Does Your Pay-Cheque Make You Happy?

Our economic system has been badly skewed against workers
November 1, 2009

Don’t worry, be happy. As of this writing, media coverage of the recession has been littered with smiling faces. Sure, the recession provoked alarming comparisons with the Great Depression.  But don’t let that scare you. Now everyone from the governor of the Bank of Canada to the chattiest newspaper columnists sees “green shoots” of economic recovery. 

Why is it that worries of economic cataclysm have morphed into happy talk? Every time we get a little positive economic data, the press releases start churning to declare victory over the economic downturn. The cheers come mostly from those who look at the recession as a weird blotch on an otherwise blameless economic model. But surely we need to be cautious before concluding that happy days are here again. Even if the statistics do get better, this recession has posed some sobering questions that aren’t going away any time soon.

This recession is talked about primarily as the consequence of a financial crisis. I suppose the take-home message is intended to be that a little more financial regulation should fix what ails us. Most countries (except Canada) will slap the wrists of the high-paid financial rainmakers, and then it’s back to business as usual in the neoliberal economic paradigm.

Here is a different take: This financial crisis was not only about finance; it also had some very non-financial roots. And unless we deal with the roots, there aren’t enough happy faces in the world to make these problems go away. 

One basic problem that we still have to deal with is that our economic system has become more and more skewed to the detriment of workers. We used to assume that workers would see the fruits of their productivity growth showing up in their pay-cheques. As we produced more, we earned more. Back in the 1960s and into the late 1970s, workers’ average wages (adjusted for inflation) rose in line with their productivity growth.

Since the 1970s, however, this link between a more productive economy and rising real wages has been broken. We have created an economic machine that is ever more productive, but most of us don’t see the benefits of that prosperity. Instead we see the huge problem of economic inequality that has escalated in Canada over the last generation. 

This failure of the economic model to share the benefits equitably produces tensions that can explode in very unpleasant ways.

What happens when pay-cheques don’t keep pace?   

Well, for a while households just send more of their members into the workforce, but at some point Grandma and Junior can only do so many extra shifts at the burger joint. 

Sooner or later households that can’t make ends meet on what they earn are forced to borrow. And as households turn to debt to fill the hole in their pay-cheques, this presents some profitable opportunities to the financial sector. Financial institutions just couldn’t push credit cards fast enough.

But while the household debt was mounting, social programs were also being cut. This meant that services that might have previously been paid for via government programs must increasingly be covered by that pay-cheque. So now you pile up more debt to send your child to summer camp because the local recreation programs have been gutted.

The subprime crisis exposed this nefarious link between underperforming pay-cheques, debt, and the decline of government programs. The provision of public housing in the United States is a mess, and since government has abdicated its role in housing modest-income Americans, these folks had to find ways to house themselves via the private sector. But these are the same people whose pay-cheques are under such pressure. Into this breach came the smartypants in finance who figured out ways to profit by lending to people who did not qualify for traditional mortgages.

Debt could—in effect—fill the vacuum left as housing programs crumbled. As new lending approaches flourished, people of even more dubious credit history got mortgages they couldn’t afford. Voila: the subprime crisis.

Even if the next economic headline sounds rosy, the underlying problem in the neoliberal economic model remains. If you have a large segment of the population that gets very little of the fruits of the economy, and if the government does not step in to even things out, something has got to give.

In fact, the government and business have been trying to solve the current recession in ways that make this underlying problem worse. When business firms lay off workers or cut wages, the pay-cheque squeeze tightens. Resistance to having the government stimulate the economy via ways that redistribute income further tightens the screws.

This problem is not going away, whether the data look better or worse today, next Tuesday, or three weeks after New Year’s Eve.  Somewhere, somehow, the problem in this flawed economic model will come back to bite us. And just as the subprime mess was tolerated and rationalized while it was going on, we may not see the next incarnation of this problem until it hits the fan.

Ellen Russell is a senior CCPA economist.