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Home Publications Blogs Beat the Press Young People Today Can't Even Conceive of Wage Growth

Young People Today Can't Even Conceive of Wage Growth

Saturday, 09 February 2013 18:39

That is undoubtedly what readers of Matt Yglesias' blogpost on immigration and retirement income are saying. Matt correctly notes that an economy cannot collectively save for a generation's retirement in the sense of putting aside the goods and services that the generation will consume in retirement. His conclusion is that we need large numbers of new workers to support our current or soon to be retired population. This leads him to call for a much larger number of immigrants.

While we may want more immigrants, the need to support a larger retired population should not rank high on the list of reasons. According to the Social Security trustees projections, a more rapid pace of immigration will make little difference to the program's finances. This is due to the fact that immigrants will also get benefits. Since they tend to work for lower pay during their working lifetime, and the program's payout structure is highly progressive, the net gain from more immigrants is limited. Increasing the projected immigration level by 30 percent reduces the projected long-term shortfall by less than 10 percent.

On the other hand, suppose that real wages grow roughly in step with productivity. If we saw real wage growth of 1.5 percent annually, then the tax increase needed to meet the projected 75-year shortfall would be equal to 4.6 percent of projected wage growth over the next 30 years. Suppose we got real kinky and imagined we saw some of that 2.0 percent annual wage growth that we had in the golden age (1947-1973). Then the tax increase need to main the program's solvency would be equal to just 3.2 percent of projected wage growth over the next 30 years.

The story here is straightforward. We expect retirees' income to be related to their living standards in their working lifetime. If wages grow rapidly then it is easy for a smaller number of workers to support a growing population of retirees while still ejoying a rise in living standards. This is the way the world used to work. It might not be easy for political reasons to get back to that world, but we should at least know that such a world did once exist and is still possible. 

Comments (4)Add Comment
Long ago and far away ...
written by David, February 09, 2013 6:08
This is the way the world used to work. It might not be easy for political reasons to get back to that world, but we should at least know that such a world did once exist and is still possible.

Beautifully put. But the austerity nuts deficit hawks would have us burn all bridges and be forced to labor in their land of make-believe.
written by Union Member, February 10, 2013 7:31

Would wage growth, as described here, also increase aggregate demand spurring economic growth? And further wouldn't the same wage growth help to reduce the deficit?

This lesson in the reality of the ratio of those who pay into Social Security vs. those who receive S.S. benefits is one that - like the myth of the invisible housing bubble - needs repeating many thousand times.
Pete Peterson's billion dollars is paying returns in propaganda. I talk to people who were children during the Great Depression - whose parents never paid into Social Security, yet had comfortable retirements because of it - who believe this "logic" and think Social Security is unsustainable.

written by John Yard, February 10, 2013 12:40
The only path out of today's dead end is real wages rising as a proportion of productivity growth. Yet this is unmentionable here and in Europe.

The irony is that this will benefit the upper classes too in the long run. Many investment counsellors are forcasting minimall real returns in the forseeable future due to the collapse in aggregate demand. An example is Credit Suisse Global Investment returns Yearbook 2013.

Real wage growth would cut into the rate of profit and exploitation
written by Mike B), February 11, 2013 5:03
Real wages are below what they were in 1964. Many commodities, other than labour power are also cheaper to purchase. The problem for the capitalist class is that it needs to sell a greater quantity of commodities cheapened through the increasing real productivity of the working class--pegged at about 1.3% a year. How can these sales be made without increasing real wages?

How about increasing the real social wage? How about a National Health Service such as that in Britain? How about a cost of living increase for Social Security which takes the evisceration of the U.S. Dollar into account? How about increasing Social Security Taxes for those in the top 10% of the population, the ones who own/control 88% of the wealth the other 90% produce?

Of course, saving capitalism is beyond the ken of most within the classes of capitalists and landlords. It would take another liberal President as popular as FDR to do that and right now, most workers have been made more concerned about the generic concept of 'taxes' thanks to the various pundits and politicians who Dean regularly takes to task. Thus, no such liberal could get elected.

BTW, flooding the labour market with more commodified labour power will do nothing more than lower the price of that human commodity. The law of supply and demand operates with no moral compass. The only way to decrease the supply of labour power while increasing immigration would be to shorten the work week to say 30 hours at the same pay as 40 hours gets the worker now. Is anyone in the pro-immigration crowd posing this solution? If they are, their voices are not being amplified.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.