Posts Tagged ‘wages’

RedMenace

Branko Milanovic has put forward an idea he thinks “will gradually become more popular”:

The idea is simple: the presence of the ideology of socialism (abolition of private property) and its embodiment in the Soviet Union and other Communist states made capitalists careful: they knew that if they tried to push workers too hard, the workers might retaliate and capitalists might end up by losing all.

The idea reminds me of an argument Etienne Balibar made many years ago (unfortunately, I can no long remember or find the original source but here’s a link [pdf] to one version of it)—that the “European project” was more progressive during the Cold War in the sense that the welfare state was constructed, by forces from above and below, as a response to the Soviet model of socialism, in order to prevent the working classes from adopting a communist ideology. (Since then, as Balibar has recently argued, the European project has fundamentally changed, as it has been assimilated by globalized finance capitalism and, under German hegemony, a strategy of industrial competitiveness based on low wages.)

Milanovice discusses some recent empirical work on three channels through which socialism “disciplined” income inequality under capitalism: (a) ideology/politics (e.g., the electoral importance of Communist and some socialist parties), (b) trade unions (some of which were affiliated with Communist or Labor parties), and (c) the “policing” device of the Soviet military power. He then offers his own analysis:

Communism, was a global movement. It does not require much reading of the literature from the 1920s to realize how scared capitalists and those who defended the free market were of socialism. After all, that’s why capitalist countries militarily intervened in the Russian Civil War, and then imposed the trade embargo and the cordon sanitaire on the USSR.  Not a sort of policies you would do if you were not ideologically afraid (because militarily the Soviet Union was then very weak). The threat intensified again after the World War II when the Communist influence through all three channels was at its peak. And then it steadily declined so much that by mid-1970s, it was definitely small. The Communist parties reached their maximum influence in the early 1970s but Eurocomunism had already expunged from its program any ideas of nationalization of property. It was rapidly transforming itself into social democracy. The trade unions declined. And both the demonstration effect and the fear of the Soviet Union receded. So capitalism could go back to what it would be doing anyway, that is to the levels of inequality it achieved at the end of the 19th century. “El periodo especial” of capitalism was over.

He admits the implication of such a story may be rather unpleasant:

left to itself, without any countervailing powers, capitalism will keep on generating high inequality and so the US may soon look like South Africa.

This is not to suggest we need another Cold War for United States to move even closer to looking like South Africa. But it does mean there will be a significant move from above toward more democracy and less inequality only if there’s a real threat to move outside of capitalism from below.

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In the end, it all comes down to the theory of value.

That’s what’s at stake in the ongoing debate about the growing gap between productivity and wages in the U.S. economy. Robert Lawrence tries to define it away (by redefining both output and compensation so that the growth rates coincide). Robert Solow, on the other hand, takes the gap seriously and then looks to rent as the key explanatory factor.

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

This is a tricky matter because there is no direct measurement of rent in this sense. You will not find a line called “monopoly rent” in any firm’s income statement or in the national accounts. It has to be estimated indirectly, if at all. There have been attempts to do this, by one ingenious method or another. The results are not quite “all over the place” but they differ. It is enough if the rent component lies between, say, 10 and 30 percent of GDP, where most of the estimates fall. This is what has to be divided between the claimants—labor and capital and perhaps others. It is essential to understand that what we measure as wages and profits both contain an element of rent.

Until recently, when discussing the distribution of income, mainstream economists’ focus was on profit and wages. Now, however, I’m noticing more and more references to rent.

What’s going on? My sense is, mainstream economists, both liberal and conservative, were content with the idea of “just deserts”—the idea that different “factors of production” were paid what they were “worth” according to marginal productivity theory. And, for the most part, that meant labor and capital, and thus wages and profits. The presumption was that labor was able to capture its “just” share of productivity growth, and labor and capital shares were assumed to be pretty stable (as long as both shares grew at the same rate). Moreover, the idea of rent, which had figured prominently in the theories of the classical economists (like Smith and Ricardo), had mostly dropped out of the equation, given the declining significance of agriculture in the United States and their lack of interest in other forms of land rent (such as the private ownership of land, including the resources under the surface, and buildings).

Well, all that broke down in the wake of the crash of 2007-08. Of course, marginal productivity theory was always on shaky ground. And the gap between wages and productivity had been growing since the mid-1970s. But it was only with the popular reaction to the problem of the “1 percent” and, then, during the unequal recovery, when the tendency for the gap between a tiny minority at the top and everyone else to increase was quickly restored (after a brief hiatus in 2009), that some mainstream economists took notice of the cracks in their theoretical edifice. It became increasingly difficult for them (or at least some of them) to continue to invoke the “just deserts” of marginal productivity theory.

The problem, of course, is mainstream economists still needed a theory of income distribution grounded in a theory of value, and rejecting marginal productivity theory would mean adopting another approach. And the main contender is Marx’s theory, the theory of class exploitation. According to the Marxian theory of value, workers create a surplus that is appropriated not by them but by a small group of capitalists even when productivity and wages were growing at the same rate (such as during the 1948-1973 period). And workers were even more exploited when productivity continued to grow but wages were stagnant (from 1973 onward).

That’s one theory of the growing gap between productivity and wages. But if mainstream economists were not going to follow that path, they needed an alternative. That’s where rent enters the story. It’s something “extra,” something can’t be attributed to either capital or labor, a flow of value that is associated more with an “owning” than a “doing” (because the mainstream assumption is that both capital and labor “do” something, for which they receive their appropriate or just compensation).

According to Solow, capital and labor battle over receiving portions of that rent.

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.

The problem, as I see it, is that Solow, like all other mainstream economists, is assuming that profits, wages, and rents are independent sources of income. The only difference between his view and that of the classicals is that Solow sees rents going not to an independent class of landlords, but as being “shared” by capital and labor—with labor sometimes getting a larger share and other times a smaller share, depending on the amount of power it is able to wield.

We’re back, then, to something akin to the Trinity Formula. And, as the Old Moor once wrote,

the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer’s fees, red beets and music.

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As the Economic Policy Institute explains,

U.S. CEOs of major companies earned 20 times more than a typical worker in 1965; this ratio grew to 29.9-to-1 in 1978 and 58.7-to-1 by 1989, and then it surged in the 1990s to hit 376.1-to-1 by the end of the 1990s recovery in 2000. The fall in the stock market after 2000 reduced CEO stock-related pay (e.g., options) and caused CEO compensation to tumble until 2002 and 2003. CEO compensation recovered to a level of 345.3 times worker pay by 2007, almost back to its 2000 level. The financial crisis in 2008 and accompanying stock market decline reduced CEO compensation after 2007–2008, as discussed above, and the CEO-to-worker compensation ratio fell in tandem. By 2014, the stock market had recouped all of the value it lost following the financial crisis. Similarly, CEO compensation had grown from its 2009 low, and the CEO-to-worker compensation ratio in 2014 had recovered to 303.4-to-1, a rise of 107.6 since 2009. Though the CEO-to-worker compensation ratio remains below the peak values achieved earlier in the 2000s, it is far higher than what prevailed through the 1960s, 1970s, 1980s, and 1990s.

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A recent New York Times article makes much of the fact that Chinese textile mills are now setting up shop in the U.S. South.

I wouldn’t bet on a great leap forward either in Chinese investments in the United States or in U.S. manufacturing, at least not in the foreseeable future.

However, as a recent study by the Boston Consulting Group shows, the existence of any Chinese investment in the U.S. manufacturing sector indicates both a rise in costs in China (based on increasing wages) and on a decline in costs in the United States (based, especially, on stagnant wages as well as low energy costs) in comparison to other developed countries.

Labor is one key to the growing U.S. competitive advantage. The U.S. has one of the developed world’s most flexible labor markets, ranking as the most favorable economy in terms of labor regulation among the top 25 manufacturing exporters. The U.S. also has by far the highest worker productivity among the world’s 25 biggest manufactured-goods exporters. Adjusted for productivity, U.S. labor costs are an estimated 20 to 54 percent lower than those of Western Europe and Japan for many products.

The big U.S. energy-cost advantage is a recent development. While industrial prices for natural gas have risen around the world, they have fallen in the U.S. by around 50 percent since 2005, when large-scale recovery from underground shale deposits began in earnest. Natural gas currently costs more than three times as much in China, France, and Germany than in the U.S.—and nearly four times as much in Japan. In addition to being an important feedstock for industries such as chemicals, low-priced shale gas has also helped keep electricity prices in the U.S. below those of most other major exporters. That translates into a sizable cost advantage for energy-intensive industries such as steel and glass.

Is there any wonder the economic elite in the United States, which is interested only in short-term profits, is opposed to both making the labor market less “flexible” and real climate-change legislation?

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As Nick Bunker explains,

wage growth looks flat no matter the measure, even when we look at just the wage and salary component of compensation in the Employment Cost Index. Consider Figure 1 below [above]. The graph looks at the growth in three different measures of wages: average hourly earnings for all private-sector workers, average hourly earnings for production and non-supervisory workers, and the Employment Cost Index’s measure of wages and salaries for private-sector workers. A lift off for wage growth doesn’t look imminent by any measure. Indeed, the trend for the Employment Cost Index would be even more quiescent if occupations with bonus pay are excluded—the factor that may have been behind the jump in the index in the first quarter of this year.

It is possible, of course, to raise workers’ wages. But U.S. employers have no interest in doing so. Nor is Congress going to enact a fiscal policy that might put more people to work, which might put upward pressure on wages, because that would challenge private employers’ power over job creation and wage-setting.

And so we’re left with wages that are barely keeping up with the rate of inflation and workers who are just getting by.

So much for the much-vaunted economic recovery. . .

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