Posts Tagged ‘wages’

productivity

Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,

After growing in tandem for nearly 30 years after the second world war, since 1973 an increasing gap has opened between the compensation of the average American worker and her/his average labor productivity.

The fact that the relationship between wages and productivity has been severed in recent decades presents a fundamental problem, both for U.S. capitalism and for mainstream economic theory. It calls into question the presumption of “just deserts” within U.S. economic institutions as well as within the theory of distribution created and disseminated by mainstream economists.

It means, in short, that much of what American workers are produced is not being distributed to them, but instead is being captured to their employers and wealthy individuals at the top, and that mainstream economic theory operates to obscure this growing problem.

It should therefore come as no surprise that Summers and Stansbury, while admitting the growing wage-productivity gap, will do whatever they can to save both current economic institutions and mainstream economic theory.

First, Summers and Stansbury conjure up a conceptual distinction between a “delinkage view,” according to which increases in productivity growth no long systematically translate into additional growth in workers’ compensation, and a “linkage view,” such that productivity growth does not translate into pay, but only because “other factors have been putting downward pressure on workers’ compensation even as productivity growth has been acting to lift it.” The latter—linkage—view maintains mainstream economists’ theory that wages correspond to workers’ productivity and that, in terms of the economy system, increasing productivity will raise workers’ wages.

Second, Summers and Stansbury compare changes in labor productivity and various time-dependent and lagged measures of the typical worker’s compensation—average compensation, median compensation, and the compensation of production and nonsupervisory workers—and find that, while compensation consistently grows more slowly than productivity since the 1970s, the series (both of them in log form) move largely together.

Their conclusion, not surprisingly, is that there is considerable evidence supporting the “linkage” view, according to which productivity growth is translated into increases in workers’ compensation and hence improving living standards throughout the postwar period. Thus, in their view, it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

ButSummers and Stansbury are still unable to dismiss the existence of an increasing wedge between productivity and compensation, which has two components: mean and median labor compensation have diverged and, at the same time, there’s been a falling labor share in the United States.

That’s where they stumble. They look for, but can’t find, a link between productivity and those two measures of growing inequality. There simply isn’t one.

What there is is a growing gap between productivity and compensation in recent decades, which has result in both a falling labor share and higher growth of labor compensation at the top. That is, more surplus is being extracted from workers and some of that surplus is in turn distributed to those at the top (e.g., industrial CEOs and financial executives).

Moreover, one can argue, in a manner not even envisioned by Summers and Stansbury, that the increasing gap between productivity and workers’ compensation is at least in part responsible for the productivity slowdown. Changes in the U.S. economy that emphasize capturing an increasing share of the surplus from around the world have translated into slower productivity growth in the United States.

The only conclusion, contra Summers and Stansbury, is that even if productivity growth accelerates, there is no evidence that suggests “the likely impact will be increased pay growth for the typical worker.”

More likely, at least for the foreseeable future, is the increasing inequality and the (relative) immiseration of American workers. Those are the problems neither existing economic institutions nor mainstream economic theory are prepared to acknowledge or solve.

 

*Actually, the argument is about productivity and compensation, not wages. In fact, Summers and Stansbury assert that “the definition of ‘compensation’ should incorporate both wages and non-wage benefits such as health insurance.” Their view is that, since the share of compensation provided in non-wage benefits significantly rose over the postwar period, comparing productivity against wages alone exaggerates the divergence between pay and productivity. An alternative approach distinguishes what employers have to pay to workers, wages (the value of labor power, in the Marxian tradition), from what employers have to pay to others, such as health insurance companies, in the form of non-wage benefits (which, again in the Marxian tradition, is a distribution of surplus-value).

wages-unemployment

The official unemployment rate continues to fall in the United States. And everyone, at least among top policymakers and the business press, has been promising that workers’ wages will finally break out.

As it turns out, the unemployment rate (the red line in the chart above) in September was 4.1 percent, far below the high of 10 percent in October of 2009 and a new low for the so-called recovery from the Second Great Depression. However, hourly wages (for production and nonsupervisory workers, the blue line) rose only 2.5 percent on an annual basis, even less than the 2.7 percent workers were gaining at the height of the depression.

The only possible conclusion is that, in the United States, expecting workers’ wages to finally begin to catch up is like Vladimir and Estragon waiting below a leafless tree for the arrival of someone named Godot.

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Kevin Hassett and the other members of the president’s Council of Economic Advisers are just like the long-haired preachers Joe Hill sang about more than a century ago. They come out every night to tell us what’s wrong and what’s right. But when asked about something to eat, they answer in voices so sweet:

You will eat, bye and bye
In that glorious land above the sky
Work and pray, live on hay
You’ll get pie in the sky when you die.
That’s a lie

With one notable exception: according to the Council (pdf), that “glorious land above the sky” lies just on the other side of the Trump administration’s proposed tax reform. And workers, whose real wages have stagnated for decades now, won’t have to die to receive their pie in the sky.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would. . .increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

There’s no other way to put it. That’s a lie.

Pie

As is clear from this chart, both corporate profits (the red line) and investment (the blue line) have soared in recent decades. There’s simply been no shortage of investment or investment funds, either from retained earnings or in terms of money borrowed from financial institutions. At the same time, the wage share of national income (the green line in the chart) has fallen precipitously.

So, even if cutting corporate tax rates (and thus permitting higher retained earnings) did lead to more investment, there’s no guarantee workers’ wages would increase as a result. They haven’t for decades now. Why should that change in the future?

Moreover, there’s no guarantee higher retained earnings would lead to more investment. Just as likely (perhaps even more so), corporations would be able to use their profits for other purposes—including higher CEO salaries, increased dividends to stockholders, more stock buybacks, and a higher rate of mergers and acquisitions—which have nothing to do with raising workers’ wages.

The only result would be more corporate power and more obscene levels of inequality in the United States.

And that’s no lie.

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It’s clear that, for decades now, American workers have been falling further and further behind. And there’s simply no justification for this sorry state of affairs—nothing that can rationalize or excuse the growing gap between the majority of people who work for a living and the tiny group at the top.

But that doesn’t stop mainstream economists from trying.

fredgraph

Look, they say, American workers are clearly better off than they were before. Both real weekly earnings (the blue line in the chart) and the median household income (the red line) are higher than they were thirty years ago.

There’s no denying that, on average, the absolute level of worker pay and household income has gone up. That’s proof, mainstream economists argue, that workers are enjoying the fruits of their labor.

fredgraph (1)

The problem, though, is that the increase in workers’ wages (the blue line, the same as in the previous chart) pales in comparison to the rise in labor productivity (the green line in the chart above): since 1987, real wages have gone up only 8 percent, while productivity has grown by 75 percent.

In other words, American workers are producing more and more but getting only a tiny share of that increase.

fredgraph (2)

It should come as no surprise, then, that the wage share of national income (the purple line in the chart above) has fallen precipitously—by 8 percent since 1987 and by 16.5 percent since 1970.

American workers are in fact experiencing a relative immiseration compared to their employers, who are able to capture the additional amount their workers are producing in the form of increased profits. Moreover, American employers have every interest—and more and more means at their disposal—to continue to widen the gap between themselves and their workers.

1-90

Not surprisingly, the relative immiseration of American workers shows up in growing inequality—with the share of income captured by the top 1 percent (the orange line in the chart) increasing and the share going to the bottom 90 percent (the brown line in the chart) falling. Each is a consequence of the other.

American workers are getting relatively less of what they produce, which means more is available to distribute to those at the top of the distribution of income.

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.”

There’s nothing just about the relative immiseration and growing inequality faced by American workers. And nothing that can’t be changed by imagining and creating a radically different set of economic institutions.

208_cartoon_wages_to_nowher_large

They keep promising, ever since the recovery from the Great Recession started more than eight years ago, that workers’ wages will finally begin to increase. But they’re not.

Sure, profits continue to rise. And so is the stock market. But not wages. And mainstream economists can’t come up with an adequate explanation of why that’s the case.

U3-wages

We’ve all heard or read the story. According to mainstream economists, as the unemployment rate falls (the blue line in the chart above), a labor shortage will be created and workers’ wages (the red line) will begin to rise.

That’s the promise, at least. But the official unemployment rate is now down to 4.4 percent (from a high of 9.9 percent in 2009) and yet wages (for production and nonsupervisory workers) are only increasing at a rate of 2.3 percent a year—much less than the 4 percent workers saw back in 2007 when the unemployment rate was pretty much the same.

What’s going on?

One of the things going on is the Reserve Army. The existence of a large pool of unemployed and underemployed workers competing with other workers for the available jobs is keeping wage growth at a very low rate.

full-part-time

Consider, for example, the growth of full-time (the green line in the chart above) and part-time work (the purple line) in the United States. Since 1968, the two kinds of employment increased more or less simultaneously—until the most recent crash. Notice in the chart that, as full-time employment fell (from 121.9 million in 2007 to 111 million in 2010), part-time employment soared (from 24.7 million to 27.4 million). But then, even as full-time work began to increase again (reaching 125.8 million in August 2017), part-time employment remained high (27.6 million in that same month).

part-time

And it’s that pool of part-time American workers (in addition to the pool of surplus workers in other countries, increased automation, and low wages in the retail and food-service sectors) that is keeping most workers’ wages from growing.

Mainstream economists keep promising the American working-class an increase in wages. But neither they nor the economic system they celebrate is able to deliver on those promises.

The fact is, the longer those promises are proffered but remain unmet, the more frustrated workers will become. And the more likely it is they will demand a solution—a radically different economic system that doesn’t rely on a Reserve Army and can actually deliver on its promises to workers.

wage share-growth

We’ve been hearing this since the recovery from the Second Great Depression began: it’s going to be a Golden Age for workers!

The idea is that the decades of wage stagnation are finally over, as the United States enters a new period of labor shortage and workers will be able to recoup what they’ve lost.

The latest to try to tell this story is Eduardo Porter:

the wage picture is looking decidedly brighter. In 2008, in the midst of the recession, the average hourly pay of production and nonsupervisory workers tracked by the Bureau of Labor Statistics — those who toil at a cash register or on a shop floor — was 10 percent below its 1973 peak after accounting for inflation. Since then, wages have regained virtually all of that ground. Median wages for all full-time workers are rising at a pace last achieved in the dot-com boom at the end of the Clinton administration.

And with employers adding more than two million jobs a year, some economists suspect that American workers — after being pummeled by a furious mix of globalization and automation, strangled by monetary policy that has restrained economic activity in the name of low inflation, and slapped around by government hostility toward unions and labor regulations — may finally be in for a break.

The problem is that wages are still growing at a historically slow pace (the green line in the chart above), which means the wage share (the blue line in the chart) is still very low. The only sign that things might be getting better for workers is that the current wage share is slightly above the low recorded in 2013—but, at 43 percent, it remains far below its high of 51.5 percent in 1970.

That’s an awful lot of ground to make up.

productivity-wage share

The situation for American workers is even worse when we compare labor productivity and the wage share. Since 1970, labor productivity (the real output per hour workers in the nonfarm business sector, the red line in the chart above) has more than doubled, while the wage share (the blue line) has fallen precipitously.

We’re a long way from any kind of Golden Age for workers.

But, in the end, that’s not what Porter is particularly interested in. He’s more concerned about what he considers to be a labor shortage caused by a shrinking labor force.

So, what does Porter recommend to, in his words, “protect economic growth and to give American workers a shot at a new golden age of employment”? More immigration, more international trade, cuts in disability insurance, and limiting increases in the minimum wage.

Someone’s going to have to explain to me how that set of policies is going to reverse the declines of recent decades and usher in a Golden Age for American workers.

wages-productivity

David Brooks should have left well enough alone.

Middle-class wage stagnation is the biggest economic fact driving American politics. Over the past many years, so the common argument goes, capitalism has developed structural flaws. Economic gains are not being shared fairly with the middle class. Wages have become decoupled from productivity. Even when the economy grows, everything goes to the rich.

But then Brooks spends the rest of his column trying to convince us that there aren’t any really structural flaws, that “the market is working more or less as it’s supposed to.”

Well, maybe it’s working “more or less as it’s supposed to” for those at the top. But it’s certainly not working for everyone else, for those who actually have to work for a living.

The relevant debate is all about wages and productivity.

For Brooks (and the mainstream economists whose work he relies on), wages aren’t growing not because something is wrong, but because productivity isn’t growing. Or in his inimitable, sloganeering fashion:

It’s not that a rising tide doesn’t lift all boats; it’s that the tide is not rising fast enough.

Except, of course, productivity has grown—and wages haven’t kept up. Not by a long shot!

As is clear from the chart above, productivity has increased enormously since 1987—whether measured in terms of real GDP per capita (the orange line) or, even more, real nonfarm business output per hour worked (the green line).

So, yes, Americans have become more productive over the course of the past three decades. But wages have lagged far behind.

In fact, as is also clear in the chart, real wages (measured in terms of real weekly earnings, the blue line) have been virtually stagnant. They’ve risen only 5.5 percent over that period, much less than GDP per capita (54.4 percent) and labor productivity in nonfarm businesses (76.1 percent).

In the end, maybe Brooks is right. Maybe the growing gap between wages and productivity is not a structural flaw. Maybe it’s the way the market is supposed to work.

If so, then it’s time the break the system that both generates and relies on the large and growing gap between wages and productivity—the one Brooks and mainstream economists work so hard to convince us isn’t broken at all.

Our job, then, is to get to work imagining and creating a radically different economic and social system.