Hearing of the Senate Banking, Housing and Urban Affairs Committee - Semi-Annual Monetary Policy Report by the Federal Reserve

Federal News Service

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE

SUBJECT: SEMI-ANNUAL MONETARY POLICY REPORT BY THE FEDERAL RESERVE

CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)

WITNESS: ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, THE FEDERAL RESERVE

LOCATION: 216 HART SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. JACK REED (D-RI): Thank you, Mr. Chairman.

And thank you, Chairman Greenspan, for attending.

It does look like we're covering jobs, but those jobs seem to not have the same kind of wages and earnings of previous -- the jobs that were lost, and that is a significant issue. We've had a chance to talk about this before, but until we can really establish wage and earning growth among a broad sector of American workers, I don't think we're going to see a robust economic recovery, and we're going to continue to have families that are trying to make ends meet by borrowing. And as interest rates go up -- and you've already raised them, and you might contemplate again -- that will put additional pressure on families. So there are -- I think perhaps some encouraging news, but there's also a very, very difficult reality we have to cope with, and I'm looking forward to your testimony.

Thank you.

BREAK IN TRANSCRIPT

SEN. JACK REED (D-RI): Thank you, Mr. Chairman.

Chairman Greenspan, one of the issues we've talked about on several occasions is this lack of growth in wages and earnings for workers. And that's a critical issue. Increases are necessary to meet increased obligations of housing, education, health care. But also, there's a distributional effect which you've pointed out, where higher-skilled workers seem to do okay; lower-skilled seem to be falling behind creating social tensions.

Looking at the numbers I have, over the last year, average hourly earnings declined 1.1 percent in real terms. Average weekly earnings declined 1.4 percent. This is in a situation where the economy is recovering, we're seeing GDP growth, and as you point out, where productivity has been growing significantly, allowing one presumes, increases of wages.

Can you explain the apparent contradiction between these falling wages and increased productivity and expansion?

MR. GREENSPAN: Yeah, Senator, I believe -- I think it was the last time I was here, we had a very extensive discussion in the question and answer period on the issue of education. I believe you were participating in it.

SEN. REED: That's right. And can I say, I think this is a slightly different, one hopes, question, because, you know, we're not talking about people entering the workforce with different skills, we're talking about, apparently, workers that are already employed -- (inaudible) -- I would think that factor would not be the most critical.

MR. GREENSPAN: No, well, in a way it is. And the reason I say that is that, as I tried to define the problem back then, what has been happening to our economy -- or more exactly, to our labor force, is that we have not been able to keep up the average skill level in our workforce to match the required increases of increasing technology. And what that has meant has been that rather than getting an ever-increasing number of college graduates at a far faster rate than we have been getting them, and hence, higher skills to create a surplus or at least a significantly large supply of skilled workers relative to the demand, in order to keep skilled wages down, and because you move up people from the lesser-skilled area to the skilled, you lower the number of surplus workers in those markets for lesser skilled, and hence, remove the down side pressure on wages.

In other words, this is an issue which as been, regrettably, going on for 15 years, or thereabouts, creating an ever-increasing opening up of the skilled versus lesser-skilled gap. And as you point out, if you put the wage changes in nominal terms for the lesser skilled, they have been growing at -- in many -- from many parts of the last 50 years at less than the increase in the consumer price index.

That is, of course, not true for wages and salaries as a whole. Indeed, the ratio of average hourly earnings for supervisory workers that one can infer from the data systems that we have have been rising relative to average hourly earnings, which you cite, for quite a considerable period of time, and they account for 40 percent of the aggregate wage and salary total. So we are getting a problem here which I think has got to be addressed.

And as I indicated last month, I think that the effective increase in the concentration of incomes here, which is implicit in this --

SEN. REED: We have --

MR. GREENSPAN: -- not desirable in a democratic society.

SEN. REED: We have several problems. One problem is training and retraining individuals. And you know, if you're starting off with high school or elementary, you still -- you maybe can have an effect -- that's five, 10 years out. The situation is what do we do in the -- this year, next year and the following years to raise the wages of people whose skills cannot -- be risen --

MR. GREENSPAN: Well, I think the way you raise those wages is you remove the large number of younger people whose skills should be upgraded significantly -- remove them from being an overhang on the work -- the job markets in which we have got from, as best I can see, an excess of supply over demand. And that has got to be changed.

SEN. REED: I don't see a ready policy there, but I see a concept --

MR. GREENSPAN: No, I'm -- whether you've got a policy or not, I think it is right to get the analysis right, because if we don't understand what is causing this, our policies are not going to address what is a significant problem.

SEN. REED: Well, what specific policies should we adopt today?

MR. GREENSPAN: Well, I -- I mean --

SEN. REED: Because that helps us understand --

MR. GREENSPAN: If we can move -- if we can improve our -- first of all, we know that from the 4th grade to the 12th grade that our children somehow are falling behind international standards.

SEN. REED: Mr. Chairman, I accept that, but let -- policies that apply to people currently in the workforce today, adults who are working hard. They're seeing corporate profits go up dramatically. They're getting very little share of those corporate profits as the data indicates. How do we --

MR. GREENSPAN: I think what you're going to find is that that share will now start to increase. It's --

SEN. REED: Now, one of the reasons you proposed the share increases is that labor costs -- is because employers will spend more for health care and for other benefits, which workers appreciate. That still doesn't increase take-home --

MR. GREENSPAN: No, I agree with that.

And I think that what I'm saying is that, as I indicated here, I think the last time I was here -- that virtually all of the increase in productivity during the year starting in the first quarter of 2003 shows up not as real wages but as increased profitability.

That stopped sometime in the last several months. And what history tells us is that the shift now goes in the other direction, and you get, with a delayed effect, the increased productivity showing up as real wages overall. And I would think that a -- while certainly supervisory workers are going to contribute -- will share significantly, it will also be true of the 80 percent of payrolls which are non-supervisory workers as well.

SEN. REED: My time has expired. Thank you, Mr. Chairman.