pretty much the same conclusion this quote is from an article by investigative reporter and activist George Monbiot that appeared in The Guardian on November 7th, 2011.

“Between 1947 and 1979, productivity in the US rose by 119%, while the income of the bottom fifth of the population rose by 122%. But from 1979 to 2009, productivity rose by 80%, while the income of the bottom fifth fell by 4%. In roughly the same period, the income of the top 1% rose by 270%.”

More on Those Protesters: Some fear that recent protests are a money grab by drifters looking to get something for nothing. They’ve heard on media outlets owned by corporations engaged in government corruption that the plan is to assess huge taxes on the rich and pass that money out in the form of welfare. Such a plan makes no sense because it wouldn’t do anything to fix the underlying problem. The problem being that our government no longer functions to carry out the will of its citizens. It has been corrupted by executives not satisfied to live like their counterparts did fifty years ago (high on the hog we used to call it). The protests are about changing that.

Make no mistake, there are drifters looking to get something for nothing; there are self proclaimed anarchists; there are some radical libertarians, tea party conservatives, people with something to sell and people from the major political parties thinking maybe they can coral supporters. All of these fringe elements combined make up just a small fraction of the millions who have taken time to inform themselves and who have decided to support the call for nonviolent change. It is a call to eliminate the corrupting influence of money and to require that government serve its citizens fairly, efficiently and transparently.

Organizers understand that the first step is to get the attention of those at the heart of the problem, the corrupted and those doing the corrupting. The classic way to get such attention is by disrupting the system.  This has been seen in the early stages of revolutionary change such as that brought about by the Suffrage, Civil Rights and Peace movements. That’s what is going on right now and will probably be going on for a while.

There are lots of ways to participate. The recent “Bank Transfer Day” is just one example. Refusing to contribute to any political campaign is another. Why would you, knowing that your contribution is nothing compared to the tens of thousands routinely given by corporate special interests. Be creative, be informed and be involved. Now you know why I’m doing this and I hope you’ll join me.

--- Que le vaya bien...Steve