Posts Tagged ‘wages’

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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.

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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.

Moreover,

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.

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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.

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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.

 

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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.

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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.

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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.

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The best Steven Kaplan can come up with in attempting to defend Wall Street against Lynn Stout’s withering criticisms is that it has helped the U.S. corporate sector in recent decades.

If those criticisms had been accurate, the U.S. corporate sector today would be ailing. Instead, corporate profits are at historical highs both absolutely and relative to GDP. Private equity and activist investors–both Wall Street creations–have pushed companies to become more efficient. Venture capital funded companies, aided by capital from Wall Street and other investors, include firms like Amazon, Amgen, Apple, Facebook, Gilead Sciences, Google, Intel, Microsoft, and Starbucks that have changed the world as we know it. While it is impossible to prove causality, it seems highly likely that Wall Street has played an important role in these results.

And he’s right: nonfinancial corporate profits (as a share of national income, the blue line in the chart above) have in fact risen since 1985 (from 4.4 percent in 1985 to 8 percent in 2015). And Wall Street has also helped itself: financial profits (the red line above) have also risen (from 1.3 percent of national income in 1985 to 3.2 percent in 2015).

What he fails to mention is that, at the same time, the wage share of national income (the green line in the chart) has fallen: from 55.6 in 1985 (and even higher, 57.2 percent in 1992) to a low of 52.5 percent in 2014 (rebounding slightly to  53.1 percent in 2015).

Yes, indeed, Wall Street has been good for business and for itself—and terrible for everyone else, especially American workers.

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For neoclassical economists (like Gregory Mankiw, in his bestselling textbook, Principles of Microeconomics), the major effect of labor unions is that they cause unemployment, by setting a wage rate that exceeds the equilibrium price for labor. According to this story, while union workers (“insiders”) may benefit, unemployed non-union workers (“outsiders”) lose out.* So, their overall conclusion is, unions ultimately hurt workers and cause increased inequality. Unions should therefore be discouraged.

Over the course of the past three and a half decades, the United States it seems has been following neoclassical economists’ advice: the overall unionization rate has fallen to 11.1 percent, while the rate for private-sector workers is even lower, 6.7 percent in 2015 (according to the Bureau of Labor Statistics).**

But the folks at the Economic Policy Institute [ht: ja] tell a story very different from the neoclassical one. As they see it, it’s the precipitous decline in U.S. labor unions from 1979 to 2013 that has played a key role in hurting workers and increasing inequality. In particular, it has decreased the wages of the vast majority of private-sector, full-time nonunion workers—and nonunion men without a college degree and nonunion men with a high school diploma or less have are the ones who suffered the most. Thus, for example, weekly wages for nonunion private-sector men would be an estimated 5 percent ($52) higher in 2013 if private-sector union density (the share of workers in similar industries and regions who are union members) had remained at its 1979 level. And for nonunion private-sector men with a high school diploma or less education, weekly wages would be an estimated 9 percent ($61) higher if union density remained at its 1979 levels (for a year-round worker, this translates to an annual wage loss of about $3,172). In general, union decline has exacerbated wage inequality in the United States by dampening the pay of nonunion workers as well as by eroding the share of workers directly benefitting from unionization. One of the key ways, therefore, to help workers and to lessen inequality is to encourage the formation and strengthening of labor unions.

What’s particularly interesting about the Institute’s analysis (in addition to their empirical estimates) is their analysis of the various ways unions help workers, especially nonunion workers. Here are some of them:

  • the threat of unionization: nonunion employers worried about a possible unionization drive may match union pay scales to reduce the demand for organization
  • the ripple effect: like minimum-wage increases, union wage rates for production workers can lead to increases in wages for those above them (e.g., their managers)
  • the moral economy: unions help institute norms of fairness regarding pay, benefits, and worker treatment that can extend beyond the unionized core of the workforce

The problem, of course, is that since the late-1970s, the presence and effects of unions within the U.S. economy and society have been on the decline. As the authors conclude:

nonunion employers are increasingly unlikely to fear a threat of unionization. . . responding to possible unionization threats through increasing wages is one pathway through which unions raised pay for nonunion workers in past periods. With organizing efforts at a standstill throughout much of the private sector, typical nonunion employers now have little to fear. Given the ongoing attacks on existing unions, labor leaders are doing all they can to hold onto their remaining terrain.

We contend that unions’ influence on nonunion pay once extended beyond these threat effects. But their ability to maintain wage and benefit standards rested on their political and economic power, and their salience throughout the culture. . .That presence has vanished throughout much of the private sector, rendering unions unable to exert the same political, economic, and cultural influence over the working lives of average Americans, union and not.

The result for all workers, but especially for nonunion workers, has been a prolonged period of stagnant wages—and, for American society as a whole, an increase in inequality that has made the existing economic institutions increasingly fragile and, in the eyes of many, fundamentally illegitimate.

 

*This is from the PowerPoint Slides for Mankiw’s book by Ron Cronovich:

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**While a much higher portion of workers in the public sector are members of unions (35.2 percent), there are many more private-sector workers (113.2 million) than government workers (20.6 million).

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