Posts Tagged ‘compensation’

productivity

Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,

After growing in tandem for nearly 30 years after the second world war, since 1973 an increasing gap has opened between the compensation of the average American worker and her/his average labor productivity.

The fact that the relationship between wages and productivity has been severed in recent decades presents a fundamental problem, both for U.S. capitalism and for mainstream economic theory. It calls into question the presumption of “just deserts” within U.S. economic institutions as well as within the theory of distribution created and disseminated by mainstream economists.

It means, in short, that much of what American workers are produced is not being distributed to them, but instead is being captured to their employers and wealthy individuals at the top, and that mainstream economic theory operates to obscure this growing problem.

It should therefore come as no surprise that Summers and Stansbury, while admitting the growing wage-productivity gap, will do whatever they can to save both current economic institutions and mainstream economic theory.

First, Summers and Stansbury conjure up a conceptual distinction between a “delinkage view,” according to which increases in productivity growth no long systematically translate into additional growth in workers’ compensation, and a “linkage view,” such that productivity growth does not translate into pay, but only because “other factors have been putting downward pressure on workers’ compensation even as productivity growth has been acting to lift it.” The latter—linkage—view maintains mainstream economists’ theory that wages correspond to workers’ productivity and that, in terms of the economy system, increasing productivity will raise workers’ wages.

Second, Summers and Stansbury compare changes in labor productivity and various time-dependent and lagged measures of the typical worker’s compensation—average compensation, median compensation, and the compensation of production and nonsupervisory workers—and find that, while compensation consistently grows more slowly than productivity since the 1970s, the series (both of them in log form) move largely together.

Their conclusion, not surprisingly, is that there is considerable evidence supporting the “linkage” view, according to which productivity growth is translated into increases in workers’ compensation and hence improving living standards throughout the postwar period. Thus, in their view, it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

ButSummers and Stansbury are still unable to dismiss the existence of an increasing wedge between productivity and compensation, which has two components: mean and median labor compensation have diverged and, at the same time, there’s been a falling labor share in the United States.

That’s where they stumble. They look for, but can’t find, a link between productivity and those two measures of growing inequality. There simply isn’t one.

What there is is a growing gap between productivity and compensation in recent decades, which has result in both a falling labor share and higher growth of labor compensation at the top. That is, more surplus is being extracted from workers and some of that surplus is in turn distributed to those at the top (e.g., industrial CEOs and financial executives).

Moreover, one can argue, in a manner not even envisioned by Summers and Stansbury, that the increasing gap between productivity and workers’ compensation is at least in part responsible for the productivity slowdown. Changes in the U.S. economy that emphasize capturing an increasing share of the surplus from around the world have translated into slower productivity growth in the United States.

The only conclusion, contra Summers and Stansbury, is that even if productivity growth accelerates, there is no evidence that suggests “the likely impact will be increased pay growth for the typical worker.”

More likely, at least for the foreseeable future, is the increasing inequality and the (relative) immiseration of American workers. Those are the problems neither existing economic institutions nor mainstream economic theory are prepared to acknowledge or solve.

 

*Actually, the argument is about productivity and compensation, not wages. In fact, Summers and Stansbury assert that “the definition of ‘compensation’ should incorporate both wages and non-wage benefits such as health insurance.” Their view is that, since the share of compensation provided in non-wage benefits significantly rose over the postwar period, comparing productivity against wages alone exaggerates the divergence between pay and productivity. An alternative approach distinguishes what employers have to pay to workers, wages (the value of labor power, in the Marxian tradition), from what employers have to pay to others, such as health insurance companies, in the form of non-wage benefits (which, again in the Marxian tradition, is a distribution of surplus-value).

fed2

Federal government jobs are a pretty good deal, especially for workers without a professional degree or doctorate.

According to a recent study by the Congressional Budget Office (pdf), wages for federal workers with a high-school diploma or less are 34-percent higher than comparable workers in the private sector. And, when you include benefits (especially defined-benefit retirement plans), their total compensation is 53-percent higher. For federal workers with a bachelor’s degree, the numbers are 5 percent (for wages) and 21 percent (for total compensation). Only federal workers with a professional degree or doctorate are paid less than their private-sector counterparts (by 24 percent), resulting in a total compensation that is also less (by 18 percent).

fredgraph

The problem is, it’s not easy to get those jobs. In contrast to what many people think (my students included), federal employment (excluding the U.S. Postal Service) makes up only 1.4 percent of civilian employment in the United States—just a bit higher than before the Second Great Depression (when it stood at 1.3 percent) but far below what it was in the late 1960s (when it was 2.8 percent).

So, to all those who complain about the growth of the “government bureaucracy,” they should be reminded of the small percentage of total employment represented by federal workers—and the fact that most federal employees (60 percent) work in just three departments in the executive branch: Defense, Veterans Affairs, and Homeland Security.

And for those who argue that federal employees are compensated better than their private-sector counterparts, there’s an easy solution: raise the pay of private-sector workers and improve their benefits!

capitalist

Who are the capitalists?

It’s one of those questions I always pose to my students, and they always get wrong. Their mainstream economics courses don’t offer much help, since the term is never even mentioned. (I know, bizarre, since presumably what the students are being taught is a theory of capitalism, which surely includes capitalists.)

But, after scratching their heads for a while (since, clearly, they haven’t really thought about it before), they finally offer up some guesses: Shareholders? CEOs? Everyone?

Nope, I patiently and sympathetically respond. Not shareholders, since they offer money to firms in exchange for some portion of equity ownership, for which they receive a cut of the profits in the form of dividends. They’re not capitalists. Nor are the CEOs, who are hired by the capitalists to run the enterprises on a day-to-day basis.* And most of us are not capitalists, since we receive the bulk of our income in the form of wages; we don’t deploy capital to generate additional money in the form of profits.

So, my questions to them continue: What is the position of capital in corporate America? Who occupies that position? Who is the personification of capital in contemporary capitalism? Who is Mr. (and Ms.) Moneybags?

They remain stumped. And so I answer my own question: the boards of directors of capitalist corporations.

As I explained earlier this year:

The members of the boards of directors of corporations (say, of Standard & Poor’s 500 companies) are the ones who sit at the top and are ultimately responsible for the enterprises. They are the people who, during occasional meetings of the boards (for which they receive a small fee), decide the general direction of the corporation, hire and oversee top executives, and fend off crises. In other words, they occupy the position of capital and appropriate the surplus created by the workers within those enterprises. . .

Within contemporary capitalism, then, capitalists are members of corporate boards of directors. And it’s a tiny group. Given that boards are made up of 10-15 members, we’re talking about (for the leading, S&P 500 companies) only 6250 individuals. Even less (closer to 4500), if we subtract interlocking directorates, that is, individuals who sit on more than one board.

BoD

But I was wrong—not about who occupies the position of capital, but about those “small fees.” As it turns out, according to recent research by Williams Tower Watson (a business consultancy that designs “solutions that manage risk, optimize benefits, cultivate talent and expand the power of capital to protect and strengthen institutions and individuals”), the average compensation of members of corporate boards of directors again increased last year, to $265,748 (about half in cash, the other half in stocks). That’s no “small fee” for a part-time position, which involves attending a few board meetings and offering occasional advice—and it’s a lot more than $160,000, which was the average board member’s compensation in 2006.**

So, as it turns out, the small group of individuals who occupy the position of Mr. (and, increasingly, Ms.) Moneybags not only appropriate the surplus from their workers. They also distribute to themselves a growing chunk of that surplus.

Not a bad job if you can get it. . .

 

*Corporate CEOs may not be capitalists but they’re certainly well compensated for their service to capital. According to the Economic Policy Institute [ht: sm], “in 2015, CEOs in America’s largest firms made an average of $15.5 million in compensation, which is 276 times the annual average pay of the typical worker.”

**According to Jena McGregor, “the average director would seem to be earning a little more than $1,000 an hour.”

 

 

CEO-worker

The CEO-to-worker pay ratio is on the rise again, according to the Economic Policy Institute, after falling in the immediate aftermath of the financial crash of 2008. That’s both because corporate executives are able to capture more and more surplus and workers’ continues to stagnate.

The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.

According to more recent numbers, reported by Gretchen Morgenson, that ratio can be 1,073 (for Starbucks), 1,111 (for Qualcomm), 2,012 (for Microsoft), and even 2,238 (for Walt Disney). To be clear, that means Walt Disney CEO Robert Iger pulled in 2,238 times the median workers’ pay (estimated to have been $19,530 last year) at Walt Disney.

Here, according to the most recent figures (from Equilar) is the list of the top 25 highest-paid CEOs in the country.

CEO pay

Fat_Cat

Well, the results are in and, to paraphrase Chico Escuela, the current recovery been berry, berry good to corporate CEOs in the United States.

According to GMI Ratings’ 2013 CEO Pay Survey, CEO compensation has set a new record: for the first time ever, the ten highest-paid chief executives in the United States all received more than $100 million in compensation and two of them took home billion-dollar paychecks.

CEOs-2012

The report also shows that the median increase in total realized compensation for S&P 500 CEOs was 19.65 percent (an increase even over last year, when they benefited from a 13.78-percent increase at the median).

While salary, bonuses, and perks remained relatively flat in the S&P 500, it was the profits made from the exercise of stock options and the vesting of restricted stock that represented the bulk of pay in the index. Examples include Michael D. White, third-year CEO of DIRECTV, who saw a realized compensation increase from $5.7 million in 2011 to $50.8 million in 2012. The increase occurred when Mr. White exercised more than one million stock options (worth $18 million) and saw more than a half million units of restricted stock vest (worth $26.8 million), all equity granted in a CEO Golden Hello. The company’s stock price has climbed about 80% over the past three years.

The average increase for the same group was 55.18 percent.

To make the appropriate comparison, consider the increase in hourly pay for workers (production and nonsupervisory) between December 2011 and December 2012. It amounted to 1.8 percent. The growing gap between those at the top and the rest meant that, in 2012, the CEO-to-worker-pay ratio in the United States rose to 354 to 1.*

Clearly, the current recovery has been very good for a tiny minority of executives, who are managing to leave everyone else behind.

 

*Again, for purposes of comparison, that ratio was 42:1 in 1982 and 281:1 just a decade ago. In terms of other countries, it was 89:1 in Sweden, 93:1 in Australia, and 147:1 in Germany in 2012.