Posts Tagged ‘labor’

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Who’s running away with the surplus, those at the top or those at the very top?

In a new study on “income inequality in the 21st century,” Fatih Guvenen and Greg Kaplan note that recent increases in inequality in the United States need to be understood in terms of trends of and, especially, within the top 1 percent. That’s particularly true when, instead of using Social Security data (which capture labor income), they turn to Internal Revenue data (which capture all forms of income).

While I agree with Guvenen and Kaplan that historically there have been significant differences between the incomes of the top 1 percent and the top 0.1 percent—those at the top and those at the very top—in my view, they tend to exaggerate the differences and lose sight of the fact that the two groups have become one.

Clearly, as can be seen in the chart above (based on data from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman), the average income of those in the top tenth of one percent has risen much more than that of the top one percent. From 1979 to 2014, the average income of those at the very top has risen 277 percent compared to an increase of 183 percent for those at the top. But, of course, the average incomes of both groups have soared compared to that of the bottom 90 percent, which has increased only 27 percent over the same period.

And while they’re right, the rise in capital income much more than labor income helps explain the rising share of income of those at the very top, especially in recent decades, the fact is both groups—whether in the form of labor or capital income—have managed to capture a rising share of the surplus.

Where do those incomes come from?

The following two charts illustrate the composition of incomes of the top 1 percent and top 0.1 percent, respectively.

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One way of making sense of the way those at the top and those at the very top manage to capture a portion of the surplus is by distinguishing between a labor component (in various shades of blue in both charts) and a capital component (in shades of green). When added together, the two components represent the total share of national income that goes to the top 1 percent (which rose from 11.1 to 20.2 percent) and the top 0.1 percent (which rose from 3.9 to 9.3 percent) between 1979 and 2014.

The labor component comprises two categories: employee compensation (e.g., payments to CEOs and executives in finance) and the labor part of noncorporate business profits (e.g, partnerships and sole proprietorships). Capital income can be similarly decomposed into various categories: interest paid to pension and insurance funds, net interest, corporate profits, noncorporate profits, and housing rents (net of mortgages).

As can be seen in the top chart above, by 2014 the top 1 percent derived over half of their incomes from capital-related sources. In earlier decades, from the late-1970s to the late-1990s, a much larger share of their income came from labor sources. They were the so-called “working rich.” This process culminated in 2000 when the capital share in top 1 percent incomes reached a low point of 49.4 percent. Since then, however, it has bounced back—to 58.6 percent in 2014. Thus, the “working rich” of the late-twentieth century are increasingly living off their capital income, or are in the process of being replaced by their offspring who are living off their inheritances.

Much the same trend, in an even exaggerated fashion, is true of those at the very top, the top 0.1% (in the lower chart). More than half of their income has always come from capital-related sources. They were never the “working rich”; they were always for the most part “coupon clippers.” The share of their income from capital-related sources was already 60 percent in 1979 and continued to grow (to 63 percent) by 2014.

What this means, in general terms, is the growth of inequality over decades is due to the ability of those at the top and those at the very top to capture a large portion of the growing surplus. But there has also been a change in the nature of that inequality in recent years, at least for those at the top—which is not due to escalating wage inequality, but to a boom in income from the ownership of stocks and bonds. They’ve now joined the ranks of the “coupon clippers,” who are able to use their accumulated wealth to get their share of the surplus.

It looks then as if those at the top have either turned into or been replaced by rentiers, thus joining the existing owners of capital at the very top—thereby mirroring, after a short interruption, the structure of inequality last seen during the first Gilded Age.

April 4, 2017

Special mention

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Banksy, “Untitled” (2009)

On first glance, liberals and conservatives agree on very little these days, especially now that we find ourselves in the era of Donald Trump. But they do seem to find common ground on one thing: the so-called dignity of labor.

Let me explain. In the article I referred to yesterday, conservative Arthur Brooks invokes the “dignity of labor” as the reason anything and everything should be done to stem the fall in the labor-force participation rate of white men and get them back to work.

If its goal is to instill dignity, the U.S. government does not need to find more innovative ways to “help” people; rather, it must find better ways to make them more necessary. The question for leaders, no matter where they sit on the political spectrum, must be, Does this policy make people more or less needed—in their families, their communities, and the broader economy?

Some may ask whether making people necessary is an appropriate role for government. The answer is yes: indeed, it represents a catastrophic failure of government that millions of Americans depend on the state instead of creating value for themselves and others. However, it’s not enough to merely make people feel that they are needed; they must become more authentically, objectively necessary.

The single most important part of a “neededness agenda” is putting more people to work.

Well, as it turns out, one of Brooks’s liberal critics, Lane Kenworthy, actually agrees that working for someone else and producing more than one needs has “significant virtues”:*

It imposes regularity and discipline on people’s lives. It can be a source o mental stimulation. It helps to fulfill the widespread desire to contribute to, and be integrated in, the larger society. It shapes identity and can boost self-­esteem. With neighborhood and family ties weakening, the office or factory can be a key site of social interaction. Lack of employment tends to be associated with feelings of social exclusion, discouragement, boredom, and unhappiness. Societies also need a significant majority of people in paid work to help fund government programs.

No matter the fundamental differences in the policies they advocate, Brooks and Kenworthy are in fundamental agreement that people should believe in the dignity of work and government policy should be redesigned to make sure people—especially the members of the white working-class—get back to work.

I have already dealt numerous times (e.g, here, here, and here) with the argument that participating in wage-labor is intrinsically dignified. But the question remains, why should the government be brought in—in the eyes of by both conservatives and liberals—to make sure people are forced to have the freedom to acquire that dignity?

The answer actually lies in an unexpected source. According to Friedrich Nietzsche (in his 1871 preface to an unwritten book, “The Greek State”), the dignity of labor was invented as one of the “needy products of slavedom hiding itself from itself.” That’s because, in Nietzsche’s view (following the Greeks), labor is only a “painful means” for existence and existence (as against art) has no value in itself. Therefore, “labour is a disgrace.”

Accordingly we must accept this cruel sounding truth, that slavery is of the essence of Culture; a truth of course, which leaves no doubt as to the absolute value of Existence.  This truth is the vulture, that gnaws at the liver of the Promethean promoter of Culture.  The misery of toiling men must still increase in order to make the production of the world of art possible to a small number of Olympian men.

And if slaves—or, today, wage-workers—no longer believe in the “dignity of labour,” it falls to the likes of both conservatives and liberals to ignore the “disgraced disgrace” of labor and create the necessary “conceptual hallucinations.” And then, on that basis, to suggest the appropriate government policies such that the “enormous majority [will], in the service of a minority be slavishly subjected to life’s struggle, to a greater degree than their own wants necessitate.”

Nietzsche believed that, in the modern world, the so-called dignity of labor was one of the “transparent lies recognizable to every one of deeper insight.” Apparently, neither Brooks nor Kenworthy can count himself among those with such insight.

*This is even after Kenworthy admits “employment is not always a good thing.”

The need for a paycheck can trap people in careers that divert them from more productive or rewarding pursuits. Paid work can be physically or emotionally stressful. It can be monotonous, boring, alienating. Some jobs require a degree of indiference, meanness, or dishonesty toward customers or subordinates that eats away at one’s humanity. And work can interfere with family life.

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It’s obvious to anyone who looks at the numbers that the wage share of national income is historically low. And it’s been falling for decades now, since 1970.

Before that, during the short Golden Age of U.S. capitalism, the presumption was that the share of national income going to labor was and would remain relatively stable, hovering around 50 percent. But then it started to fall, and now (as of 2015) stands at 43 percent.

That’s a precipitous drop for a supposedly stable share of the total amount produced by workers, especially as productivity rose dramatically during that same period.

The question is, what has caused that decline in the labor share?

The latest story proffered by mainstream economists (such as David Autor and his coauthors) has to do with “superstar” firms:

From manufacturing to retailing, giant companies have managed to gobble up a larger and larger share of the market.

While such concentration has resulted in enormous profits for investors and owners of behemoths like Facebook, Google and Amazon, this type of “winner take most” competition may not be so good for workers as a whole. Over the last 30 years, their share of the total income kitty has been eroding. And the industries where concentration is the greatest is where labor’s share has dropped the most. . .

Think about the retail sector, where mom-and-pop stores once crowded the landscape. Now it is dominated by a handful of giants like Walmart, Target and Costco.

It is true, industry concentration has increased dramatically in recent decades (as I explain here). And the wage share has declined (as illustrated in the chart above).

Here’s the problem: exactly the opposite argument is the one that prevailed in the United States for the earlier period. Economists at the time argued that American workers earned a relatively high share of national income because they worked in concentrated industries, such as cars and steel. Thus, their collectively bargained wages included a portion of the “monopoly rents” captured by the firms within those industries.

Now that the wage share has clearly fallen, and shows no signs of returning to its previous levels, economists have changed their story. In their view, market concentration leads to a lower, not higher, wage share.

Why has there been such an about-face in economists’ story about the causes of the declining wage share?

What all the existing stories share is that they avoid identifying anything that has been done to workers as a class. Whether the story is about technological change, globalization, or now superstar firms, the idea is that there are larger forces that unwittingly have created winners and losers—and the losers, if they want, need to acquire the education and skills to join the winners. But don’t touch the basic elements of the economic system that has created such disparate and divergent outcomes.

As it turns out, the presumed rule of a stable wage share turns out to have been an illusion, an exceptional period of relatively short duration during which workers’ wages did in fact rise along with productivity. That wasn’t the case before, and it hasn’t been true since.

The actual rule, as it turns out, is that the wage share falls, as the rate of exploitation increases. That’s how capitalism works, at least much of the time—through periods of faster and slower technological change, higher or lower levels of globalization, more or less concentrated industries.

Sure, under a particular set of postwar conditions in the United States, for two and a half decades or so, the wage share remained relatively stable (and not without pitched battles between capital and labor, as Richard McIntyre and Michael Hillard have shown). But that ended decades ago, and since then workers have been forced to have the freedom to sell their ability to work under conditions that, even as productivity continued to grow, the wage share itself declined.

Mainstream economists have finally recognized the fact that workers’ share of national income has been failing. But they continue to formulate stories that deflect attention from the real problem, the relative immiseration of workers that has them falling further and further behind.

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Readers know the old adage: in this world nothing can be said to be certain, except death and taxes.

And, we should add, employers complaining they can’t find enough good workers.

The fact is, if workers were really scarce, their wages would be rising dramatically. That’s how things works in a capitalist labor market: employers who want to hire workers offer higher wages.

But, according to the latest report from the Bureau of Labor Statistics, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $21.84—and weekly earnings by $1.34. That’s an annual rate of just 2.1 percent, the same as the rate of inflation.

Workers’ wages continue to increase at a very slow rate because the situation is exactly the opposite of what employers claim: workers are not scarce, they’re abundant.

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While the official unemployment rate (the red line in the chart above) was 4.8 percent in January, the expanded (or U6) rate—which includes marginally attached workers and those who are employed part-time but prefer full-time jobs (the green line in the chart)—was a much higher 9.4 percent.

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Meanwhile, the civilian employment-population rate (the ratio of total civilian employment to the civilian noninstitutional population or, more simply, the portion of the adult population 16 years and older that is employed) was still below 60 percent—and thus far less than its pre-crash peak (in December 2006) of 63.4 percent.

There are in fact plenty of potential workers out there—in the labor force and in the larger working-age population. But employers would rather complain than pay higher wages to hire them.

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Special mention

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In discussing the textbook treatment of the minimum wage, James Kwak provides a perfect example of how contemporary mainstream economics “can be more misleading than it is helpful.”

Kwak refers to the problem as “economism.”* For me, borrowing from a different tradition, it is a case of “vulgar economics.”

The argument against increasing the minimum wage often relies on what I call “economism”—the misleading application of basic lessons from Economics 101 to real-world problems, creating the illusion of consensus and reducing a complex topic to a simple, open-and-shut case. According to economism, a pair of supply and demand curves proves that a minimum wage increases unemployment and hurts exactly the low-wage workers it is supposed to help. The argument goes like this: Low-skilled labor is bought and sold in a market, just like any good or service, and its price should be set by supply and demand. A minimum wage, however, upsets this happy equilibrium because it sets a price floor in the market for labor. If it is below the natural wage rate, then nothing changes. But if the minimum (say, $7.25 an hour) is above the natural wage (say, $6 per hour), it distorts the market. More people want jobs at $7.25 than at $6, but companies want to hire fewer employees. The result: more unemployment. The people who are still employed are better off, because they are being paid more for the same work; their gain is exactly balanced by their employers’ loss. But society as a whole is worse off, as transactions that would have benefited both buyers and suppliers of labor will not occur because of the minimum wage. These are jobs that someone would have been willing to do for less than $6 per hour and for which some company would have been willing to pay more than $6 per hour. Now those jobs are gone, as well as the goods and services that they would have produced.

That’s exactly the argument presented by Harvard’s Gregory Mankiw in his best-selling textbook Principles of Microeconomics. He uses neoclassical economic theory to distinguish (as in the figure above) a “free labor market,” where the market is in equilibrium and there is full employment, and a “labor market with a binding minimum wage,” where there is a surplus of labor or unemployment. In the latter, at a minimum wage above the equilibrium wage, the quantity demanded of labor (by employers) is less than the quantity supplied of labor (by workers). Thus, in his view,

the minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find jobs.

Mankiw then supplements his discussion of the negative effects of the minimum wage by asserting it “has it greatest impact on the market for teenage labor.” Low wages, he argues, are appropriate for such workers because they “are among the least skilled and least experienced members of the labor force.”**

Only after presenting the model of unemployment created by a minimum wage and focusing on teenage workers does Mankiw admit that the minimum wage “is a frequent topic of debate” among economists, who “are about evenly divided on the issue.”***

Nowhere does Mankiw discuss the history of the minimum wage nor the determinants of either the supply of or demand for workers who are forced to have the freedom to sell their ability to work for a wage at or below the minimum wage. He is thus content, like many nineteenth-century economists, to “interpret, systematise and defend in doctrinaire fashion the conceptions of the agents of bourgeois production who are entrapped in bourgeois production relations.”

That is the very definition, in our own time, of vulgar economics.

 

*I hesitate to use Kwak’s term economism because, in my view, it signifies something different: the reduction of all social phenomena, in the first or last instance, to the economy (or some part thereof, such as the relations or forces of production). In other words, economism is an economic determinism—the positing of some kind of economic essence. The irony, of course, is that neoclassical economics represents an essentialism but of a different sort: it reduces all economic and social phenomena to a given human nature. Neoclassical economics is therefore a theoretical humanism.

**Later, he adds that such teenagers are “from middle-class homes working at part-time jobs for extra spending money.” Even less reason, then, to worry about such low-wage workers. According to the Bureau of Labor Statistics, minimum-wage workers do tend to be young. But they’re not just teenagers. In 2015, more than 2.5 million workers in the United States received wages at or below the federal minimum wage (3.3 percent of the labor force), of whom 1.4 million were 25 years or older (2.2 percent of the labor force).

***The 2006 survey Mankiw refers to was conducted only among members of the American Economic Association, the main organization of mainstream economists in the United States. It is interesting that the minimum wage is one of the few issues on which there was no consensus, even among mainstream economists. About 38 percent wanted it increased, while 47 percent wanted it eliminated entirely.