Why Aren't Real Wages Rising?

Matthew Yglesias asks a good question http://yglesias.typepad.com/matthew/2005/04/why_low_wages.html:

Why Low Wages? I'm a little puzzled by Steven Greenhouse's inquiry into the falling wages problem. The bulk of the hypotheses and so forth mooted about seem to suggest that wages are being held down by something or other, with possibilities such as foreign competitition, WalMart's low wages, the possibility of substituting technology for labor, etc. being canvassed. That seems to suggest that, in the past, wages went up when productivity went up because bosses were nice and realized that with productivity on the rise they could afford to raise wages. Now thanks to foreign competition, WalMart, and other low wage sources they "can't afford" pay raises. But that's not how the economy works, now or ever. If productivity is growing much faster than wages, then it should be easy to make a lot of money by hiring new workers.

As people do that, wages should start to go up, until it no longer becomes profitable to add new workers, at which point wages will start levelling off. Wages and productivity can't become de-linked because today's businessmen are greedy or because WalMart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up. So what's going on nowadays? None of the stuff discussed in the article seems relevant to the issue at hand. Professor DeLong is quoted in the article but doesn't have any further comments. I'd be interested to know.

Well, there are three hypotheses:

1. Improvements in firms' ability to squash unions, and thus shift wage bargains toward employers (the Wal-Mart hypothesis).
2. A slack labor market--much more labor-market slack than the level of the unemployment rate would lead one to expect--in which firms find it easy to hire workers and workers find it hazardous to ask for higher wages.
3. Changes in the international economy that boost the wages of the skilled and educated (whose products can be sold abroad for more) and put downward presure on the wages of the less-skilled and less-educated (who now face much stronger competition from abroad).

I believe that (3) is likely to be a very important factor over the next two generations. But this wage-growth slowdown we have seen since 2000 has hit too rapidly and has been too large to be credibly attributed to "offshoring" or other long-run international factors. (1) is surel a factor, but (1) wouldn't work unless (2) were exerting a powerful downward force on wages. (2) has many causes--a relatively high value of the dollar that switches demand from home to abroad is one of them.

I expect things to turn around as employment expands and as (2) loses its force--unless the Federal Reserve decides that it needs to fight inflation now.

Why hasn't (2) lost its force already? Why, with rapid productivity growth and stagnant wages and cheap money that is easy for firms to borrow, isn't firm demand for workers already through the roof? Well, how much would you like to expand capacity if you knew the country had a large budget deficit, and that either big tax increases or a burst of inflation were likely in the future? When Paul Volcker and Bob Rubin say that a serious financial crisis may well be on the horizon? Wages and productivity can't become de-linked because today's businessmen are greedy or because WalMart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up.

Comments

[John Emerson]

I've asked this before, but isn't it productivity growth if you can do the same work with less labor time? So increased productivity growth combined with flat employment and stagnant wages is hardly a paradox. More like two descriptions of the same thing.

[Derelict]

I am more inclined to think that tremendous slack in the labor market is responsible for flat real wages. The last four years have hit white-collar workers and skilled manufacturing labor extremely hard. Many have found themselves unemployed for years, and/or chronically underemployed. I also believe that the official unemployment number no longer reflects reality and millions of workers who long ago lost their jobs fell off the unemployment rolls when benefits ran out, and have since become people who no longer effectively participate in the workforce.

With such a huge available surplus of labor, employers would indeed be foolish to increase their costs by raising wages. Why pay someone $18 per hour when you can get the same work done for $10 per hour? This is especially true of the legions of skilled, educated white-collar workers, many of whom have had to resort to taking any job they could get as wages that are a fraction of their former salaries.

To me, the wonder isn't that real wages are flat. It's that they're not falling.

[spencer]

Let me suggest a different way to think about the problem of wages and productivity that I am just starting to think about. Over the past decade Wal-Mart has been a major driving force behind retail and total economic productivity. But on the other hand Wal-mart has something over 50% annual labor turn over. This means that the traditional way of thinking about learning on the job and experience playing a major role in productivity growth has not applied. Essentially, what WMT has done is break every job down to such small components -- a form of disaggregration -- that they can teach anyone to do the job in just a few minutes. Consequently, Walmart gets little or no benefit from having experienced labor and 50% or higher labor turn over is not a problem for them.

Is this disaggregration of work playing a significant role in the flattening out of the corporate structure
and eliminating jobs for middle class America. I suspect is may play a significant role in the growing inequality in the country and squezing of the middle class. Is technology producing a very different result then theory suggest? Is it driving the middle out of the job structure leaving only top level planner and management at the top and unskilled labor at the bottom?

Over the last quarter century average hourly earnings in the various sectors have tended to converge towards the average except in retail. 25 years ago average hourly earnings in retail was over 90% of the national average. Now it is around 75% of the average even though it has been one of the fastest growing area of employment. Is it because of the disaggregation of retail jobs so that experience and on the job training is no longer of value to the firm?

[anne]

Spencer:

"Let me suggest a different way to think about the problem of wages and productivity that I am just starting to think about. Over the past decade Wal-Mart has been a major driving force behind retail and total economic productivity. But on the other hand Wal-mart has something over 50% annual labor turn over. This means that the traditional way of thinking about learning on the job and experience playing a major role in productivity growth has not applied."

What an important commentary. After all, we have America's largest employer and the Wal-Mart effect influences others retailers and more. Interesting indeed.

[Tim H.]

I'm having trouble believing in an American businessman who upon making record profits after laying workers off responds by hiring more people. That's not greed, that's psychosis.

[mrjauk]

There has been no increase in real wages because the economy is NOT growing. If you really believe that inflation is being held at about 2% annually, then I have some beachfront property in Idaho I'd like to sell you.

[Thomas T. Schweitzer]

The OECD PISA studies show that the American schools prepare the new labour force entrants poorly for the challenges of contemporary labour markets. The American school system is mediocre indeed, particularly for the lower half of the students. This may explain the low competitive strength and comparatively low productivity of the American labour force.

[Karmakin]

Very good comments so far, I'll take it a step down a different path. The whole idea of productivy, and the idea that higher productify results in higher wages, is a bit busted. It's busted in the idea of what exactly is labour, why people use labour, and all that jazz.

The idea behind productivity is to get a per-worker value of what they add to the company. And in the industrial days, that was pretty much true. You'd hire more workers, and it would increase your output. (to a point of course, there's some sort of diminishing returns).

In the service sector, and economy is more and and more based on the service economy. In this, you don't have a set output. What you have, is you have an amount of labour that needs to be done. And then you hire the people to do that labour. Period. Eventually you might hit a point where you need more people to cover the labour that needs to be done, but more often than not, your customers just suck up the busy periods because we're used to it. So productivity increases, but in reality, that doesn't mean more jobs meaning higher wages, because the labour that needs to be done is already being done.

Using Wal-Mart as an example, of course, every second where a cashier is waiting for someone to step in line, is lost productivity to them. Yes, sometimes there will be 2 customers, and one will need to wait. But until productivity gets to a point where the customers start getting upset, you're not going to see any additional hiring. These things are strictly controlled and regulated. As well, often times it's cheaper to expand hours of your current workforce to cover any additional labour costs rather than additional benefits payouts (Hi Single-Payer!!)

In this way, you can see that the traditional way of thinking about labour is frankly dead wrong. Labour is not about production anymore. It's about having enough people to serve your customers.

[kharris]

Even taking critiques of US education as a given, "low competitve strength" and "comparatively low productivity" of the US work force seems a bit of a stretch.

Do we think that insecurity is part of the problem? A couple of years ago, there was a good deal of talk about worker insecurity. I'm not convinced worker insecurity has generally come down very much. Most workers would be hard pressed to provide health coverage for their families without a job. Loss of (now scarcer) health coverage is compounded by the loss of income. If money is tight and one is paying for a car on time, the next job is quickly put at risk by the inability to continue car payments. So the way to get a raise is to get another job. Easier in some lines of work than others.

Now, tack on insecurity for the employer, as well. Yes, profits are dandy, but oil prices are high, interest rates are rising, overseas competition is fierce, benefits costs have piled up new labor costs faster than budgeted for several years, and stock holders think that earnings ought to go up every quarter. How can you justify a wage hike?

Rather than management greed, are we dealing with management nervousness? Not that managers are big-hearted. I just think there may be a second consideration piled on top of the traditional one.

[anne]

Important comments on this thread :)

KHarris

"Do we think that insecurity is part of the problem?" Well, I think so, from both manager and worker perspectives there is a grown insecurity. Continue the thought however. Real wages are not rising, while corporate profits are soaring. There is real insecurity on the part of workers and managers, but there has been a shift in competitive strength toward managers that is pronounced. We must think about this carefully, if my thinking is correct.

[Michael Carroll]

John Emerson

Your making a mistake that I make every time I think about productivity for the first time in a while. See: if you can do more of something with less of something you make more money. If pull that trick off once with one employee, you are better off but not rich. If you can pull that trick off 1,000 times with 1,000 employees then your rolling in the dough!

So... why would you stop by capitalizing on the rising productivity of one worker? If your "greedy and cunning" you wouldn't. The rub is, if there are 1,000 employees around and you and your competitors all have access to the new labor saving technology, you all are gonna wan't these guys to work for you and not the other guy. The economically rational thing to do would be to jack up the wages you'll pay so your get your share of the labor pool.

This bidding up should go on to the point where your still just a little bit better off than not hiring anyone. When equilbrium is reached the extra money you made from the increase in productivity is exactly off-set by the cost of hiring the new work (i.e. the higher wages plus some costs for the trouble). Under competition you can't separate the two (theoretically, see next post...)

[kharris]

Anne,

Yep. I know this is far from rigorous, but if both workers and managers are nervous, wages don't rise. If both workers and managers are optimistic, wages do rise. If both are nervous, but things turn out well, it's a windfall for execs and stock owners - like now. If both are optimistic and things turn out well, the spoils are shared. If both are optimistic and things don't turn out well, stock owners take a beating, wages rise for a while, then employment falls, and execs do ok. Funny about the execs.

[James]

I think the problem is that we are approaching the technology level limit on pure capitalism. Capitalism only works when people want more than society is capable of producing. If you have high enough productivity, this is no longer true.

A standard assumption in economics is that demand is unlimited and supply is limited. Under these conditions, a free-market economy will provide a good allocation of resources such that people produce whatever society values most. But demand is not actually unlimited. Even if cars were free, most people wouldn't want more than two or three, and many people would only want one (or none). If productivity is high enough that people are happy with a level of consumption that can be produced using only 80% of the available labor, wages will be driven down. This creates the problem that the working class can no longer afford anything, which reduces demand. Reduced demand puts cost pressures on companies and eventually leads to a reduced output, which further reduces employment. The only way to stop this spiral is with a good welfare program that ensures people have money to spend even if they aren't working.

We may not be there yet, but eventually manufacturing technology and increases in productivity will make pure capitalism unstable. The government has to step in to support workers by limiting effective productivity. The options I've considered are

1. taxes to support welfare
2. reduce the number of hours people are allowed to work in a year so that companies have to hire more people to get the same number of hours worked

The tricky part with option 1 is setting unemployment insurance at a high enough level to stimulate demand and prevent poverty without causing inflation or ending up with too many people deciding they will just take their handout and not work. Option 2 was tried in France and is being reversed now. I haven't gotten around to looking at why it didn't work there (it's possible that it isn't time yet). Reducing hours per year can be done by reducing hours per week or by increasing vacation time. I'm not sure which is better.

Anything else will cause capitalism to devolve into something resembling feudalism, where a small number of wealthy people own and control everything, while everybody else just barely scrapes by. I hope that the government addresses this without waiting for a depression, but I don't really expect it.

[anne]

KHarris

"I know this is far from rigorous, but if both workers and managers are nervous, wages don't rise. If both workers and managers are optimistic, wages do rise. If both are nervous, but things turn out well, it's a windfall for execs and stock owners - like now. If both are optimistic and things turn out well, the spoils are shared. If both are optimistic and things don't turn out well, stock owners take a beating, wages rise for a while, then employment falls, and execs do ok. Funny about the execs."

An analytical gem.

[Michael Carroll]

to continue...

I'd say I agree with Karmakin mostly but I'd put it a bit differnetly. First I'd say that infering that the increase in productivity equates to the increased margnial productivity of labor is something economists should be rethinking. More importantly however I think the constraint on expanding capacity results from some fairly obvious constraints on aggregate global demand. Those that know how to consume can't afford to consume much more (U.S.) and those that can afford to consume can't bring themselves to do (East Asia). The business world probably sees this and figures productivity gains that derive from a fixed labor force making better of capital is profitable enough while there is little headroom and too much short term risk in ramping up capacity.

[bakho]

Technology has also led to increased productivity and in the case of WalMart enabled unskilled labor to subsitute for skilled labor. For instance, inventory and sales are combined and occur when the checker scans the item. No longer is a room full of trained accountants necessary. The inventory is computerized. Ordering can also be computerized and consolidated. There could be jobs writing the inventory software, but those jobs are outsourced to India. Computers and technology are making possible the elimination of much of middle management. We see Ford announcing the layoff of 1000 white-collar workers. Foreign competition has had a huge impact on jobs and wages for tech workers. In the late 90s, the dotComs were a growth engine of high wage jobs. Now there is a glut of available labor and a huge "private consultant" class that can do work on a part time basis. It's tax time and the computer software makes tax filing more rapid. Again technology is allowing the replacement of skilled labor with unskilled. Much of the labor market is no longer national but international. Many jobs traditionally done in the US, because of communications advances can be done elsewhere.

The American Method of manufacturing has always been to mass produce indentical parts using unskilled labor because of a shortage of craftsmen compared to Europe. This model is being adopted by developing countries who can successfully compete with the US.

Apart from quirky businessmen like Henry Ford, labor only received adequate compensation because of unions. Labor strikes have nosedived since 1980

http://www.bls.gov/opub/ted/2005/apr/wk2/art01.htm

in part reflecting the weakness of unions. We now see the job opening rate falling in the professional and business services sector and increasing in lower wage areas like health services and transportation.

[Michael Carroll]

Bakho,

Whether labor is unionized or not unionized should not be thought of as being a particularly important unless the rate at which labor unions' influence on wages is falling at precisely the rate the rising marginal productivity of labor is rising.

[elizabeth_a]

People have a made a lot of good points -- all together they start to explain the condundrum (thank you mr greenspan for popularizing a great word) of wage softness in growing economy, or when does 4% not count for 4%.

The explanation seems clear. All economic growth is not equal and labor markets are not (and have never been) totally efficient and have dramatically increased competition from abroad.

1. Some GDP today comes from capital here but labor there (see rise in profit's share of GDP). The response to excess profits will not be hire more workers here but rather other firms will enter and lower prices for consumers (evidenced by increase in Chinese wages). Consumers then use savings to buy more imports, repeat cycle. In the long run, factor prices will equalize but in the long run...

2. Another part of rise in GDP is in financial sector -- reflected both in financial sector wages and profits.
This is due to number of factors -- artificially low interest rates, inflated asset prices, increased consumer credit etc etc. Last I looked, financial sector was 45% of profits but only about 25% of stock market capitalization. The market and even firms themselves discount sustainability of profits and it shows in hiring patterns... and all the bankers use bonuses to sink money into houses and other minimally productive assets.

3. Availability of global workforce dramatically increases effective slack in labor market and directly takes other jobs.

4. Plus, in retail operations, who ever said the labor market works like it does in a factory with marginal production? Stores have much more fixed ratios of labor to capital.

I think we have to remember that the classical view is nice but in reality wages, prices and profits are negotiation between workers, employers, and consumers.

[Francis]

It appears to me that this is related to Warren Buffet's recent complaint that he has billions of dollars in low-return investments but nothing else to invest in.

Is the US awash in too much capital? Are interest rates artificially low because too much money is around?

Despite the lump-of-labor fallacy which seems to be implied in his post, i'm concerned that James has a point. In essence, we're built out. Until the US can start increasing exports, the current work force is producing everything needed.

(this comes from the perspective of a land use lawyer, so please feel free to shred my logic.)

[anne]

Elizabeth A:

http://www.nytimes.com/2005/04/11/business/11tax.html?ex=1113969600&en=03ff92d98095dbd3&ei=5070

Report Says Financial Firms Are at Less Risk of Tax Audits
By DAVID CAY JOHNSTON

The Internal Revenue Service audits the tax returns of nearly every large company in manufacturing, mining, heavy construction and agriculture, but just a fifth of big banks, insurance companies and brokerage firms, Syracuse University researchers said in a report scheduled for release last night.

The researchers said the disparity in audit rates for the years 2002 through 2004 raised questions about the agency's focus on old-line industrial companies over the returns of financial services concerns, many of which have been central to the proliferation of aggressive tax shelters....

Tax returns were filed by 5.3 million corporations last year, but the largest 10,989 accounted for 90 percent of all assets and 87 percent of profits, the data show.

Among the largest companies, the big banks, insurers and other financial services firms collected a quarter of all revenue and earned 61.6 percent of profits to shareholders, but just a third of taxable profits.

Manufacturing was larger, with a third of the revenue. This sector earned just under a quarter of all corporate profits reported to shareholders, but more than 37 percent of all profits subject to tax. Tax rules run counter to the business cycle, pushing up manufacturing profits subject to tax in hard times and pushing it down in good times.

Based on figures reported to shareholders, the financial services firms had a tax rate in 2001 of 15.6 percent because only a little more than half of those profits were subject to tax. The story was the reverse for manufacturing industries, where more money was subject to tax than profits reported to shareholders, resulting in an effective tax rate of 28.8 percent.

[anne]

Warren Buffett's Berkshire Hathaway began the year with 47 billion dollars in short term securities from 188 billion in assets. This should give us a sense of how reluctant to invest long term Buffett has become.

[ken melvin]

Rising hell, they're falling, and they are falling because real unemployment > 10%.

[anne]

Francis:

From the perspective of a land use lawyer, how would you answer the question whether there is excess saving available to us? Of course, if there is what can we expect in investment returns?

[anne]

Ken Melvin

There has to be more unemployment than is being recorded by the rate, and Labor Department data does reflect this, remember however there is a high unemployment rate in Germany and France and Spain and Italy but real wages are growing.

[anne]

Francis:

What do you make of this?

There seems to be a curious problem with REIT earnings that we should be aware of. The earnings growth rate for the REIT Index has now been negative for almost 3 years. Since the earnings growth rate is recorded each month for 3 years, this means REIT earnings have grown increasingly more slowly for more than 5 years. REITs have been gaining in price as property values haves increased, but earnings to REITs have been increasingly poor. All that matters for investors in this period is that property prices are rising. The current earnings growth rate for the REIT Index is -3.1% for the last 3 years. The price earning ratio is 33.3.

[ken melvin]

Anne,

Then we can but assume Germany, France, spain and Italy are doing a better job. I hear that Germany has joined this race to the bottom. Does anyone accept the premise that we don't need near the work force we did say in the 70s and that the model, due automation, simply no longer works? That this current some "8%" (really 10-12%) unemployment with low wages is the new standard?

[camille roy]

Well I'm not an economisty, but I like to contemplate these issues. I wonder if there is a relationship between the trade deficit and labor market slack. Basically the unemployment rate does not measure the same thing it used to, due to globalization and trade deficits.

To focus on the trade deficit angle, say there is a relation between the level of employment and the utilization of productive capacity in the economy. That is, the lower the level of unemployment, the higher the utilization. So at a relatively low unemployment rate, say 5.2 (our current rate), utilization would be high, suggesting a tight labor market.

Bring the trade deficit into it. Now a relatively low unemployment rate, say 5.2 (our current rate) does not imply a high utilization, because we don't utilize our productive capacity as intensively as we used to -- we simply import. So at our current level of unemployment, we have labor market slack.

Of course I don't have the expertise to firm this up with data.

[Francis]

gak, i'm a lawyer not an investor. Here in southern California, demand is extraordinarily high, but the major builders are bringing new product on line at a rate which appears to be less than demand.

A couple of factors may be driving the market, per gossip. One, the cost of housing material is supposedly very high. The housing materials market (including construction-grade wood, concrete, plywood and the like) is apparently now global and chinese builders are driving up prices beyond what the US market will bear.

Two, getting permits to build a significant number of units is tremendously difficult. (this ain't gossip; this is what I do.) Since the core areas of LA and Orange County are built out, all new growth is occurring in the perimeter, which happens to be one of the world-wide hot spots for endangered species. Also, So.Cal. is water short. Also, So.Cal. is home to some of the most sophisticated and well-financed anti-growth and slow-growth advocates anywhere.

This leads to a very challenging regulatory environment and multi-year delays in bringing product to market. Due to the long delays there are very few sophisticated developers and builders in the marketplace. (Take a look at Lennar, Toll Brothers for developers' financials and KB Homes for builder's financials.)

hope this helps.

[camille roy]

World-wide, every single trend disempowers labor relative to capital. That includes
- rising productivity that lessens the need for workers.
- decreasing rates of unionization.
- a vast increase in the global labor supply, increasing competition among workers for available jobs.
- 'free market' ideology (I personally think that associating 'freedom' with 'markets' is the rape of a fine word).
- speculative capital movement which also favors the lowest wages and increases competition among workers.
- Etc.

We see the outcome: an increasingly indebted American consumer, a huge American trade deficit, and central banks of exporting countries sitting on vast piles of dollars. No wonder there is a dearth of investment opportunities! There's a dearth of consumers, duh. E.g.: auto sales in China are DOWN.

We say this is 'consumer capitalism' because it results in cheap goods, but you could also call it anti-consumer capitalism, because it undermines wages, and consumers need wages to consume.

That is why a year or so ago I decide to develop some intellectual property. (Don't ask.) Forget selling your skills. In this brave new world, a wage worker is sh*t.

[bakho]

Unions not only get higher wages for union workers, they have had a substantial impact on the 40 h work week and minimum wage legislation. Ask, when was minimum wage last raised? That gives a good idea of how little clout unions have in the US. When I was in Europe last month, France was in the process of dumping its shorter work week. Wages may be going up, but in France hours worked may go up, too.

The ability to replace domestic labor with foreign labor or technology has been a part of the economy for quite some time. During the late 90s people were truly surprised that unemployment could drop to 4% without runaway wage inflation. This trend has continued through the recession.

[ken melvin]

Camille Roy,

Elaine is fudging the numbers. A close look at their own numbers reveals an unemployment rate of some 8+%relative the 2000 figure. She's hiding part of it in 'no longer in the work force'. For example: the population increase from 2000 to 2004 was 5.2% while the 'work force' only increased some 3.5% and the 'not in work force' increased some 8.3%. A 5.2% increase in the work force represents some 7.2 million workers but a 3.5% represents only some 4.9 million for a difference of some 2.3 million. The 8.3% increase in 'not in the work force' represents some 5.8 million people. Doesn't seem hardly fair, does it?

[anne]

Ken Melvin

Contrasts in labor market structures in Western Europe, Canada, Australia, Japan, and America suggest to me that work problems in America can at this point be attributed to domestic structures and policies. Much as Brad suggests.

Francis

What is happening broadly in the real estate market is a puzzle to me, so I store up anecdotes and notice as much as I can. The employment boost from the real estate surge is most pronounced and I am hoping this employment is sustainable. Whether this development is sound in a market sense may help us understand.

Thanks both for the interesting comments.

[Jay]

I think that we have moved to a different paradigm of labor. In the 20th century paradigm, skills are learned by employees and boost wages. In the new paradigm, skills are programmed into capital and boost profits.

Not all skills can be programmed, and sometimes a human touch is necessary. But the number that can be programmed is large and growing.

[chris]

"financial sector was 45% of profits but only about 25% of stock market capitalization," to quote Elizabeth A. The strong current profit growth is due to the easy money financing available. This is not sustainable. The 25% stock market capitalization for financial firms is greater than their portion of the total economy. The value of these firms will revert to more closely match their portion of the economy.

What we're talking about are companies like BOA and Fleet. BOA buys out Fleet, consolidates whatever can be consolidated then fires workers who perform duplicated services between the two banking companies. BOA can promise the state of Massachusetts that they will fire the minimum number of workers possible then go ahead with their plans and let go as many workers as possible.

I can be mistaken about this but where is this productivity growth coming from? A bank can set up one of those horrible phone service numbers eliminating teller type jobs. The bank saves money on labor boosting productivity but the customer hangs on the phone during the phone tree run around compared to getting into the car, parking, waiting in line, then getting your questions answered within a minute when you finally get to talk with a teller.

The supposed good news in the economic numbers especially in the last years are based on some dubious concepts like hedonic pricing, you start with some reasonable assumptions but when it is applied the results might be at variance from what you really wanted to measure. Doesn't hedonic pricing assumptions help boost productivity figures? Then there's the company birth/death model that produces jobs just like an internet boom. Those jobs might be no more real than smoke signals from the other side of the hill. Potemkin village economics all PC based.

Our MBA president is managing a reduction in Americans' standard of living.

[fred]

I recall hearing a lot of noise about an increase in the number of service industry jobs and a concomitant loss of better paying manufacturing jobs. Is that no longer bandied about, or does it fall under the rubric of the Wal-Mart effect?

[tante aime]

Productivity Plus, Labor Minus
1) Ultra-cheap manufacturing from China, and ultra-cheap IT from India driving down unit prices, a factor ignored by the "closed-economy" model used by US economists.

(ad hominim: Take a walk through any department store, then ask yourself, do the higher unit profits these stores make on foreign-manufactured goods offset the lower unit prices these stores sell those items for?

I bought an excellent pair of electrician's pliers the other day for $2.50, made in India. Incredible how well-manufactured they are. The hardware store made 100% profit, but that's only $1.25 per sale. There are only so many transactions in any city on any given day with a mini-mall just about every block. Ergo, sales staff get laid off, then hired back as associates without benefits at minimum wage, if they're even hired back at all. Then multiply this by 2,500,000 retail stores across the US.

You can see the meltdown happening day by day, inventory shrinking, empty shelves, more dollar stores everywhere, more people humping their life away beside an abandoned drive-up window. Think what this does to State sales tax receipts and why nearly every State is insolvent.)

Similarly, I don't know a single person from back in my IT days, who is still working as a full-time employee. Most US programming outside of a core staff is now done by contracting work out to the lowest bidder, competing against world programmers making less than minimum wage.

You can see the meltdown in the SOHO's, most of them going quietly bankrupt after a year or two, a hundred thousand points of light fading to darkness. Hey, they can always work as bicycle couriers, $ per delivery, or work the strip clubs, twirling around a pole for $'s.)

Productivity Minus, Labor Minus
2) Ultra-rapid cost increases of worker healthcare and pension service, (and I'd add the rapidly decreasing amount of work that gets accomplished, judging from how real productivity was accomplished back in the day.)

This is born out by recent studies of computers' impact, showing that real productivity in fact did not increase, although there are ancillary effects which led to the persistent growth and ultimate reliance on computers.

Or look at how much it costs to build a building nowadays, far above inflation. There was a skyscraper in California built for $30M in 1985 dollars, larger by ten times than the newly minted $600M US embassy in Iraq, a cost-growth, per year, of 10% in an industry where materials costs increase only a little over 2%.

(ad hominim: There is a reason Congress passed a law against age discrimination, a law which, coicidentally, officially seals the doom of anyone over 45. Cost of health and pension services is hammering senior workers.
Doesn't an anti- age discrimination law raise alarms?

Of course, there was WTC 9/11, but how long can you blame the whole economy on a single event costing less than 0.1% of the national GDP, and the lives of less than 1% of those who die of other unnatural causes?
And if you destroy the pension, as US Air did, doesn't
that show up as a productivity increase on the books?

This is manipulation, not Keplerian economic engines.
More below.)

Productivity Artifice Big Plus, Labor Deep Minus
3) A gradual drift in developed economies from primary capital expansion (classic labor theory of value in production of real 'stuff'); to a secondary tier of real asset inflation (both real production demand and also passive capital chasing asset futures), and now a third tier of nearly abstract, almost artificial paper assets chasing paper assets, "junk".

(e.g. I'd posit that third-tier came into wide use in Reagan's Era during the Boeski-Milken Experiment, when Fed created the S&L bailout, starting the death spiral, junk dealers literally spending $1,000 at lunch, buying $10,000,000 homes in the Hamptons for *cash*, setting a schlock precedent that the Net Scandal would eventually trump by a factor of ten, and now the entire economy is sucked into this twilight zone of artificial valuation. When productivity is created with a printing press, a clever balance sheet and a slick sales pitch, of what use is labor, other than the accountants and peddlers?)

====

Reading a myriad of classical economic theories posted on Brad's column today, all pointing towards the coming hump, bump, loop, parabolic or hyperbolic inflection point whereafter everything goes jabberwocky, it reads like Euclidean theory, only we're post-Lobatchevski.

Brad needs to devise a new economic postulate, for the case when a giant red-and-yellow star moves within the gravitational effect of a small but vibrant red-white- and-blue star, to find which star destroys the other.

Zen riddle: If a black hole of passive capital vastly more powerful than either of those two stars is sitting out there sucking all energy out of the two systems, will they even make a sound as they destroy each other?

[john c. halasz]

There is a theorem in Sraffa that, given a model industrial capitalist economy, with a given set of production coefficients and a given real total output, shifting the distribution of the surplus product between the wage-rate and the rate of profit in favor of increased profits and lower wages will have a "negative Wicksell price effect", which means that, though the real economies are identical, expressed in nominal monetary prices, as the rate of profit increases, the value of capital, the capital to output ratio, and the value of the total product will increase. This makes some sense in market terms, since wages and prices are largely flip-sides of the same coin, high wages being equivalent to low prices and vice versa, whereas, given to identical sets of real capital stocks, one of which receives more profit than the other, markets will value the former over the latter. Sraffa presents a highly abstract model, of course, and one that is static, focusing on long-period equilibrium, rather that a dynamic inter-temporal one. But its focus on the effects of distribution does seem to suggest that maximalizing the rate of profit, which is not just every capitalist's dearest wish, but has been the goal of a series of policy measures in a by now long-running strategic-political campaign, might produce inflated results in nominal monetary terms, but, in fact, be a good deal less robust in terms of real output. For what it's worth...

[anne]

http://www.nytimes.com/2005/04/14/international/europe/14ischgl.html

Nation That Once Drew Guest Workers Now Sends Them
By RICHARD BERNSTEIN

ISCHGL, Austria - You would not tend to apply the term 'guest worker' to Anna Hass, who is a 23-year-old waitress at the large mountaintop Panorama Restaurant in this Austrian ski resort, because for four decades, a guest worker - Gastarbeiter in German - meant a Turk or a Yugoslav who came to labor-short Germany in search of the sort of job Germans did not usually want to do.

But now, in a somewhat painful twist of fate, Germans, especially young people from the former East Germany like Ms. Hass, are traveling abroad in search of work. They become ethnic German Gastarbeiter in Austria or Switzerland or Iceland, embodying the lengthy economic stagnation in the country where Gastarbeiter always meant somebody else.

'It's very bad,' Ms. Hass, who is trained to be a veterinarian's assistant, said of her home, a village in Mecklenburg-Western Pomerania, in northeast Germany. 'There's no chance to find a job, except maybe one that's totally underpaid, like 600 euros a month,' about $775.

The result, as an Austrian tabloid had it in big headlines last month, is, 'The Germans Are Coming!' According to news reports, 45,000 are working in Austria, compared with half that number five years ago, though others put the current figure at more like 25,000.

'It started about three or four years ago,' said Harald Seidler, the manager of the Panorama restaurant. 'It was when the European Union became more restrictive about non-E.U. workers....

[kharris]

Jay,

Vonnegut as micro theorist?

[eyelessgame]

This may be a very callow and flawed question, but it occurs to me...

Is it possible there is a significant base of investors who are making only short-term decisions? The daytrader, who seems to have dropped off the media radar, probably still exists; perhaps the gestalt of the daytrader has had some impact on a larger investor class? Or perhaps a broader class of small-to-medium investors are making less-fully-informed decisions with their own stock?

If so, these investors will react badly to corporate investment in non-short-term profit (i.e. investing in workforce to boost future productivity), and prefer immediate return in the form of dividends or maximally healthy profit in the current quarter.

In other words, perhaps fickle-stockholder greed is overwhelming corporate greed? Corporations aren't making rational profit-maximizing decisions (hiring more of today's super-productive workers) because to do so would hurt their immediate-term outlook, and drive away stockholders who are uininterested in the longer-term prospects.

Is this at all possible? I know it flies in the face of the stock market being rational and efficient. But then Mike Royko did say there's a reason why the most prominent investment company uses, as their symbol, a herd animal...

[philip]

I have to question the "Wal-Mart Effect" While WMT is a large employer I have to wonder how much their business model effects other retailers, for example Costco. While WMT is the #1 largest company in the US in terms of revenue COST is #29, and they do esentially the same thing. Though how they have chosen to treat their employees couldn't be more different. COST has low turnover, high wages, good benefits, and room for advancement. (Revealing my geographically limited perspective) Retailers such as REI and Nordstrom also follow a different tack than WMT wrt to labor. WMT is imo just one of many business models in the retail sector, and while they may lead the way in many areas, it doesn't seem, from my perspective, that all the other retailers are lemmings following their employee relations model.

I would put the real wage problem squarely on #2, a slack labor market not fully captured in the unemployment figures, i.e. lots of people underemployed or not "actively seeking work". Anecdotally, yesterday George Shaheen was appointed new CEO of Siebel Systems. Shaheen comes to them by way of Andersen Consulting, and Webvan. Quoting from CBSMArket Watch:

"In 2001, Shaheen stepped down from ill-fated Webvan as part of a last-ditch but ultimately unsuccessful bid to save the online grocer. He had been hired by Webvan in September 1999, just months before the company, whose system of automated distribution centers was meant to re-engineer the way online commerce delivered goods, went public.

Webvan closed its doors in summer 2001, sacking 2,000 workers and filing for bankruptcy. Goldman Sachs had pegged Webvan's market value at $4.8 billion when it went public, but the company's value sank steadily as investors fell out of love with Internet commerce companies that had high overhead, low revenue and large losses."

I think we are still in the hangover period from the explosive growth of the late 90's and while this is just one minor case there are hundreds of stories like this, each with thousands, or tens of thousands, of employees who lost good paying jobs with benifts and have not yet been able to find comparable replacements, thus under-employment and an artificially low unemployment rate. It also brings me to the problem our real estate lawer friend brought up:

"Is the US awash in too much capital?"

The simple answer is "yes", which also represnts the fundamental problem with Bush's tax policy. As Krugman pointed out at the time, if GE is sitting on 8 billion in cash, then investment capital is not the problem, lack of investmets are (this is also the Buffett argument). However Bush's solution to this problem was to cut taxes and write GE and 800 million check in the hopes that it would spur investment, while stiffling investment in new industries that may provide the next big growth cycle (biotech, life sciences, and stem cell). However, if GE they can't find anything to do with 8 B, is 8.8 B going to be any different? As we found out, and Krugman predicted - no.

The upside to low real wage growth, under-employment and higher unemployemnt than the number indicate? Our graduate schools are packed with bright individuals inventing the new technologies and business models that will lead the economy in the future, individuals who in the late 90' would have been pulled away from education and research by high wages, stcok option packages and the dreams of becomeing overnight millionairs.

[camille roy]

"The upside to low real wage growth, under-employment and higher unemployemnt than the number indicate? Our graduate schools are packed with bright individuals inventing the new technologies and business models that will lead the economy in the future.."

I don't know about other fields, but enrollment in computer science programs is way down, on the order of 30 to 40 %.

Why go into a technical career, and get in hock up to your ears, when the Indians are getting all the R&D?

[Dan Kervick]

Michael Carroll,

This issue of the relationship between productivity and demand for labor, raised by John Emerson, continues to mystify me. As I understand you, you are claiming that the increased productivity of workers should lead your firm (and other firms) to demand more of them, thus driving up their wages.

But that only seems to make sense if the only reason you had not expanded production before was that the added cost of purchasing more inputs - including labor - exceeded the added income that would come from selling the additional output. Then it does seem true that an increase in labor productivity could change that equation so as to make it rational to expand production.

But what if you are already producing as much as you can sell? Then the increased productivity of your workers is is only going to lead you to lay off workers, so you can produce the same amount and reap higher profits.

In fact, even if the market can absorb more of your products, if the productivity increase is large enough it might be possible for you to increase production and decrease your prices and the size of your workforce at the same time, but still increase profits.

The only way the scenario you suggest makes sense to me - where the improved productivity of the workers leads you (and others) to to continue to add workers until the the gradually increasing wage leads to a new equilibrium - is if there a tremenous amount of unmet demand for your products, so that production can be increased dramatically.

[Ellen1910]

Maybe productivity isn't growing as quickly as evryone says its is.

http://www.morganstanley.com/GEFdata/digests/20031202-tue.html#anchor0

[john c. halasz]

Dan Kervick:

No expert here, but I think that the standard answer depends on the price-elasticity of the demand for what is being produced, but that the increase in the real product, expressed in monetary terms, will, in the medium term, be divied up between profits, wages (of the remaining workers), and consumer prices, (as well as the competitive advantage conferred on innovating, productivity-improving firms increasing their market-share and driving out competitors and their work-forces.) The second leg of the answer would be that, insofar as productivity gains in one sector lead to declines in labor-employment in that sector, even if wages increase for the remaining wage-earners, then "labor resources" are freed up for deployment in other sectors of the economy, which are, of course, less productive/more labor intensive, but whose inputs have been lowered in cost, insofar as the innovative sector that has released the labor provides such inputs, while the relative price effect of prices lowered by the innovative sector would increase demand and bid up prices in the remaining sectors. (For example, the manufacturing sector of the U.S. economy has gone from about 30% of GDP to less than 15% of GDP in the last 4 decades, partly from increased global competition, but mostly from technical innovations, even as it increased in real output and the overall GDP increased.) But that too would depend on price-elasticities and the short-to-medium term costs would, in considerable part, be borne by displaced workers themselves, while the implication of increased employment in lower-productivity enterprises would be wage-constraint. Everything seems to depend on whether new sectors of economic activity can be opened up and developed to absorb the labor supply idled by increased productivity without lagging behind relevant time-frames. That is why I posted about Sraffa's theorem above, even though it's more than 4 decades old, since its suggestion, from the left-Keynesian perspective, is that conditions that are too conducive to the maximalization of profit might be self-undermining, since they might lead to a surplus of capital, while, even as short term figures look appealing, mal-distribution leads to shortfalls of aggregate demand. We are perhaps living in strange, if not entirely unprecedented, times, as IT has at once increased the flexibility and productivity of capital goods, while lowering their cost and thus increasing the substitutability of capital for labor, even as it has enabled an increased global aggregation and thus arbitrage of labor supplies. Meanwhile government policy measures have either grown decreasingly effective or been disabled by increased complexity, international market pressures and political-ideological blockages.

[Dave]

If you are already producing as much as you can sell, maybe the solution is to take that excess capacity and labor and turn it to military material and manpower, so as to put yourself in a good position for picking fights in the hopes of gaining fresh export markets by moving others' satellites under your influence. (That is the "home by christmas" scenario. If things turn out to go other than as planned, and both you and your opponent trash each other's infrastructure and economy, you will have plenty of demand for rebuilding, to be satisfied by what little production capacity you have salvaged from the ruins)

[Jim Brady]

I must say I'm a bit disappointed in this discussion. I hoped for some more convincing insights.
Let me put in my 2 pfennigs worth:
1. The statistics refer to average productivity but the standard argument quoted by Matthew Yglesias is based on marginal productivity. Maybe the relationship between the two has changed. There are two possibilities:
a. the shape of the production function has been changed by technology so that it falls more steeply at the point on it where we are;
b. unemployed workers are less productive than employed workers.
I suspect that both may be occuring together as rapid technological changes devalues the skills of the existing workforce AND increases the necessary capital/worker ratio.
2. Neo-classical always assume equilibrium, but we are in a state of extreme disequilibrium. Essentially, we are in a period of massive structural change that causes great uncertainty and is offsetting any local increases in employment.

[JT]

I'd like to underline what mrjauk said above -- that the official rate of inflation may be understated due to certain exclusions (owned real estate) and "hedonic" adjustments (which may be overstated). This is seemingly conventional wisdom among asset managers.

If the inflation rate is understated, the productivity increases are overstated. This whole discussion is premised on statistics which may be flawed.

[Jörg Wenck]

Anne:
It is definitely not true that real wages in Germany are rising. Similarly a look at the data available at the web site of the German statistics office shows that Germans aren´t saving because of a demographically motivated fear of spending. In fact, the lowest decile of the population demonstrably dissaves while also scaling back spending.
In this regard, developments in the U.S., Germany and Japan are synchronous. What is different between the U.S. and the other two is the fact that living standards of the poor in Japan and Germany used to be buttressed to a greater degree by government-provided health care and other social services (which are now coming increasingly under attack: in the last few years Germany has started to see the emergence of a phenomenon typically associated with American capitalism, i.e., a significant - though as yet not comparably large - share of people without insurance coverage).

[anne]

Jörg Wenck

I am off to the German statistic site, then to Japan. My understanding was the real wages were rising in both countries, though nominal wages have fallen in Japan. For the skae of German and Japanese workers I would like to be right, though I know what you are saying about the German buttress being increasingly limited is correct. Soon :)

[anne]

Jörg Wenck

We likely agree by degrees. Though for 2003, there was a decline in German real wages, the trend is gently up from 2000 if I am seeing correctly. So too the trend for real wages is gently up in Japan. Saving levels nationally are in excess of ours in Germany and Japan. The sense is labor in Japan and Germany is more competitive with management. But, I may not be giving enough attention to German unemployment or to a relative limit to women in the regular work force in Japan.

[anne]

http://www.nytimes.com/2005/04/14/international/europe/14ischgl.html?ex=1114315200&en=4931fdd5df6a3575&ei=5070

Nation That Once Drew Guest Workers Now Sends Them
By RICHARD BERNSTEIN

ISCHGL, Austria - You would not tend to apply the term "guest worker" to Anna Hass, who is a 23-year-old waitress at the large mountaintop Panorama Restaurant in this Austrian ski resort, because for four decades, a guest worker - Gastarbeiter in German - meant a Turk or a Yugoslav who came to labor-short Germany in search of the sort of job Germans did not usually want to do.

But now, in a somewhat painful twist of fate, Germans, especially young people from the former East Germany like Ms. Hass, are traveling abroad in search of work. They become ethnic German Gastarbeiter in Austria or Switzerland or Iceland, embodying the lengthy economic stagnation in the country where Gastarbeiter always meant somebody else.

"It's very bad," Ms. Hass, who is trained to be a veterinarian's assistant, said of her home, a village in Mecklenburg-Western Pomerania, in northeast Germany. "There's no chance to find a job, except maybe one that's totally underpaid, like 600 euros a month," about $775.

The result, as an Austrian tabloid had it in big headlines last month, is, "The Germans Are Coming!" According to news reports, 45,000 are working in Austria, compared with half that number five years ago, though others put the current figure at more like 25,000.

"It started about three or four years ago," said Harald Seidler, the manager of the Panorama restaurant. "It was when the European Union became more restrictive about non-E.U. workers.

"Before, they came from Turkey, Croatia and other parts of the former Yugoslavia, like Slovenia, but that's all over. It's really mostly Germans now. They speak German and they have good qualifications, so there's no communications problems with our guests, who are 80 percent Germans, and there's a lot less paperwork than for somebody from the East."

It is not difficult to pinpoint the paradox in this for Germany: the home of more than two million Turkish guest workers is now exporting guest workers of its own, a reversal of fortune that illustrates the extent to which Germany is no longer the country of the economic miracle....

[the rest of the god damn world]

Chris Hansen and Richard Greenberg that they are either complete morons or they have been neatly folded into the union bosses pockets.

Dateline Story: http://www.msnbc.msn.com/id/8243331/

I am trying to determine what the intent was behind their "hidden camera" story. Was it to stop the poor in the US from being able to afford more quality goods for their families, or was it to put people like Masuma (a factory worker in India) out of work, because those are the only two REAL options. Everything else in this report is designed to make these journalist look good by trying to discount the realities of a free market system, where people get paid based on what the market demands, and in a country of a billion people, people don't get paid much for manual labor.

Why don't they bring up the fact that perhaps India is over populated and thus the supply of willing workers is very high, or that in Vietnam where the free market system and the "Wal-marts" of the world have actually increased that countries standard of living three fold in the past 20 years.

I'm sure they'll say, but we got the children out of the factories in India! Ya, because there were thousands of adults who were willing to work for the same pay. All you did was force the kids on the street (not in schools which are already overcrowded, do a story on that lately???) with nothing to do, except perhaps join some gang or terrorist group that hates Americans because they (the ignorant, can't keep their damn noses out of other peoples business, or just trying to get a get a anchor position, journalists) cost all these kids their jobs.

I swear, if journalists would take a split second to realize the REALITY of what they do, and not just satisfy their "lets make the world better so I can feel better about myself", whims... perhaps all of us (around the world) would be a bit better off.

I plan to post this in every blog I can find so that hopefully someone will realize that these damn journalist while perhaps helping their own career are actually screwing the rest of us.

Signed... the rest of the god damn world.