Labor Day and Who Pulls the Communal Cart

Each Labor Day is marked by parades, picnics, ball games, barbecues for family and friends, and perhaps fireworks. In between these colorful spectacles, a few with a taste for history might steer the conversation toward thanking labor unions for their early role in improving working conditions. Today’s heroes – those who fund national defense and the ever-broadening social safety net – will probably remain unacknowledged.

Some will note their disappointment in today’s hourly wages, income inequality, and the audacity of a $15 minimum wage. There will be little agreement on whether it makes economic sense. The thoughtful, sober adults will avoid partisan preaching that tends to kill camaraderie. Later in the day, tales of earlier times and refreshed emotional bonds may evoke promises to meet more often, maybe before next Labor Day.

As players in the economy, Labor Day celebrants experience different connections to “labor.” Of the 322 million people living in the US, fewer than half, 146 million, are employed full or part time. More than half don’t qualify as being in the labor force since they do not hold any job. Their status requires independent wealth, a pension or social security, age under 16, full time college attendance, chronic illness, or public assistance.

Everyone who works pays payroll taxes (earmarked for Social Security and Medicare). In 2010, 142 million federal tax returns were filed, but 58 million paid no federal income tax. So, the massive federal government rests on the shoulders of just 84 million tax returns – one federal tax return for each four people in the population.

Hourly wages are experienced by those who filed the 84 million tax returns. Surely there are employees who are working hard and working smart, but on average employees’ productivity (the ratio of their output to their wages) is almost stagnant. Wages may decrease when employees compete against unemployed candidates who have both the requisite skills and the willingness to bid down hourly wages. But when workers are steadily employed and the unemployed are relatively few or lack skills or motivation, changes in wages will track changes in productivity. That is what we should see in a growth economy.

Real average hourly earnings increased by 1.9% in the year ending July 2015. But in the 6 months ending July 2015, real wages decreased by 0.6%. That flaccid wage performance is entirely in sync with the meager 0.3% productivity increase for the year ending second quarter 2015.

Higher productivity will coerce employers to pay more. Public protests and sermons on social justice will not have a constructive effect on wages. More likely, employers will explore “strategic alternatives” such as a move to more economically hospitable locations or investment in smart machines to handle routine task functions, eliminating some jobs and enriching others. That bitter result will afflict labor long after the community protest organizers have migrated to other causes.

Stagnant wage rates are not labor’s only problem. The slow growth in total wages is further diluted by federal taxes. Through taxation, those who are employed are expected to provide for those who are not employed. This is becoming more burdensome because the number of people not in the labor force has increased by 16 million in the last decade. The dilution in take home wages will worsen as entitlements expand demanding more from the 84 million who file paying tax returns.

So, at some point in the Labor Day festivities, perhaps after acknowledging union’s contribution to working conditions, we should acknowledge that there are other modern-day labor heroes – those who fund the government programs that some see as necessary and the programs that some of us cherish. The funds come from income taxes applied to hard earned paychecks, and only one in four of us chips in.

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