Posts Tagged ‘wages’

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4855  Bennett editorial cartoon

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Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili:

Firms cannot afford a misalignment of their workers’ pay and productivity increases—the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the folks at the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

So, no, there is no necessary or automatic link between productivity and wages within the U.S. economy. There may have been such a relationship after World War II, during the so-called Golden Age of American capitalism, but not in recent decades.*

A natural question that arises is just where did the excess productivity—the extra surplus U.S. employers appropriated from their workers—go? A significant proportion, as I showed last year, went to higher corporate profits. Another large portion went to those at the very top of the wage distribution.

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As is clear in the chart above, the top 1 percent of earners saw cumulative gains in annual wages of 157.3 percent between 1979 and 2017—far in excess of economy-wide productivity growth and nearly four times faster than average wage growth (40.1 percent). Over the same period, top 0.1 percent earnings grew 343.2 percent, with the latest spike reflecting the sharp increase in executive compensation.

In other words, corporate executives—on both Main Street and Wall Street—have been able to share in the extra booty captured from American workers, who were forced to have the freedom to sell their ability to work for wages that have barely increased in recent decades.

That combination of stagnant wages for most workers and the ability of those at the top to capture a large portion of the extra surplus is therefore at the root of increasing inequality in the United States.

 

*Even then, as I explained back in 2017:

The fact is, the supposed Golden Age of American capitalism was based on a set of institutions that allowed the boards of directors of large corporations to appropriate a growing surplus and to distribute it as they wished. At first, during the immediate postwar period, that meant growing incomes for those in the bottom 90 percent. But, even then, the mechanisms for distributing income remained in the hands of a very small group at the top. And they had both the interest and the means to stop the growth of wages, get even more surplus (from U.S. workers and, increasingly, workers around the globe), and distribute a greater share of that surplus to a tiny group at the very top of the distribution of income.

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600_219645  Alone

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No matter how we measure it, most Americans are falling further and further behind the tiny group at the top.

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That’s not at all surprising. Whether we compare the growing gap between average wages and Gross Domestic Product per capita (as in the chart on the left) or real median household income and real Gross Domestic Product per capita (as in the chart on the right), it’s clear the average American has been losing out. A growing proportion of what workers produce hasn’t been going to them but to the richest households for decades now.

That does not mean, contra Robert Samuelson, that “the incomes of most Americans have stagnated for decades.” That’s a canard. No one makes that argument.

No, the real issue is that American workers have been producing more and more but getting only a tiny share of that increase. As I explained last year,

That’s what mainstream economists can’t or won’t understand: that workers may be worse off even as their wages and incomes rise. That problem flies in the face of every attempt to celebrate the existing order by claiming “just deserts.”

It’s what is known as relative immiseration. And it simply can’t be disputed by the alternative statistics invoked by Samuelson or Stephen J. Rose (pdf).

The exact numbers concerning the distribution of income in the United States depend, of course, on a whole host of assumptions and methodological choices, mostly involving what counts as “income.” The more categories that are included in income—starting with the traditional series (wages and salaries, dividends, interest, and rent) before and after taxes, and then including payments from government programs (such as Social Security, unemployment insurance, Temporary Assistance for Needy Families, and the earned-income tax credit), and going so far as to add employer contributions for health insurance and 401(k) retirement accounts, the employer share of the Federal Insurance Contributions Act, government noncash benefits (e.g., the Supplemental Nutrition Assistance Program, Medicare, Medicaid, and housing vouchers), housing services (homeowners paying rent to themselves) and government services (e.g., defense, education, legal system, and administration)—the less measured inequality turns out to be.

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In fact, as Rose demonstrates, most of the available studies show growing inequality in the United States, with a high and rising share of income captured by the top 1 percent.** The only real outlier is by Auten and Splinter, who merely demonstrate that it is possible for mainstream economists to make growing inequality virtually disappear with enough “massaging” of the underlying numbers.***

In the end, Samuelson himself is forced to admit,

None of this means we should stop debating inequality. Who gets what, and why, are inevitable subjects for examination in a rich democratic society. By contrast with many advanced societies, income and wealth are indisputably more concentrated in the United States.

And the problem of growing inequality is only going to get worse as we move forward, especially with ongoing automation. As David Autor explains,

employment is growing steadily, and its growth in terms of number of jobs has not been discernibly dented by technological progress. But the sum of wage payments to workers is growing more slowly than economic value-added, so labor’s share of the pie of net earnings is falling. This doesn’t mean that wages are falling. It means that they are not growing in lock step with value-added.

That’s exactly right. Workers’ wages and middle-class incomes may continue to rise in absolute terms but their relative standing with respect to the tiny group at the top—those who are in the position of capturing the surplus—will likely worsen.

Measure by measure, the economic and social landscape is being fractured and American workers are being left behind.

 

*So that I avoid the problem I encountered when I presented my “Merchant of Venice” paper, this post is not about Shakespeare’s play.

**The main studies include Emmanuel Saez and Thomas Piketty (pdf), Piketty, Saez and Gabriel Zucman (pdf), Gerald Auten and David Splinter (pdf), and the Congressional Budget Office. As I showed in 2016, even Rose, for all the faults in his own study, found

an enormous increase in inequality between 1979 and 2014: combined, the share of income going to the rich and upper middle-class more than doubled, from 30 to 63.1 percent, while the amount of income going to everyone else—middle-class, lower middle-class, and poor—fell precipitously, to less than 40 percent.

***Auten and Splinter arrive at such a misleading result through two statistical maneuvers: allocating underreported income (primarily business income) according to IRS audit data and retirement income. Thus, they conclude, “Our results suggest an alternative narrative about top income shares: changes in the top one percent income shares over the last half century are likely to have been relatively modest.”