It's not a mystery, it's clear why wages remain stagnant

In a recent news story, Federal Reserve Chairman Jerome Powell called the continuing wage stagnation a "puzzle." He said, "I wouldn't say it's a mystery. But it's — it's a bit of a puzzle." The same day, headlines cited the rapid growth of the stock market. Powell should understand that the trends are inextricably linked. Here's why.

There has been a fundamental transformation of the American economy from one where workers were valued and shared fairly in a growing economy gaining access to the middle class to one where most corporations shifted to a philosophy that "maximizes shareholder value" at the expense of workers.

Economists have dubbed the period following World War II until the mid 1970s "The Great Compression." It was a period of unprecedented prosperity featuring high wages paid to middle-class Americans, job security, family supporting benefits such as health care and pensions and generous profits for business. Others dubbed the period "stakeholder capitalism."

Frank Adams, then-CEO of Standard Oil, said, "The job of management is to maintain an equitable and working balance among the claims of the variously affected interests groups ... stockholders, employees, customers, and the public at large."

Lynn Stout, the late distinguished professor of corporate and business law at Cornell Law School, in her book, "The Shareholder Value Myth," wrote, "Fifty years ago, if you had asked the directors or CEO of a large public company what the company's purpose was, you might have been told the corporation had many purposes: to provide equity investors with solid returns, but also to build great products, to provide decent livelihoods for employees, and to contribute to the community and nation. The concept was to focus on long-term performance, not maximizing short-term profits."

Stout states, "All this changed in the 1980s. Economists began arguing, confidently, if incorrectly, that shareholders 'own' corporations and that stock price always captures a firm's true economic value. Thus shareholders should have more power over corporate boards, and executive pay should be tied to shareholder returns. These academic arguments were embraced by activist investors seeking to buy shares, pump up price, and sell for a quick profit. They also appealed to CEOs hoping to enrich themselves by boosting share price by any means possible (including, at Enron, outright fraud). The result is today's world, where 'shareholder value' is king."

Stephen Roach of Morgan Stanley described the 1990s as the rise of the power of the financial markets whose new mission was to control the destiny and strategy of corporations. "Shareholders got rewarded beyond their wildest dreams, but there's a cost — through stagnant wages, through downsizing and layoffs, through widening inequalities. Capital wins but at a cost ... The 1990s is the ultimate triumph of shareholders around the world, the worker is pretty much a pawn in the process."

Many economists say that wages generally increase with productivity — you're paid in line with the value of what you do. This was credible from the end of the World War II to the 1970s, when productivity and hourly wages rose almost perfectly in sync. But according to research by the Economic Policy Institute, from the early 1970s to 2016 productivity went up 73.7 percent, and wages only 12.3 percent.

As a result, the gap between the rich and everyone else has been growing markedly for 30 years. The wealthiest 1 percent of American households own 40 percent of the country's wealth. That share is higher than it has been at any point since at least 1962, according to data from the federal Survey of Consumer Finances.

The bottom line: in order to maximize profits, costs must be controlled. Controlling wages and benefits became the key corporate strategy. The result? Wage stagnation and cuts in benefits such as pensions and an attack on the one institution that stood in their way - — the American labor movement.

It's alarming that the chairman of the Federal Reserve is "puzzled" why raises are "elusive." It's no "mystery" Mr. Powell. Read Lynn Stout's book.


Paul F. Cole of Loudonville is executive director of the American Labor Studies Center at the Kate Mullany National Historic Site in Troy.