Your Incredible Shrinking Paycheck

The recession is over, but its legacy of falling wages is likely to stick with us

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Illustration by Harry Campbell for TIME

Before I started writing this column on why paychecks are likely to keep shrinking even if unemployment starts to inch down, I consulted Google to see if the term Marxism was trending upward. It was and has been ever since the end of December, the conclusion of a year in which workers' share of the U.S. economic pie shrank to the smallest piece ever: 54.4% of GDP, down from about 60% in the 1970s.

No wonder Marx is back in fashion. It's been more than 100 years since the German philosopher predicted that capitalism's voraciousness would be its undoing — as bosses invest more in new technologies to make things more cheaply and efficiently and less in workers themselves, who, deprived of fair wages, would eventually rise up and revolt. That hasn't happened, of course, though depressed wages certainly contributed to the revolution in Egypt, not to mention lots of other instances of public unrest over the past few years. But the fact that wages in the U.S. and most other rich countries have been falling since the 1970s and went off a cliff after the recent financial crisis is going to become a more pressing economic and political concern. Just think how hard it will be for Obama to sell himself in 2012 if salaries are still falling.

And fall they have, to an extent not seen since the 1930s. Labor Department figures show that from 2007 to 2009, more than half the full-time workers who lost jobs and then found new work took pay cuts. A depressing 36% had to take positions paying 20% less than the ones they lost.

The drop in wages occurs in part because unemployment rose so sharply and widely after the crisis and has remained higher for longer than in past recessions. Both factors have led to a disconnect between labor supply and demand that makes it tough for workers to negotiate better deals. Forget about driving a hard bargain with a new boss. Most of us feel lucky just to have bosses, and we work as hard as we can to keep them happy — as the productivity figures emphatically show.

Yet even if unemployment starts to ease, it's unclear whether labor's portion of the pie will stop shrinking. The global headwinds may be too strong. Just as Marx predicted, technology-driven productivity is increasing not just in manufacturing but also in services. Even the financial wizards that caused the crisis aren't immune. While trading volumes and the size of global markets have increased dramatically in the past 20 years, Wall Street still employs roughly the same number of people. If you've ever watched a trader working a three-screen Bloomberg terminal flashing hundreds of prices in dozens of countries, you'll understand why.

The other megatrend of our age, the rise of emerging markets, will also continue to put pressure on U.S. wages. According to Goldman Sachs, more than 70 million people in developing countries become middle-class consumers each year. That's great for us in some ways, because it means they'll have money to buy goods made by companies in the rich world. But it also means they'll have the skills necessary to do our jobs. A lot of Wall Street data crunching, for example, is now done in India, and the number of high-end strategy jobs in fields like consulting is increasing there too.

The latter trend is gaining on the former. A recent study by Capital Economics found that from 2002 to 2008, employment abroad by U.S. multinationals abroad 22.6%, while employment at home increased by a mere 4.9%. What's good for U.S. companies and what's good for U.S. labor and wages are no longer always the same thing. The discrepancy may become an increasingly contentious political issue.

The best way to mitigate the fallout — which may include the rise of ugly populist politics — is to focus on social mobility. While rich-country wages will be increasingly compressed across the board, those at the top of the socioeconomic scale will feel the pressure much less. The goal, then, should be to push more people upward. Portable pensions and health care reform would help by allowing laid-off workers with skills to move more easily to places where they can command good jobs. Creative retraining programs would help as well. Denmark provides a good example: when companies there shed workers because of outsourcing, the government continues to pay those workers for two years, but on a declining scale and only with the promise that they attend retraining programs for jobs in higher-growth industries.

None of these are easy or quick solutions to shrinking wages. But they are a lot better than the Marxist alternative.