Freeman

ECONOMICS ON THE TRAIL

Overworked and Underpaid?

Free-Market Economists Dispute Reich's Claims

NOVEMBER 01, 1995 by MARK SKOUSEN

“Most blue-collar workers and midlevel white-color managers are overworked and overwhelmed.”
Robert Reich, Secretary of Labor
September 11, 1995

According to Labor Secretary Robert Reich, eight million Americans are holding two or more jobs, the highest figure since data were first collected 25 years ago. Work time is on the rise, while leisure time is on the decline.[1] Median wages have fallen from $479 a week to $475 a week (factoring in inflation). In fact, according to the Bureau of Labor Statistics, average real wages have been declining since the mid-1970s. “There is something terribly wrong, terribly un-American, about the fact that the economy’s prosperity is bypassing so many working people,” Reich asserted.

Is the American dream falling on hard times? Free-market economists dispute Reich’s claims. Ohio University professor Richard Vedder points out that Reich’s real-wage data do not include fringe benefits, such as medical insurance, paid vacations, and pension plans. When benefits are added, total real compensation per hour has been rising, albeit modestly since the mid-1970s. Moreover, by using another measure of human economic welfare, consumer spending rose a dramatic 40 percent per person in real terms. As Professor Vedder says, “How many Americans in 1975 had VCRs, microwaves, CD players, and home computers?”

In short, measuring the quantity, quality, and variety of goods and services is often a better measure of economic progress than average real wages.

The Dramatic Slowdown in Productivity

Still, there is much to be concerned about. Statistics from the U.S. Commerce Department clearly show that worker productivity has slowed considerably since the mid-1970s. And productivity is the key to rising or falling wages.

Many years ago, F. A. Harper, an economist and staff member of FEE, wrote a grand little book entitled Why Wages Rise. He demonstrates that wages aren’t high because of unionization or government-imposed minimum wages. Rather, “Higher wages come from increased output per hour of work.”[2] Ludwig von Mises adds, “if you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise.”[3] Training, new production methods, and updated machinery and technology make workers more efficient and valuable.

How does a nation increase its capital invested per worker? A clue may be found in another interesting statistic: Government debt as a percentage of GDP started rising in the mid-1970s, at the same time real wages stopped growing significantly. Coincidence? I don’t think so. Deficit spending crowds out saving and private capital investment and reduces the funds available for training, new tools, and new technology.

Deficit spending isn’t the only factor that has slowed the rate of capital formation in the United States. Other determinants are (a) heavy taxation and regulation of business, (b) Social Security and other employment taxes, and (c) the tax burden on saving and investment, specifically capital gains, interest, and dividends. All of these factors have kept the U.S. savings rate at a low level, creating a serious capital shortage and slowing productivity gains.

The Hong Kong Model

Hong Kong provides an interesting case study of how the U.S. might increase productivity and thereby reignite the rise in average real wages for Americans. Real earnings in this small Asian colony have been rising steadily and rapidly over the past half-century. Immigration has been high and union membership low in Hong Kong over the years. Yet worker income keeps rising. Why? There are several reasons: A high rate of personal and business savings. Heavy emphasis on education and training. No perennial government deficits. No trade barriers. And most importantly, a flat minimum tax on personal income (15 percent) and corporate income (16.5 percent), a minimal Social Security program, and no tax on capital gains or dividends. In short, there are virtually no limits on the ability of the residents of Hong Kong to save and thus increase the capital per worker. Consequently, wages keep rising.

Here in the U.S., many pundits (including Secretary Reich) will continue to blame our lackluster performance in real wages on big corporations, foreigners, women in the workforce, and lack of union power. But the root cause is the anti-growth policies of government.

Recently there has been a strong movement to overhaul the budget and tax system in the U.S. One proposal favors a flat tax system similar to Hong Kong’s. Such a policy change would cause a sharp rise in saving, investment, economic growth, and the standard of living of the American wage-earner. []


1.   Juliet B. Schor, The Overworked American: The Unexpected Decline of Leisure (New York: Basic Books, 1991), pp. 1-5.

2.   F. A. Harper, Why Wages Rise (Irvington, N.Y.: Foundation for Economic Education, 1957), p. 19.

3.   Ludwig von Mises, Economic Policy: Thoughts for Today and Tomorrow (Chicago: Regnery Gateway, 1979), p. 88.

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