Plain English with Derek Thompson - "We’re Seeing a Fundamental Reorganization of Work in America"

Episode Date: February 23, 2024

Today’s episode is about arguably the most important economic statistic out there: real (or inflation-adjusted) wage growth. For much of the last few years, many people's real wages have declined. But for the last few quarters, real wages have been growing. In fact, they've grown so much for the poorest workers that several key measures of inequality are falling, and the Black-white wage gap is shrinking. But many Americans still don't seem to buy the idea that things are getting better. Today's guest is Dr. Arindrajit Dube, a professor of economics at University of Massachusetts Amherst—one of the world’s top researchers on minimum wage policies and pay. He says things are happening in this economy that we haven't seen since the 1950s or 1960s. "We're seeing a fundamental reorganization of work in America," Dube said. If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guest: Dr. Arindrajit Dube Producer: Devon Baroldi Learn more about your ad choices. Visit podcastchoices.com/adchoices

Did Don Draper really buy the world of Coke? Did Tony Soprano really die? Or just order more onion rings? The finales of our favorite shows can make us argue, make us cry, and make us crazy. From Spotify and the Ringer, I'm Andy Greenwald, and this is Stick the Landing, a new podcast where we'll be telling the story of modern TV backwards, one fade out at a time. Find Stick the Landing on Wednesdays on the prestige TV feed, on Spotify or wherever you get your podcasts. Today's episode is about arguably the most important economic statistic out there. Real wage growth.

If you've listened to episodes in this show before where we talk about the economy, you know that I think one of the most interesting dynamics in this economy right now is the gap between the hard data and the soft data. Hard data are reports of economic activity. Unemployment rate, GDP, housing starts. Soft data is how people feel about the economy. And it comes from surveys run by organizations like the University of Michigan and the conference board. For much of the last year, the hard data showed that inflation was falling while the economy was growing strongly.

But the soft data showed that consumers didn't buy this story. They felt like everything was a mess. Their finances were a mess. Business outlook was a mess. The national economy was a mess. And for the most part, people have been predominantly upset about inflation. And they have had every right to be upset about inflation. Inflation describes a rate of change in prices.

So when economists are cheering, or news media people like me, are cheering that inflation has fallen from 9% to 3%. Well, that doesn't mean that prices fall. It just means the rate of growth of prices has gone from some crazy high number to a smaller number. But in the last few quarters, something important has changed. Real wages, that is inflation-adjusted wages, have been growing faster. than prices overall. Now, before I'm misunderstood on this point, let me tell you what that does not mean. It does not mean that everyone has to think that everything is suddenly affordable. It doesn't mean people don't suffer sticker shock at the grocery store, leasing a car, buying a house.

There are 170 million working Americans and one billion things they can buy with their money, and there is no statistic in the world that's going to guarantee that everybody thinks that everything is getting better at the exact same time. But in the biggest picture, we have to find some useful way of describing reality, some useful way of describing this economy. But in the big picture, the best way for any of us, an economist, a podcaster, a voter, to know if Americans overall are getting richer is to look at real inflation-adjusted wages. And today, and this is a story, I think that you're not necessarily hearing everywhere. Real wage growth is strong, and it's rising the fastest for the poorest Americans.

Today's guest is Aaron DuBay, a professor of economics at University of Massachusetts Amherst, who is one of the world's top researchers on minimum wage policies and pay. He says things are happening in this labor market, right now in 2024, that we haven't seen since the 1950s or the 1960s. He calls it a fundamental reorganization of work in the low-wage sectors in America for the first time in our adult life. I'm Derek Thompson. This is Plain English.

Professor Aaron DuBay, welcome to the show. Great to be here. So we're going to talk about real wages for this entire interview. And I don't know that I've ever done an entire podcast episode about a single economic statistic. I do think this is a very important economic statistic, but before we get started, I would actually be interested in your perspective here. Here's like a scenario. You are teaching an undergraduate seminar on labor policy and real wages, and it's day one of class, and you don't want to assume

any knowledge, but in 90 seconds, you want to kick things off by explaining why real wages might be one of, if not the most important indicator of economic health and progress. How do you open that seminar? Right? For most people, we don't own a whole lot of stocks or bonds. So income from capital is relatively small compared to income from labor. So the key question becomes, if we want to understand prosperity, especially broad-based prosperity in a society, we got to pay attention to what's happening to wages. Now, wages, on the other hand, by themselves, are not enough because you could have a 10% increase in wage, but if prices are also increasing by 10%, well, your purchasing power hasn't really increased. So the key thing that economists look at to

understand what's happening to people's paychecks is to look at the growth in nominal wages and then subtract from that the growth in prices, inflation. And that is what real wage growth is all about. I want to tell this story in chronological order. The story story of real wage growth since the calamity of the pandemic. And I want to start with the pandemic. So the economy crashes and unemployment skyrockets and the government passes a bunch of stimulus bills. This is a chaotic period for economic data. And you wrote in an essay that understanding exactly what happened to this all-important statistic of real wages during the 2020 and maybe even early 2021 period, sort of the worst part of the pandemic, is actually very hard.

It's very hard to tell a clear and accurate story about real wages during the crisis. Why is that? That's a great question. So to understand what the problem is in terms of measuring wages, let's just review how we actually go about measuring wages to begin with. One of the most common ways of doing that is by looking at a household survey. It's called the current population survey. The government collects data every month. from about 30 to 40,000 households.

And what you can do is you can look to see, let's take all the people who say they're working this month, and let's look at what they say they're earning. And let's take the person in the middle. We'll call it the median wage, okay? And so let's just do that. And let's do that in January of 2020, let's do that in February, 2020, March, and so forth.

Now, here's the thing. Now, if you actually were to do that exercise, you would find that in between February and April of 2020, the median wage rose by something like 12%. Wow. Now, that sounds like an amazingly good thing. Yeah, it makes it sound like 2020 was like the best year for the economy in the last like 150 years. Very surprisingly, apparently all we needed to do to unleash prosperity in America was to unleash the pandemic. So, you know, that sounds weird and kind of scary, but turns out to be actually wrong. So why is it wrong?

Well, here's the thing. Remember what I told you, the median is the person if you kind of rank everyone by their wage and you take the middle person. now what happens to that middle person or who that middle person is when suddenly a whole bunch of people stop working because after all that's exactly what happened unemployment rate over the same months shot up from below 4% to 15%. So suddenly you took 10% of the workforce usually from the lower wage strata and you just kind of got rid of them. And then you took the rest of the people and you took, oh, who's in the middle of that bunch?

And that's your new median. Well, the new median actually just excludes a bunch of low-wage workers that went into figuring out the old median. And that's why suddenly the composition of the workforce really has tilted away from low-wage workers, making it seem like the median wage rose a lot. lot. But that's basically, you know, it's like saying suddenly what happens to the, you know, what happens to the wage if a really rich person like Jeff Bezos walks into a small bar. Right. Well, it's even worse than that, maybe. It's even worse than that because it's, it's really like what if an American dictator outlawed the entire restaurant sector? He said, for whatever reason, I'm very biased against restaurants. I don't want any restaurants to exist in

America. Well, suddenly, no one works in restaurants anymore. Waiters are on average, a low-income service sector group. So now you take all those people out of the economy and the median wage, the median person who's still employed in this sort of Putin-esque economy, is much richer. And so I think it's really important for people to understand as we're beginning to talk about real wages that economists are trying to see how the average person is doing. But sometimes understanding how the average person is doing is really hard when the economy is swinging from One crazy reality, like, for example, the pandemic actually did kind of do that dictator work and shut down the restaurant industry across the country to another reality like the Great Resignation, where certainly the restaurant service sector is like as hot as any sector has been in terms of labor demand and labor churn. So you have this really chaotic period in 2020 where weirdly in the economic data, it looks like median wages are rising and rising, but really in reality, a lot of people are suffering.

Let's flip the calendar to 2021 and 2022. This is the period of the Great Resignation, which is a terrible name. I prefer your term of the Great Reshuffle. This is really a period where a lot of people are quitting jobs and moving to higher paying jobs, especially in the service sector. Inflation is surging. Prices are growing faster than people's pay. And to a certain extent, I think a lot of people in this economy who are frustrated about the economy, as in 2024, are still reacting to the trauma. of the inflation spike of 2021 and 2022.

So tell me what was happening to real wages during this period when inflation was really running rampant. So first of all, in the beginning of 2021 is when we start to really reopen the economy. And what happens is we opened up the economy and we provided support in terms of giving people more higher transfers that helped increase spending. So that all helped reopen the economy relatively fast.

However, the pandemic also did a lot of other things, including creating problems in particular sectors and supply chains. And in generally, having basically labor supply be more constrained for a period of time. all of which did contribute to higher inflation. So it was a very confusing time. If you look at 2021-22, on the one hand, you see very sharp increase in employment growth and this tight labor market allowing workers leverage

to be able to actually quit jobs, and particularly the worst-paying jobs and moving into better-paying ones. So what you see is strong nominal wage growth fueled by a tight labor market, that for those at the bottom, roughly third of the workforce, actually, the nominal wage growth was stronger than even the inflation that was occurring.

On the other hand, for other folks at the middle and top, less so, 2020, of course, was also confusing because we had another price shock that happens from the war in Russia. And so all of that holds down real wages for some folks. But even during that time, what's remarkable is low wage workers were seeing rise in real wages in spite of this inflationary burst that happened in 21 as well as 22. So there's sort of two stages of the economy that we've talked about. There's the pandemic stage of 2020 and early 2021, which is just absolute chaos.

and we're throwing a bunch of stimulus into the system and just hoping that we can normalize. And then there's part two, which is the beginning of the normalization process. But the normalization process doesn't actually feel normal. On the one hand, you have tight labor markets. On the other hand, you have really high inflation that's coming from a bunch of different sources. Some of it might be coming from stimulus. Some of it might be coming from gunked up supply chains. It's a messy, messy economy and nobody is happy about it.

Let's finally turn to, let's say, the last year or so. because this is the period where median wages, typical wages, seem like they are growing faster than the inflation rate. And that's because wages are still rising as the inflation rate is coming down. Paint the picture of what we can say for sure about real wages in the last year. So, 2023 turned out to be a little bit of that Goldilocks economy. So we basically had soft landing. A lot of it actually occur during 2023.

What I mean by that is we saw inflation coming down. We saw real wages or nominal wages continuing to grow, though at a somewhat slower pace, but the key thing is wages were growing faster than prices. And that allowed very strong real wage growth in the middle. How strong? Well, strong enough that by end of 2003, median wages were higher then they would have been if wages had just followed the pre-pandemic trend.

So think of it this way. If basically real wages were growing in 2020, as if the pandemic didn't happen, and fast forward to 2024, well, we would actually expect real wages to be somewhat lower than they were in reality, which is quite remarkable if you think about it, given what we just talked about all the messiness of 2020, 2012, and 22. So that was a really remarkable thing. We had a continuing tight labor market, not the sort of craziness of 2021-22, but nonetheless, very strong tight labor market with strong real wage growth for those in the middle.

So we're talking in generalities. We're talking about real wage growth overall, but there's no such. thing as the American wage. There's 170 million workers. They're all earning their own wage. They're in a thousand different occupations in several dozen different industries. Is there a more refined way that we can talk about whose wages are going up the most? Whose real inflation-adjusted wages are going up the most right now? Yes. So it's helpful to sort of put this in perspective in the broader historic context. So historically, from about 1980 to 2015 or so, we had a situation where wages systematically rose

more for those at the top than those at the middle or the bottom. So we had increased wage inequality. In the last couple years before the pandemic, wage growth was actually more egalitarian. It was a strong labor market in 2019 as well. and we had a relatively broad-based wage growth. Here's the thing. If you look at where wages are today compared to 2019, you'll find that real wages have grown the most for those at the bottom,

followed by those at the middle, and the worst performer are those at the top. And this really flips the script of the last 40 years, where we saw increase in equality. In fact, in our work, we found that about 40% of the growth in inequality measured by comparing the 10th and the 90th percentile worker, for example, 40% of that growth in inequality between 1980 and 2019 was actually reversed during the pandemic period, which is quite remarkable. So that means it almost half of the growth in wage and equality. between the top and bottom, the top 10%, and the bottom 10%,

was erased in just two and a half, three years? In the last three years, we basically erased a little under half of the gap that had emerged between the 10th and the 90th percentile in the wage distribution. This is a very, very unusual situation. And I imagine that's just not happening in terms of wage deciles. It's probably also happening for different ethnic groups because historically for the last 50 years, white Americans have earned significantly

more than black Americans. But if low-income workers are seeing their wages rising right now faster than high-income workers, are we seeing that racial gap closed as well? In fact, we are. Here's the interesting thing. If you look at the black-white wage differential, it fell a lot between 1960 and 1980 during the civil rights era. But after 1980, the gap basically stagnated. And in fact, in the last 20 years, the gap actually grew some. So the gap between black and white workers in 2019 was somewhat higher than it was in 2000, which is not great. Here's the thing. Since then, we have seen a sharp reduction in the gap between black and white workers for the first time since the civil rights era, which is again quite a testament to

what a tight labor market can do in terms of raising wages of those folks who are usually less privileged in the labor market. There is a double mystery here when we think about the fact that low-income workers are seeing fast real wage growth and high-income workers, in some cases, based on your your research are seeing negative real wage growth. And the question is, why is the first thing happening and why is the second thing happening? So looking at it from like an industry by industry level, you know, the service sector industry, people working lower income jobs in education, healthcare, restaurants, retail, is there a sector or industry in particular that we are

seeing real wages outpace the median that might be responsible for these really extraordinary things that you're describing, and almost halving of 50-year inequality and a narrowing of the racial wage gap. Yeah. So the key thing is that the strongest wage growth has been in sectors like hospitality and retail, which are low-weight sectors. What we're seeing is really a fundamental reorganization of work in the low-wage sectors in America. Really, for the first time in my adult life. And this is going to leave a potentially long-term impact in how we structure work, especially service jobs in this country. So the other really important thing to recognize is that a lot of the wage growth is happening from people changing jobs. If I tell you the market's really

tight and workers of leverage, you could see that having two types of impact. One, maybe workers feel less nervous about asking for a raise from their boss. And so they see a higher wage growth at their current jobs. Another could be, there's a lot of opportunities out there. So maybe people are moving to better jobs. So it's an empirical question, which of these channels is more important? And what we find is that it's actually mostly people changing jobs. So we're seeing people leaving the lowest paid jobs and moving to better paid employers. Some of that is within the same industry. So think like going from a low-wage restaurant to a higher-paying restaurant. Other is moving away from the lowest-weight sectors into better-paying sectors. And we've seen

for both of those things actually happen. Let me just jump in here. This is something I know a lot of economists are really excited about right now. There's some early evidence that worker productivity numbers are rising. How does tightness in the labor market for low-income workers help overall productivity numbers? Well, in general, we know that lower-paying employers tend to also be lower productivity employers. So if we see a reallocation of workers from low-productivity, low-weight jobs

to higher productivity, high-paying jobs, you will probably see that show up in productivity statistics, maybe not immediately because churn is always costly, but eventually. And in fact, we may be starting to see some that, which is actually what's something we call a double dividend because you're not just raising pay, you're also actually raising productivity, which is an underlying source of pay, which actually could have a very positive impact on the economy going forward.

I told you had two questions about the great compression that you're describing. One is why the bottom is accelerating, and the other is why the top is falling. So what is your explanation for why some of the richest workers are seeing their real way is flatline or even decline? So I think the answer to that question actually sort of is the same answer as why the wages are rising so fast in the bottom to begin with. So remember, we see that most of the wage growth is happening from workers changing jobs. So if you are not changing jobs, you could be a high wage worker or low wage worker.

you probably did not see very much of real wage gain in 2021-22. And we don't see that kind of job-hopping behavior actually amongst those with a college degree and those especially at the top in 2021 and 22. So that, I think, explains why we did not see positive real wage growth at the top. However, in the last year, we've actually seen strong wage growth, across the labor market, the top, the middle, the bottom. And so I think basically the high inflation period was one where workers just did not see their paychecks rise enough to keep up with cost of living.

However, low-wage workers, many of them were able to switch out of low-paying jobs, and that helped. But at this point, we have a much more manageable, healthy economy with relatively low-inflaying, low inflation rate when wage growth is actually outpacing price growth for pretty much most workers in the economy. The optimistic way to put this is inequality is falling. Inequality is falling between the rich and the poor. It's falling between white and non-white workers. There is a slightly less positive way to put this, which is that the college wage premium is falling. Historically, when I have written about the value of a college education, what goes into

paragraph one is always the college wage premium, the fact that it's okay to spend thousands of dollars in a college education or tens of thousands, hundreds of thousands of dollars on a college education, because there's something called the college wage premium. You are expected to make much more as a worker in the economy if you get that degree. But if what you're describing is true, then it seems almost inevitable that we're seeing the college wage premium come down, which somewhat scrambles at least my paragraph one explanation for why people should just not look at the sticker price and pay whatever to go to college. So maybe talk a little bit about what you're seeing with the college wage premium and whether you find that to be significant. So yes, the college wage premium has fallen over this period.

Now, that's not surprising because, you know, the college wage premium rose a lot after 1980. In fact, economists have been trying to think about why. because really it's a key part of the growth in inequality is the gap between those with a college degree and those without. So it's not clear that we want college wage premium to be high per se. Here's the thing. In general, if you're going to reduce inequality in wages, you're probably going to also reduce the college wage premium, and that seems to be what's happened. The question is, does that lead to reduced enrollment? And if it does, then there may be causes for concern.

More generally, we thought that the reason the college wage premium rose as much as it did was we were failing to increase enrollment. So basically, you had a demand for college grads, but the supply wasn't keeping up. So it's interesting that we've seen the college wage premium now fall a bit. At the same time, there's also been reduced enrollment, though the reduced enrollment has mostly been for two-year colleges and not four-year colleges so far. But going forward, it will be important to see what is happening to college enrollment, because I think ultimately we want to make sure we are increasing and not reducing the share of people who have a college degree.

But it is a tricky thing because some people think that the college is no longer affordable. actually, I think for most people, getting a college degree is certainly a good investment, even if you take on debt because you do still get college wage premium. It may be somewhat lower today than it was five years ago, but it's still substantial. So here's where I think we have to acknowledge that many Americans, if you tell them your wages are rising fast than prices, they're going to say, like hell they are. If we're talking about how real wages are rising fastest at the middle and the bottom, why do so many low-wage people who are, after all, experts in their own income feel so terrible about this economy that you and I have been praising?

We were able to really strive for and achieve the kind of full employment economy that we had been hoping for but hadn't really seen in, really in generations. So that's good. And I think that's really something will be good to keep in mind and pursue going forward. but of course that was only one part of what's happened in the last five years or four years. The other part was we had a pandemic. And we also had a variety of sources of inflationary shocks. And people hate inflation, understandably. And so in people's mind, if you think about what the economy is, it's a mixture of all these things.

What I'm trying to do as an economist is trying to sort of point out, parse out the different components and say that, hey, look, it may be really hard to sort of separate out the wheat from the chaff here, because we have a lot of both. But if we want to take lessons from this period about what is portable to a future society for creating broad-based prosperity, it has to be critical for us to remember that a full-employed economy is one that is a key part of that broad-based prosperity. He just finds so ironic. And I would just love to stay on this topic a little bit longer because it seems to me

that the economic lesson of the stimulus plans, like this ones that Biden signed, the ones that Trump signed, the economic lesson of those stimulus plans is that it helped to get us out of the recessionary dynamics of the pandemic faster. And it helped to produce a tight labor market faster. that type labor market raised low-income wage growth can cash out more productivity. An economist is looking at this picture and saying, this is exactly what we need to do going forward. But the political lesson seems actually quite toxic.

It might not be that people blame the stimulus explicitly. But as you said, they lump it into all the other shit that was going on, the pandemic and the dislocations and the nine-month waits for their couch when they ordered it and the fact that the lines out of the restaurant were really long, they're lumping it together with everything else that was happening in this pandemic economy. And it's just kind of ironic that the very lessons that economists are drawing from the last few years

as saying, oh, we should definitely try to do this in the future, are the same things that voters are looking at or people are looking at and telling consumer sentiment surveyors and pollsters that they're not really happy with. Like, do you find something kind of tragic? or ironic or sad about this discrepancy between the economic picture that you are painting and the reality that, frankly, a lot of Americans are describing in surveys.

So two things. I think is it the case that I would have rather that our society rediscover the beautiful, full and plan economy in a cleaner period where we didn't have, you know, lots of other messy things happen? that would allow us to have easier causal inference about the impacts of policy, yes, it would have been much easier if we had done this after their financial crisis. And then I think the lesson would have been much easier to actually discern. But we live in the reality that we do. The second part of that, though, is I'm maybe unreasonably optimistic that the longer we have the current economy

go on, the easier it's going to be for folks to see what that economy looks like, and there's a lot to love about it. And in fact, I would say if we look at even some of the recent consumer sentiment numbers, that would seem to be consistent with my hope and reading of where things are going. Of course, predictions are hard, especially about the future, as the saying goes. But if we actually managed to continue down this path for this year, at least, I think we will be in a better place to say, okay, this is what we were after. This is really what we want. Like some of the messiness has gone away. And at that point, maybe it's an easier story to tell the story that I think fundamentally is the right one, that basically providing strong fiscal support was a key positive

ingredient to this economy that at this point seems to be looking pretty good. It is really striking to me. Maybe we can close here that if you compare the U.S. economy to the other G7 economies, if you look at GDP growth and you look at our inflation and you look at our unemployment rate, and you compare that to Japan and the UK and France and Germany and Italy, I mean, it's no contest. We had a shallow array. recession and we've had a much faster recovery. The tough thing is that no voter in America can possibly be expected to shape their opinion of Joe Biden based on the relative performance of the U.S. economy compared to Germany. No one does that. But it's tough because as an economist,

you do have to figure out, like, okay, if all these economies essentially face the same crisis or the same kind of crisis, because their energy markets are different than ours, their demographics are different than ours, but you all face the same pandemic. There was a kind of controlled experiment, and we're just winning the race, period, like question over. We're winning the race of recovery. And so as an economist, you're looking at this and saying, wow, there's a lot to recommend about U.S. public policy choices. But then again, from a political standpoint, in politics often makes history, the person who signed a lot of those bills is polling at like 38% behind Donald Trump. And so I do think it's a somewhat tortured reality. I think,

for a lot of economists, looking at the fact that we have these achievements, and yet the people on whose behalf, the achievements were won, aren't very happy with their economy and aren't very happy with their country. Yeah, look, I think it's critical to have a sense of the counterfactual. Counterfactuals are hard. We're saying, what would have happened? We don't know for sure, but we do have the following data, which is that there are lots of countries that tried a lot of different things. Here's the thing. Almost all of them had very high inflation this period. And for that reason, it's also the case that incumbents, whether political right, political left, are really not doing well. They're unpopular because people don't like high inflation.

People certainly don't like inflation that they didn't expect. And so it's inevitable that we're going to have voter dissatisfaction with an economy that suffers from the post-pandemic trauma, including inflation. But the longer that we actually settle in on a healthy, positive, balanced economy of the sort that I think we have today, I think it becomes easier for voters to draw firmer conclusions about what kind of policies actually put us there. Aaron Dubay, thank you very much. Thank you for listening. Plain English is produced by Devin Biroldi. We've got new episodes every Tuesday and Friday. If you like what you're hearing, give us five stars and a nice review on Apple Podcasts or Spotify or wherever you get your podcast. For feedback and episode suggestions, email us at plain English at Spotify.com.