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Does America’s Social Contract Demand Wage Inequity?


Recently, the New America Foundation held a speaker series on the damage done to what they called “America’s social contract.” With a line-up that included James Galbraith, an economist at the University of Texas, and Jared Bernstein, Vice President Joe Biden’s chief economist, the multiple panels called for a re-examination of the policy precepts that undergird America’s current fiscal situation.

I wondered why the event, with its covey of specialists who engage more in studying big picture economics or faulty regulatory systems, was linked to something more in line with political philosophy. How many early philosophical texts mapped out the ideal social contract, the indefatigable relationship between state and citizenry, and citizenry with itself? Political philosophy and political economics have a nippy relationship—one is lodged in thought while the other is tethered to numerical charts, a sort of strange dichotomy of the frustratingly abstract.

But economic data doesn’t exist in a vacuum. Through parsing and disaggregation, it’s part of a narrative that boils down to what policy makers consider to be the social contract of choice for Americans. Living in a liberal capitalist country, our input is understood economically, and the rewards and services we expect our government to proffer are largely economic as well.

For example, this country places greater urgency on production levels than on workers actually reaping the benefits of that efficiency. Whereas in 1970 the gap between wage and productivity was slight (PDF), standing at under 10 percent, as of 2006 it has widened to over 70 percent. Productivity is up, but wages are down.

After real hourly wages rose in the three decades following the end of the second World War, income flatlined. In 2007, family income actually fell compared to the previous year. And, as I’ve pointed out previously, but I will mention it again because it is my favorite measurement of the diminished returns US workers have experienced: household income today is only $7,000 more than it was in 1973, using 2008 dollars. Think about it, with more mothers entering the labor field, household income inched up by only 16 percent. I assure you the average working woman makes more than $7,000 a year.

I harp on the production-to-wage discrepancy because many economic observers assume higher production levels pave the way for higher wages down the road. In July, the European Central Bank (ECB) showed participating European economies experienced a drop-off in productivity by .4 percent on a quarterly basis going back to 2008 (PDF). In that same period, U.S. productivity increased an average of 3.2 percent.

Brian Blackbone, blogging for the Wall Street Journal, had this takeaway:

“Over the long run, productivity is key to rising wages, low interest rates and higher standards of living. If workers produce more, then they can command higher wages without putting pressure on corporate profits or inflation.”

He wrote this despite many European companies choosing to keep labor on board but with diminished wages, in stead of outright laying off workers, which is what US companies by-and-large chose to do. The ECB estimated that 69.6 percent of European companies avoided layoffs, while only 20 percent outright cut hours or shed payroll.

Keeping workers on board during economic downturns is a practice very popular in Germany, a country that was especially hit hard by the recession because its economy is based on the high-skilled export model. And even though real wages for German workers have fallen half a percent since 2000, total compensation for German workers dwarfs what US workers receive, $48 an hour versus $32 an hour. It doesn’t matter that Germany is now the pacesetter for a European recovery. Even at the nadir of their recession slump, workers weren’t let go. Evidently, the social contract in Germany values morale and labor retention.

I don’t see the relationship between productivity and increased wages in this country. Wages have either sidled upward by a tiny margin or have fallen, depending on how you look at it, since the ‘70s. Meanwhile, productivity is growing, and it’s rewarding the owners of enterprise, not the producers. In 1965, company heads earned roughly 24 times more than their average workers; today a chief executive’s income is 275 times greater than his or her average worker.

Many of these figures have been fleshed out by others criticizing the economic inequality in this country. But more than just solemn economic data, the numbers point to a social contract that seems to be taking a lot more than it is giving. And suddenly New America Foundation’s decision to call a mostly economic discussion series a crisis in the social contract makes sense. As we reconsider the levers that make the economic engine run, we should also reconsider just what it is the social contract expects from us, and why it’s been hitherto largely inequitable. 

Mikhail Zinshteyn is a staff writer for Campus Progress. You can e-mail him at

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