Stagnant Wages And Slow Productivity Growth

This article on productivity at Forum Economics says that there has been a global slowdown in productivity growth, and discusses some common explanations. As I pointed out, there is every reason to think that the actual slowdown in productivity growth is greater than the numbers suggest. That’s because productivity grows when output increases while hours worked remains the same or declines, as happens when firms exercise market power to increase prices without changed costs. Forum Economics argues that if productivity growth slows down, workers will not be able to improve their standards of living, explaining:

Household income is dependent on wages, which are consequently dependent on a firm’s ability to grow through greater productivity. The widening gap in productivity would account for the widening gap in household income and consequently, social equality.

At one level, this is just a version of the economic maxim that markets pay people what they are worth. In this case, the argument is that the productive people get the increased rewards. In the case of exercise of market power, this means that some people benefit from exercise of market power, and we know it isn’t the producers of the goods and services; it’s the people at the top, holders of debt and equity, and financiers.

At another level, it says that companies can’t pay higher wages unless workers increase their productivity. And certainly not at the expense of returns to capital.

Economists used to think there was some magic connection between productivity and wages. That was generally true for some time. But, as this This chart shows the relationship between wages and productivity split beginning around 1980, while productivity was growing rapidly.

That’s just after Paul Volker, then Fed Chair, raised interest rates to ludicrous levels. At the same time, economists were preaching that the problem facing the economy was inadequate levels of capital. So Reagan and the Republicans, along with plenty of complicit Democrats, slashed taxes on the rich, reduced regulations, deregulated industries, and clobbered unions. At the same time, they increased taxes on the working people of the country by increasing FICA taxes.

That worked. According to this 2012 report from Bain & Co.:

By 2010, global capital had swollen to some $600 trillion, tripling over the past two decades. Today, total financial assets are nearly 10 times the value of the global output of all goods and services. …

Our analysis leads us to conclude that for the balance of the decade, markets will generally continue to grapple with an environment of capital superabundance.

This article estimates total financial assets at about $294 Trillion in 2014. And, of course, banks have an almost unlimited capacity to lend for any useful purpose. There is certainly no shortage of capital today.

Once capital achieves a new baseline of return, it doesn’t drop back without a bitter fight, sometimes just political, but always with the threat or reality of physical violence. That’s how labor got its share in the first place, a fact no one wants to talk about. When was the last time you heard an economist discuss the violence in the coal fields, the violence that won miners safer working conditions and better wages. Once labor loses its power, workers can’t defend themselves, and can’t force the rich to share the benefits that flow from any level of productivity, whether or not that level is increasing. And indeed, the rich are now taking all the gains from productivity and more, the labor participation rate is at pre-1980 levels, and wages have been stagnant for decades. Even so, all discussion about wages is centered around increasing productivity, as if it mattered to workers when all the benefits flow to the richest among us.

One school of thought blames workers, saying they have to increase their training and preparation for the work force. A kinder version blames hysterisis effects, the idea that when workers are unemployed for extended periods, they lose their skills. The Republican answer is invest in yourself, borrow money, and get that training. Of course, you take all the risks, for example, whether you can master the schooling, or figure out what training might get you a job, or find a school that will actually train you, and by the way, if you fail, you still have to pay until you die. The Democratic version is jobs training, but that’s only sporadically available, and it’s always underfunded and rarely useful, thanks to the neoliberals in both parties. As to the older people in the workforce who can’t retrain, and can’t move to where there are jobs, both parties do nothing. We don’t just blame the victims, we ignore them, and treat them as losers who deserve nothing.

Many of the 23 economic writers cited in the Focus Economics article, and the other experts it discusses, say the problem is inadequate business investment. So the solutions offered are centered around stimulating demand and cutting taxes and regulations. No one explains how this solves the problem of the rich taking all the gains.

There are few outside the box observations. A couple of the writers think maybe the problem is that there are too many low-productivity jobs available, and too few high-productivity jobs. People see the available jobs as dead-end, and their treatment as demeaning, and they don’t do more than the absolute minimum necessary to get that minuscule paycheck. Another writer points out that the next wave of capital investment is not going to make people more productive, it’s going to replace them. I assume he means industrial robots, for the short term at least.

Another suggests that we are already very efficient at a lot of things, and in those areas, improvements in productivity won’t make much difference. In areas we aren’t very efficient at, it’s going to require something enormous to make a difference, or we would already done it. John Quiggan says that the financial sector has separated itself from the productive sector, which seems true. You can almost hear the words “Vampire Squid”. All these are intractable problems.

But I think the problem is different. The economic orthodoxy is that capital is always efficient, while labor is always bloated, lazy, indifferent, greedy, demanding, corrupt and insufferable. That was and is the rallying cry of the union-busters, and you can hear it today. That is a perfect description of the capitalists of today. They don’t want to take risks. They want protected markets, special tax treatment, immunity from criminal prosecution and civil suits, and they have the money to pay off politicians to get that and more. They want all the money. They don’t want to pay their share. They want the right to wreck the economy with impunity. They want the right to screw consumers into the ground. They want the right to destroy the environment. And they want to make all the decisions about the future.

We have the power to solve that problem if we have the will.

Update: after I posted, I ran across this astonishing article by Michael Hiltzik at the Los Angeles Times, discussing the reaction of Wall Street analysts to American Airlines decision to increase pay to its pilots and flight attendants. Do read it.

14 replies
  1. Rapier says:

    This productivity stuff that pop up  is mostly politics disguised as economics so it is proper to discuss it in the political terms you do.  Of course this will never win over anyone who thinks in the terms that comprise Economics as we know it, and that’s the point or our Economics.

    I suggest instead of going off into what is sort of the weeds, productivity, that people go right to the heart of the problem, which is Economics itself. There is no better place to start than here.

    Professor Philip Mirowski, of your almost neighbor by the way Notre Dame, with this and his other withering and deep criticism of Economics itself.


  2. P J Evans says:

    Reading about retail chains that are in trouble, I wondered why the people talking about them can’t see that it’s part of the lower wage thing: people who get paid less (for whatever reason) don’t have money to spend, and they’re not going to go to places they can’t afford. They’ll go to Target, to W*lM*rt, or, going down the economic scale, dollar stores or thrift stores.

    This is what happens when all the policies are designed to benefit the 1% and kill the middle class: the businesses that served the middle class will fail.

  3. lefty665 says:

    Thank you Ed. Question, do you think perhaps that the hourly compensation graph line more closely represents productivity growth and the productivity line pricing?  The difference between them representing roughly the increase in prices capital has been able to extract and to keep for itself?

    The LA Times article is jaw dropping.  It helps explain the debacle at Delta. Employees not being paid equitably take compensation where they can get it. In Delta’s case out of company assets (seats) at the expense of paying customers.

    Frightening that the dead hand of the ghost of #$%^&*() Milton Friedman is still screwing things up, but not surprising.


    • Ed Walker says:

      That’s a good question. In the link where I got  this version of the chart, Larry MIshel of the EPI gives a breakout of his estimate of the causes of the variance. But I don’t think that’s the only way to understand the differences. And even with that, it’s possible that there is a connection as you suggest. Certainly some of it is buried in the “terms of trade” category.

  4. earlofhuntingdon says:

    One would think that profitability and not growth would determine a firm’s success. I suppose it depends on how constrained one’s ego is. The scale might range from Tom Watson (who personally knew what his IBM machines and punch cards were doing in Germany during the 1930s and 1940s) and Steve Jobs (whose growth gave him the power to illegally restrain competition for Silicon Valley engineers) to Ben and Jerry and Al Peet.

    As you say, that firms pay workers what they are worth is a myth. They pay them as little as they can get away with, keeping the rest for themselves, naturally. They network with their competitors and co-opt government to restrain wages (Steve Jobs) and ensure that government and the law – and the potential violence inherent in it – overwhelmingly work in the interests of employers (Taft-Hartley). Level playing fields, like fair fights and business ethics, are rarely found in nature.

  5. earlofhuntingdon says:

    Thanks for this, Ed.

    As you suggest, when proposed fixes to the economy focus only on worker productivity and ignore distribution of the gains from all productivity, and the underlying systems that impose them, economists are just rearranging deck chairs on the Titanic.

  6. earlofhuntingdon says:

    Kudos to American Airlines board and top management.  A rare example of pro-active behavior.  They knew Wall Street would crucify them for having the temerity to increase wages for anyone outside the executive suite (for whom every bonus, benefit, raise, and profit distribution is wholly inadequate) – and two years ahead of schedule, but not ahead of the desperate needs of their industry.

    So far, they are sticking to their guns.  I hope they have plenty of ammunition, because their action will be deemed an existential threat in the smoke-filled rooms where the sun never shines and on all the plantation resorts where it does.

  7. M Carson says:

    I think with a higher proportion of service jobs productivity growth will slow. You can’t get an elderly man dressed & in a wheelchair faster than 10 years ago. You can’t cut his meat & spoon potatoes in his mouth faster. No productivity growth there. How many people want to cut their time in a nice restaurant by 30%, or have to share the waitress with more dinners?
    I think productivity slowed when the national job mix changed.

  8. earlofhuntingdon says:

    Wall Street is so beyond time and out of touch that it wants struggling Whole Foods (aka Whole Paycheck) to behave more like the mega-chain grocery stores and less like Trader Joe’s and the food co-op (Ocean Beach has a great one.) Expecting productive change from Wall Street fits the proverbial definition of insanity.

  9. earlofhuntingdon says:

    OT, but apropos of a comment from bmaz’s twitter feed, Trump and Tillerson propose draconian cuts to the State Dept, including eliminating housing subsidies for foreign service officers serving overseas. Try getting suitably located and physically safe digs in London, Tokyo, Beijing, or Moscow on a bureaucrat’s salary, let alone housing in Venezuela, Somalia, the Sudan, Egypt, the Congo, the Caucasus.  Not.gonna.happen.  The posts will remain unstaffed or there will develop a host of politically corrupt exceptions, except for the staff at our nearly 1000 military bases around the globe.

    This is not “management”, or skillful propaganda designed to elicit turmoil and misdirection.  The State Dept has the smallest budget of any federal agency, notwithstanding that its head is one of the top three members of the Cabinet, performing what would appear to be an essential function for a global imperial power. Trump could save more money by playing less golf or making do with one less aircraft program.

    These cuts are aimed at eliminating the State Dept’s function while appearing not to do so.  That would leave us with the principal foreign policy we have in fact now: the Pentagon’s.

    • earlofhuntingdon says:

      Trump could also maintain the State Dept’s budget by cutting a fraction of the tax givebacks he proposes to give to himself and the rest of the one-tenth of one percenters. If Trump wants to shrink the gubmint’s complexity to what will fit on a single page, typed and double-spaced, he will give us a one-page gubmint. If you’re a MOU, I suppose that’s what you want. Pity about everyone else though.

    • lefty665 says:

      I have no more love for Trump’s “management” and decimation of government than you. I do have questions about what we have been getting from State.

      We and the world might have been better off if State had not been effectively lobbying for our illegal war on Libya, or collaborating in a coup that overthrew the elected government of Honduras, or if neocon Asst Sec. Victoria Nuland had not invested $5 Billion in overthrowing the elected government of Ukraine, or if Sec State Kerry had not almost talked us into war on Syria on false pretenses, or tried to blow up negotiations that ensured Iran did not develop nuclear weapons. Those are just some of State’s activities in the last administration, it gets worse if we go back to State under Duhbya.

      Should FSOs get allowances that allow them to live decently and safely when they serve overseas? You betchya!  Has the nation or the world been well served by State in this millennium, and should the Dept be fully funded to continue to blunder along as it has been?  That is not so clear. Will Trump make things better? Not likely.

  10. chuck roast says:

    let’s see…slow productivity growth, stagnating wages, low capital investment, curtailed risk taking…all hallmarks of what the great Joan Robinson called (in an entirely civilized manner) “imperfect competition.”  Or what Baran and Sneezy  more precisely called “monopoly capitalism.”

    Stagnation as a precursor to socialist revolution?  One can only wish.


Comments are closed.