Posts Tagged ‘wages’

Cartoon of the day

Posted: 14 October 2016 in Uncategorized
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Yesterday, I argued that capitalism has, over the course of its history, generated movements of masses of people, both within and between nations. However, in the United States, the effects of capitalism’s laws of population are mostly ignored, as are the links between internal and external migrations of workers. Instead, the discussion tends to focus only on the consequences of immigration (and, even then, on only some of the consequences).

And that’s exactly the focus of the new study, “The Economic and Fiscal Consequences of Immigration,” by the Panel on the Economic and Fiscal Consequences of Immigration of the National Academies of Sciences, Engineering, and Medicine.

I won’t attempt to summarize the entire, 508-page study (itself a follow-up to the last major report on the topic by the National Academies, The New Americans: Economic, Demographic, and Fiscal Effects of Immigration, in 1997). However, as I read it, the study boils down to two key questions: First, what are the consequences of immigration, particularly those involving wage and employment prospects, for individuals already established in the United States? Second, what are the fiscal impacts of immigrants for local, state, and federal governments?

The answer to the first question is covered in Chapter 5 of the report, titled “Employment and Wage Impacts of Immigration.” The panel surveys a large, diverse literature, which they summarize as follows (on p. 4):

When measured over a period of 10 years or more, the impact of immigration on the wages of natives overall is very small. However, estimates for subgroups span a comparatively wider range, indicating a revised and somewhat more detailed understanding of the wage impact of immigration since the 1990s. To the extent that negative wage effects are found, prior immigrants—who are often the closest substitutes for new immigrants—are most likely to experience them, followed by native-born high-school dropouts, who share job qualifications similar to the large share of low-skilled workers among immigrants to the United States.

The first result, concerning the effects over a decade or more, should be treated with more than a few grains of salt. That’s because, as George Borjas explains, the finding (that “the impact of immigration on the wages of natives overall is very small”) is actually an artifact of the mathematical assumptions on which the models are built. More important are the shorter-run effects on the wages of workers against whom immigrants are often thrown into competition: prior immigrants and native-born high-school dropouts. Their wages do fall when large numbers of foreign-born workers immigrate and are forced to have the freedom to sell their ability to work within U.S. labor markets. And, of course, one can argue that new immigrants’ wages are lower than they otherwise might have been because of the existence of a large pool of previous immigrants (many of them without documents) and native-born workers without high-school degrees.

So, who gains from immigration?  Clearly, employers benefit from the existing “stock” as well as the annual “flow” of immigrants, especially since foreign-born workers “are more responsive than natives to regional differences in labor demand” (p. 222) and because “immigrants can be employed under arrangements in which payroll taxes are ignored and labor regulations are not observed” (p. 242).* That’s particularly true in the construction industry, where foreign-born workers constitute about 25 percent of the labor force.**

And, of course, there are two other major groups that benefit from an influx of workers: wealthy households that directly employ them, in “child care, landscaping, . . .and other household services” (p. 226); and the owners of the housing stock, who rent to immigrant workers and their families.***

The other major area of academic and policy research, and a key area in the Panel’s report, has to do with the impact of immigration on public finances. As with labor-market effects, estimating the fiscal impacts of immigration is complex (since it involves different levels of government as well as different generations of foreign-born workers and their families). The general conclusion is that the fiscal impacts of immigrants are generally positive at the federal level and negative at the state and local levels (p. 354):

State and local governments bear the burden of providing education benefits, upon arrival and continuing, to young immigrants and to the children of immigrants, but their methods of taxation tend to recoup relatively fewer contributions later from the most highly educated taxpayers. Federal benefits, in contrast, are largely focused on the elderly, so the relative youthfulness of arriving immigrants means that they tend to have positive fiscal impacts on federal finances in the short term. In addition, federal taxes are more strongly progressive, drawing more contributions from the most highly educated. The investment in public education requires public funds and pays public dividends, but a key issue is that the public dividends tend to be absorbed by the federal government, while the public funds are provided by the states. The fact that states bear much of the fiscal burden of immigration may incentivize state-level policies to exclude immigrants. Equity issues between the federal government and across states should be given consideration in future iterations of immigration policy.

It should come as no surprise, then, that especially at the local and state levels, where taxation is generally much less progressive than for the federal government, native-born workers (in additional to small-business owners and others) are forced to shoulder a higher burden of financing the expansion of education and other public programs needed by immigrant (especially first-generation immigrant) workers and their families. Over the longer-run, though, the net fiscal impact of immigrant (especially second- and higher-generation immigrant) workers turns positive, particularly at the federal level—and their future contributions to Social Security and other national programs will take some of the burden off other workers.

And the bottom line? The Panel itself never attempts to combine the labor-market and fiscal effects to determine the overall impact of immigration.**** But it’s clear from the various pieces of information this study provides that, as with all of the other periods of internal and external migration induced by U.S. capitalism, recent waves of immigration have benefited a tiny group of employers at the top, who in turn have managed to shift the costs—through wage reductions and higher taxes—onto workers (both recent immigrants and native-born workers).

The problem in American public debate is, now as in previous battles over immigration, foreign-born workers are scapegoated—and attention is shifted from the real cause of immigration.***** As I see it, American workers have every right to be concerned about lower wages and higher taxes. But they also have to recognize that wage stagnation and their growing tax burden are only partly caused by immigration—and that capitalism, not the influx of foreign-born workers, is what is responsible for their plight.


*As a result, immigrant workers are “more likely to hold jobs characterized by poor working conditions or high risk than are natives” (p. 242).

**Overall, if immigrant labor accounts for a large percentage (according to the report, 16.5 percent) of the total number of hours worked in the United States, the Panel estimates that “the current stock of immigrants lowered wages by 5.2 percent and generated an immigration surplus of $54.2 billion, representing a 0.31 percent overall increase in income that accrues to the native population” (p. 128), most of which flows to their employers.

***For example, according to the Panel (p. 227),

The immigrant share of rental unit growth was 26.4 percent in the 1980s, 60.4 percent in the 1990s, and 31.7 percent in the 2000s; it is projected to be 26.4 percent in the 2010s. The unusually high immigrant share of rental unit growth in the 1990s is attributed to an upswing in immigration in that decade, combined with a downswing in the population growth of native-born young adults, due to the arrival in adult years of the undersized cohort known as Generation X (those born from the mid-1960s to the early 1980s).

****In a footnote, Borjas attempts a back-of-the-envelope calculation of the total wealth transfer—which amounts to $500 billion—caused by immigration:

The calculation of the immigration surplus reported in Chapter 4 of the NAS report assumes that GDP is $17.5 trillion; that 65% of GDP goes to workers; and that 16.5% percent of the workforce is foreign-born. The report also says that “the current stock of immigrants lowered wages by 5.2 percent.”

Because only 65% of GDP goes to workers, that means that the total earnings of all workers is $11.4 trillion (or 0.65 × 17.5). But because only 16.5% of workers are foreign-born, the fraction of total earnings that goes to native workers is $9.5 trillion (or 0.835 × 11.4). The NAS report says that native earnings fell by 5.2 percent, so that the wage transfer from native workers to employers is $494 billion (or 0.052 × 9.5).

****There is, of course, a large nativist lobby that has spearheaded that scapegoating.


Special mention

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Wage growth has been so slow in recent years even the International Monetary Fund has taken notice. They’ve even discovered the reason: the Reserve Army of the Unemployed and Underemployed.


Let me explain. Stephan Danninger, writing on IMF Direct, has noted that, while the U.S. labor market seems to have healed (with an official unemployment rate now below 5 percent), wage growth is “still disappointingly low.” (For example, in my chart of average hourly earnings of production and nonsupervisory workers, while wage growth had risen to 2.5 percent in August of this year, it was still almost 1.5 percentage points lower than in October 2008.)

And Danninger’s analysis?

Low wages are a vestige of the crisis. Almost eight years after the height of the crisis, laid-off workers continue to re-enter the labor force, which affects average wage growth. This so-called decomposition effect occurs when new employees are hired for less than the average wage rate. When a worker finds a new job after a long unemployment spell, his or her wages tend to be well below that of peers who remained employed. As a result, these new hires bring down the average hourly wage rate—that is, the rate across all workers.


wage growth for a broad segment of workers is also lower than a decade ago. For instance, wages of so-called job stayers—the vast majority of U.S. workers who remain at the same job—have risen 3.5 percent this year, a full percentage point lower than before the Great Recession. Similarly, earnings in the middle of the wage distribution—the 50th percentile—are also seeing less gains than in the past: they have risen by 3.2 this year compared to 4.1 percent during 2000–07.  The same is true for workers in services and other sectors.

In other words, the existence of the Reserve Army and the movement of workers out of the Reserve Army has had the effect of dampening the wage increases of both rehired workers and of workers who remained on the job. All workers have therefore been disciplined and punished by the Reserve Army of Unemployed and Underemployed workers that was created by the crash of 2007-08.


But, as it turns out, Danninger doesn’t have a long enough view. While wage increases in recent years have been less than workers saw before the crash (e.g., 2005-2007), workers’ wages have been growing at a relatively slow rate for decades now, beginning in 1986. Whereas wages grew at a rate of between 7 and 9 percent a year from 1969 to 1981, those increases have fallen dramatically since then, hovering between 1.5 and 4 percent a year.

The conclusion? American workers have been disciplined and punished not just since the crash, but for at least three decades. That’s why their employers’ profits have skyrocketed and why the working-class itself has fallen further and further behind the tiny group at the top of the U.S. economy.


Two findings stand out in a new study from the Economic Policy Institute (pdf) on black-white wage gaps in the United States:

First, since 1979, the gap between all workers’ wages—black and white, women and men—and productivity has increased dramatically. Thus, while productivity increased by over 60 percent, wages for white workers rose by only 22.2 percent and black wages by even less, 13.1 percent.

Second, wages for African American have grown more slowly (or, in the case of men, fallen by a greater amount) than those of their white counterparts. As a result, pay disparities by race and ethnicity have expanded since 1979. For example, white women’s wages increased by 30.2 percent and black women’s wages by only 12.8 percent. And while men’s wages actually declined, they fell by 3.1 percent for white men and even more, by 7.2 percent, for black men. Thus, the overall black-white wage gap increased from 18.1 percent in 1979 to 26.7 percent in 2015.

It is pretty clear from the report that overall wage stagnation (especially for the majority of workers, i.e., those below the 90th percentile), in conjunction with lax enforcement of anti-discrimination laws, led to higher wage disparities by race and ethnicity.

But, and this goes beyond the report, we also need to consider the other side of that relationship—that increased racial and ethnic disparities reinforce the growing gap between productivity and the wages of all workers. Black workers are paid less than their white counterparts (of both genders), and all workers’ wages are as a result less than they otherwise would be.

In the end, then, wealthy individuals and large corporations, who capture the resulting surplus, are the only ones who benefit from racial and ethnic wage disparities.



Special mention



According to the norms of both neoclassical economic theory and capitalism itself, workers’ wages should increase at roughly the same rate as their productivity.* Clearly, in recent years they have not.

The chart above, which was produced by B. Ravikumar and Lin Shao for the Federal Reserve Bank of St. Louis, shows that labor compensation has grown slowly during the recovery of the U.S. economy from the 2007-09 recession. In fact, real labor compensation per hour in the nonfarm business sector was 0.5 percent lower 20 quarters after the start of the recovery, while labor productivity had increased by 6 percent.

Clearly, the gap between worker compensation and productivity has grown during the current recovery.


But the authors go even further, showing that the gap in the United States between compensation to workers and their productivity has been growing for decades.

labor productivity has been growing at a higher rate than labor compensation for more than 40 years. As Figure 3 shows, labor productivity in 2016:Q1 is 3.8 times as high as that in 1950:Q1; labor compensation, on the other hand, is only 2.7 times as high. In other words, the gap between labor productivity and compensation has been widening for the past four decades. The slower growth in labor compensation relative to labor productivity during the recovery from the two most recent recessions is part of this long-term trend. (reference omitted)

The data in Figure 3 show that the productivity-compensation gap—defined as labor productivity divided by labor compensation—has been increasing on average by approximately 0.9 percent per year since 1970:Q1. Based on this long-term trend, the gap would have been 51 percent higher in 2016:Q1 compared with 1970:Q1; in the data, the gap is actually 47 percent higher.

The fact is, labor compensation has failed to keep up with labor productivity after the Great Recession. But, as it turns out, there’s nothing unique about this period. The gap has been growing for more than four decades in the United States.**

Clearly, the recent and long-term trends of productivity and labor compensation challenge the norms of neoclassical economics and of capitalism itself. But we are also seeing the growth of another gap—between the promises of both neoclassical theory and capitalism and the reality workers have faced for decades now.


*Neoclassical economics—in particular, the marginal productivity theory of distribution—is based on the idea that the factors of production (land, labor, capital, and so on) receive in the form of income what they contribute to production. So, for example, as labor productivity increases, real wages should also rise. Similarly, capitalism is based on the idea of “just deserts.” That idea—that everyone gets what they deserve—is essential to the very idea of fairness or justice in the way the economy is currently organized.

**The authors’ analysis is based on the gap between labor compensation and productivity. If we look at real wages (as in the chart below) instead of compensation (which includes benefits, and therefore the portion of the surplus employers distribute to pension plans, healthcare insurers, and others), the gap is even larger.


According to my calculations from Fed data, since 1979, productivity has grown by 60 percent while real wages have increased by less than 5 percent.