Greenhouse and Leonhardt on Real Wages and Productivity

The thoughtful and reliable Steven Greenhouse and David Leonhardt:

Real Wages Fail to Match a Rise in Productivity - New York Times: With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.... The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity -- the amount that an average worker produces in an hour and the basic wellspring of a nation's living standards -- has risen steadily over the same period.

As a result, wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960's.... Until the last year, stagnating wages were somewhat offset by the rising value of benefits, especially health insurance, which caused overall compensation for most Americans to continue increasing. Since last summer, however, the value of workers' benefits has also failed to keep pace with inflation....

"Some people who aren't partisans say, 'Yes, the economy's pretty good, so why are people so agitated and anxious?'" said Frank Luntz, a Republican campaign consultant. "The answer is they don't feel it in their weekly paychecks."...

Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology -- as well as the insecurity caused by them -- appear to have eroded workers%u2019 bargaining power. Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. And health care is far more expensive than it was a decade ago, causing companies to spend more on benefits at the expense of wages.

Together, these forces have caused a growing share of the economy to go to companies instead of workers' paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

Total employee compensation -- wages plus benefits -- has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990%u2019s and otherwise has not been so low since 1966....

For most of the last century, wages and productivity... have risen together.... But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.

"If I had to sum it up," said Jared Bernstein, a senior economist at the institute, "it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth."...

Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers.... In 2004, the top 1 percent of earners... received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data...

Comments

[John Emerson]

I've asked this question umpteen times, and I don't remember getting a response. Umpteen + 1:

Isn't labor productivity defined as value of production divided by cost of production? And isn't labor, directly and indirectly, the biggest single factor in production cost?

So couldn't a productivity increase include either of the following: a.) producing the same product with fewer workers (downsizing, modernization) or b.) producing the same product with the same number of workers, but paying them less (outsourcing, union busting)?

If so, isn't it erroneous to talk about the big paradox of productivity-increase which doesn't benefit labor? Because productivity increase can be identical either to lower employmewnt or lower wages.

[Altoid]

Overall, this trend strikes me as an excellent illustration of what happens when one side of an adversarial relationship gets the total victory it craves.

But the long run? I remember Walter Ruether asking how many cars those spiffy new machines could buy, lo those many years ago, and contrast that in my mind with Henry Ford's principle of paying his workers enough that they could actually buy what they built. Not an argument against progress, but for livable incomes.

I don't have an answer to John Emerson's question. I think it's a good one, depending on how productivity is actually defined. If it's the value of output per worker-hour, I'd think that paying less wouldn't show up in the statistic itself but in earnings.

However, I've long suspected that the enormous gains in "productivity" in the last decade or so are semi-tautological artifacts of the way productivity is defined-- a product of definitional circularity somewhere in the measures. I don't know enough to make it more than a suspicion, though.

[Captain Video]

According to "Macroeconomics" 2nd. ed. By J. Bradford DeLong and Martha L. Olney

Labor productivity is "National product divided by the number of workers (or, alternatively, by the total number of hours worked). Such a measure of output per worker is probably the best available measure of long-run economic growth.

This is found in the Glossary, page 529.

[Captain Video]

The Bush Adminstration has aggravated the process by cutting the taxes of the rich and corporations while cutting programs that help working people and the poor.

THERE IS A CLASS WAR GOING ON, AND THE RICH ARE WINNING!

[Rob Hayward]

I think that you have to include benefits. Then the picture is not so dramatic. However, there is surely a natural mechanism to re balance power between workers and capital (or whatever you want to call it) - without purchasing power consumer spending falls and profits fall even further. This appears to have been prevented in recent years by consumer borrowing that has taken place, but a correction will surely come.

[anne]

John Emerson:

"If so, isn't it erroneous to talk about the big paradox of productivity-increase which doesn't benefit labor? Because productivity increase can be identical either to lower employmewnt or lower wages."

A useful question; but while median wages have fallen, mean wages have increased.

Ron Hayward:

"I think that you have to include benefits. Then the picture is not so dramatic."

The picture is, to my estimate, evidently as dramatic including benefits, which have been increasingly limited for significant numbers of workers.

What is remarkable is the absence of a mechanism for correction, for where is significant worker balance against management?

[anne]

http://www.nytimes.com/2006/08/29/opinion/29tue3.html

August 29, 2006

The Falling Paycheck

After huddling with his economic team at Camp David this month, President Bush emerged from a meeting and, flanked by advisers — including the secretaries of labor, commerce and the Treasury — announced to reporters, “Things are good for American workers.”

The comment is preposterous. As The Times’s Steven Greenhouse and David Leonhardt reported yesterday, the economic expansion that began in late 2001 is on track to become the first since World War II that fails to offer a sustained lift to the real wages of most American workers. Although the nation’s economy has grown and productivity has been strong, American employees have not shared in the wealth they’ve helped to create. Wages and salaries now make up the lowest proportion of the economy since the government began keeping records in 1947, while corporate profits have climbed to their highest share since the 1960’s.

Until recently, the decline in real wages has been masked in large part by the housing boom that allowed many Americans to borrow and spend, even as their pay was squeezed. But now the housing market is flagging and with it, the Bush-era economy — without American workers having ever experienced a period of solid prosperity.

Unfortunately, there’s little likelihood of meaningful improvement anytime soon. When Mr. Bush and his advisers are not insisting that everything is fine, they’re promising more high-end tax cuts as a cure-all, or painting the problem as one of impersonal market forces for which there are no government solutions.

Those are not the paths out of the predicament. Just the opposite, they are approaches that have contributed to it.

[anne]

http://www.nytimes.com/2006/08/29/opinion/l29wages.html

Blame for Falling Wages

To the Editor:

You report that wages are stagnating at the very same time that profits are soaring. We can now expect a chorus of conservative pundits to tell us that no one is to blame; it is just a result of supply and demand.

But someone is very much to blame for the fact that taxes are being cut on capital gains and fabulously wealthy estates, while they are rising on wages — to pay for retirement benefits; and for the fact that the minimum wage, and various government benefits, are worth far less than they were worth 10 years ago.

Someone is to blame, and they should be voted out of office.

Richard Joffe
New York, Aug. 28, 2006

[anne]

Warren Buffett argued at the close of 1999, that there is a natural mechanism that limits the proportional relations of profits and wages. Buffett suspected the limit of profits as a portion of GDP was at the levels reached in 1998 or 1999. However, after the recession what we found was that profits increased severely while wages as a portion of GDP were limited. The portion of profits found through modern history were easily surpassed.

[John Emerson]

I guess I still don't see the mystery. Labor cost is a cost, no? And costs are to be minimized, right? (Are there non-Marxist economic systems within which this is not true?) So when we see that, on the net, management (with government help) has succeeded in keeping labor costs low,
as economists shouldn't we celebrate? And don't many economists do so?

Is the question "What exactly are the mechanisms by which the many powerful people who want to minimize labor cost -- economists, business management, and governmental officials -- have succeeded in doing so? How did they do it? How was it that the people who wanted to increase economic growth without benefitting those in the bottom half of the income distribution succeeded?"

Because I don't know the answers to these specific questions, though I have some ideas. But I don't see that there's a msytery.

It seems that the problem might be more easily solved if it were recognized that the old liberal consensus hasn't been there since 1970 or so, and that the actual powers that be believe that average Americans have been over-rewarded rather than under-rewarded up till now, and that they should be rewarded still less in the future.

You could look at 30+ years of propaganda convincing low-information voters that the bottom half of the income distribution consists mostly of black welfare-mother prostitutes who own fleets of Cadillacs.

And 30 years of propaganda arguing that labor unions are corrupt gangsters, and union workers lazy and incompetent, and that wages should be set by survival-of-the-fittest mechanisms.

During this whole period not only was the Republican Party was unashamedly anti-labor, but so was the dominant part of the Democratic Party. (No "pandering to the base"!) The New Democrats were talking about how important it was not to be anti-business at the very moment when business had become aggressively anti-labor.

Coming on the heels of DeLong's claim that no one except neoclassical economists should read Marx for fear of contaminating their wetware, I'd like to suggest that Krugman and DeLong have their own contamination problems. They seem to be wanting to slap a semi-egalitarian political unit onto an economic system which is aggressively anti-egalitarian, and they're wondering why it isn't working. krugman recently declared that "power" has something to do with it -- but is "power" part of economic terminology.

Just as a parting thought, one reason why low-information voters are so low-information is that truth about political reality has been commodified and is being distributed according to effective demand, and there is no effective demand for truth from people in the bottom half of the income distribution, who mostly most rely on free information coming from people who can afford truth for themselves, but certainly don't want to give it away to free riders.

People have also been baffled recently by the poor performance of the respectable media (the Times and the Post), but I think that the fact that Sulzberger and Graham function both as financial managers and operations managers of their respective enterprises goes a long way toward explaining that. (To say nothing of Murdoch, Scaife, Moon, Welch, and the others.)

[Slocum]

"I think that you have to include benefits. Then the picture is not so dramatic."

Yes, from the employer's point of view, wages and benefits together add up to the cost of the employee and the proportions are irrelevant. Here:

http://cafehayek.typepad.com/hayek/2006/08/catering_to_ign.html

Russel Roberts has BLS stats that show real hourly compensation (including benefits) has been growing every year of the last 10 (even during the 2001 recession). There have been individual quarters where hourly compensation fell, but no full years. Another data set show that labor's share of national income (again, including benefits) has fluctuated closely around 70% since the late 1940s.

So the story here is NOT that wages and labor power have been falling but rather that annual gains in compensation are being eaten by the rising cost of benefits (mostly healthcare). That and gains seem to be trailing productivity:

"Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent"

But the BLS stats in Roberts' table show a real hourly compensation rise of 10.5 percent from 2000 through 2005. But even the 7.2 percent figure makes it clear that, when you include benefits, compensation has consistently grown faster than inflation.

[John]

An interesting aspect of this is to consider the labor market over the period in question. The labor market has traditionally been fragmented in comparison to the typical markets for goods. When I earned my BA and hit the job market in 1991, I used help wanted ads to find a job, using a resume that I typed...yes, I said typed. Needless to say, as compared to buying/selling/pricing groceries, this was inefficient.

Today, I can post my resume to Monster, Careerbuilder, Hotjobs, the CFA jobsite, the schools where I earned my BA or MS, etc. I can also use all of those sites to look for work. Theoretically, this should increase competition among employers and employees and help the market set some rational pricing.

Given a more efficient market, the products (ie people) should be priced based upon differentiation. How much education do you have? What is your employment history? What can you bring to a company? Or. What doe sthe company have to offer, intellectually & financially? Is the company stable? What other non-salary benefits are available?

So my question is, with a more efficient labor market, is it that the product (labor) is now more reasonably priced under market mechanisms? I would contend that the answer is yes. Each time that I have improved my product (additional work experience, additional certifications, additional education, etc), I have been more marketable and have improved my salary. Competition in the free market is working. While this is anecdotal, I have seen it happen with enough regularity to believe there is a trend. The employees that work to improve their usefulness have beat the averages & inflation. They also have the option to go to another company, if they feel that they are not being paid for their performance.

[anne]

John Emerson:

"What exactly are the mechanisms by which the many powerful people who want to minimize labor cost -- economists, business management, and governmental officials -- have succeeded in doing so?"

Reading of the years of Teddy and Franklin Roosevelt, I will be thinking through your question.

[Cyrus]

In a competitive marketplace, the increase in profits that occurs with the reduction in cost should be transient, because competition will force firms to pass lower production costs onto their customers.

But, this might not happen very quickly if capital has better things to do than compete on price. When revolutionary technological change, or the dropping of regulatory barriers presents obvious opportunities for supernormal profits, there are more promising investments to make than using already-known means to undercut someone else's bottom line.

There has to be a lag time between productivity increases and declining prices (the lag during which some firms' increasing profits signals to other firms which markets they should enter). But if there is some mechanism to limit the total rate of new captial investment, I think it is reasonable that the length of the lag time is proportional to the size of the productivity increase: the productivity increase has to be in some sense fully exploited before profits fall to normal rates, and competition is restored.

[JTapp]

I find it amusing that so many people skim the article and use it to attack the Bush administration. Where was that anywhere in the article?

The Times article clearly states that overall compensation has kept up with inflation until very recently (the past year), and that's only because of rising energy prices.
So maybe there's your invitation to bash the Bush administration: the war has caused higher energy prices. But so do hurricanes, and last I checked the President doesn't control the weather.

They throw a flashy headline out there to counter the WSJ's article about the paper presented at Jackson Hole on offshoring actually being good for workers' wages, and people jump on the bandwagon without looking at what the data actually says.

[anne]

Cyrus:

"In a competitive marketplace, the increase in profits that occurs with the reduction in cost should be transient, because competition will force firms to pass lower production costs onto their customers."

Well, there may be competition in sales or hiring but any number of marketplaces are curiously little competitive either with regard to product sales or in hiring. The general weakening of a labor-management balance has been long in the making. Competition in terms of advertising is a widespread replacement for price and service competition and can actually protect general profit margins.

[anne]

Oh dear, I really do wish to be fair as a snowflake but this Republican Administration and Congress have done all they possibly can to advantage the wealthiest at the expense of the middle class. From tax structure to a balance between labor and management, the skew has been away from the middle class. Median wages have declined for 5 years, and almost surely will be found to have declined for 6 years. Even on such a matter of favoring investment income, capital gains and dividends are taxed no more than 15%, while interest income of far more significance to middle class savers-investors is taxed at regular income tax levels. Fairness would be lovely from Republicans, but not a chance.

[a different chris]

>Given a more efficient market, the products (ie people) should be priced based upon differentiation.

Do you have a wife? Does she work? Do you have a home? Is the location a reasonable compromise between the location your wife's job and your job? Do other opportunities for either of you upset this particular apple cart? If it does, what are the fixed costs of moving (real estate agents cuts, closing costs, etc.)? Do you have kids, do they want to be uprooted?

How much vacation do you have? How much does your wife have? Can you find a company to not only increase your salary but also match your vacation time? Dare you even ask for it, after spending a whole interview spinning about how hard and committed a worker you are?

Any pre-existing medical conditions for *anyone* (you, wife, kids) that would cause a problem with transferring your heathcare?

There is far less symmetry in market power between companies and the labor force today than in our father's day, before the effects of sprawl, the needs of two-worker families, and the healthcare mess kicked in.

And a cute website and resume-building software does not change that.

[a different chris]

Oh, I meant to respond to something else earlier before I kicked into rant mote:

Note that as per the definition simply over-estimating national product can also give you a (wrong) productivity number. Maybe there isn't as much to share.

Because as much as I agree every story we see that says "CEO so-and-so got a x.x billion dollar stock sweetener whilst the employees got another bennie cut" is a moral outrage, often when you divide the CEO's windfall by the number of employees affected, you find out that even if he took his windfall and threw it into the pot it would not be near enough per employee to cover the benefit.

So maybe the pie isn't as big as people say it is.

[anne]

Yes; we can even be fair :)

http://www.allheadlinenews.com/articles/7004659264

August 26, 2006

Study: Outsourcing Raises U.S. Wages
By Josephine Roque

Jackson Hole, WY - Two Princeton University economists claim that job outsourcing increased productivity and real wages for low-skilled U.S. workers.
Princeton professors Gene Grossman and Esteban Rossi-Hansberg debated that salaries for the least-skilled blue collar jobs had been increasing since 1997 as outsourcing pushed productivity.

They discussed their paper during the Kansas City Federal Reserve conference with the theme, "The New Economic Geography."

The Princeton economists say that critics tended to gloss over the productivity benefits that come with offshoring labor.

They showed evidence that the resulting productivity had actually increased real wages for the least skilled among U.S. workers by about a quarter of a percent per year between 1997 and 2004.

Grossman and Rossi-Hansberg said outsourcing critics had cited "incomplete" figures that the low-wage labor overseas decreases low-skill wages or increases unemployment in the United States.

Rising productivity related to U.S. firm outsourcing "have served to bolster U.S. wages ... contrary to the fears of Lou Dobbs and others," they said relating to the high-profile CNN anchorman who has rallied against U.S. outsourcing.

"We need to move away from the traditional approaches to trade in which only goods can be exchanged internationally, and move toward a new paradigm," they said.

The economists added that global trade is not only through goods but tasks which allows specialization without geographic concentration.

"This has allowed firms to take advantage of differences in factor costs and expertise across countries, thereby enhancing the benefits of specialization," they said.

[Raoul Duke]

Should we be looking at the data in conjunction with the relative inflation (deflation) in prices of capital and other goods consumed by businesses vs. the inflation of goods consumed by wage workers? In other words, what has happened to the purchasing power spread between wage labor and capital? (I remember seeing something on this in recent months) Does it increase or decrease the disparity? What else is missing from this analysis?

[anne]

http://www.princeton.edu/%7Egrossman/offshoring.pdf

Trading Tasks: A Simple Theory of Offshoring
By Gene M. Grossman and Esteban Rossi-Hansberg - Princeton University

August 2006

Abstract

For centuries, most international trade involved an exchange of complete goods. But, with recent improvements in transportation and communications technology, it increasingly entails different countries adding value to global supply chains, or what might be called “trade in tasks.” We propose a new conceptualization of the global production process that focuses on tradable tasks and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that results from reductions in the cost of trading goods in other neoclassical frameworks.

[fs]

How much of the drop in wages can be attributed to firms assuming all their "white collar" staff are exempt from overtime premiums?

As the workforce has shifted out of hourly wage blue- and grey-collar jobs and into weekly salaried putative white collar positions, many employees assume they are not due overtime premiums. This is a very confusing area of wage law, as evidenced by the Department of Labor's FairPay initiative which attempts to outline who is and isn't exempt.

Evidently there are indications whole industry groups routinely ignore complying with OT statutes, ie. consider the recent litigation with Electronic Arts, Starbucks, RiteAid and state certified Registered Nurses.

With such egregious non-compliance, it becomes nearly impossible to rely on market mechanisms for a correction because the individual does not "have the option to go to another company, if they feel that they are not being paid for their performance", as suggested by uber-acheiver John above. Absent an alternative, the employee is coerced into protecting existing well-being and not opting into an "unFairPay" job market.

I have been witness to this dynamic. While working in an agency that didn't pay overtime, I could look out my window to another agency in an adjacent tower that did comply with the law. I assumed that they were unionized. Actually, it was that they complied with the law.

My company finally started complying, but they are the only two agencies I know of in this region that pay a premium to any of their employees.

Most folks assume if you receive a salary, you are not eligible for OT. Thus, increased productivity is acheived simply by realizing more work for the same pay.

And these additional hours are not reported. So, if labor productivity is "National product divided by the number of workers (or, alternatively, by the total number of hours worked)", and the hours are not factored in -- voila! -- healthy productivity gains. Hooray for capital.

I would learn more about how this micro-economic phenomenon affects the aggregate national wage and productivity figures.

[anne]

http://www.princeton.edu/%7Egrossman/offshoring.pdf

Trading Tasks: A Simple Theory of Offshoring
By Gene M. Grossman and Esteban Rossi-Hansberg - Princeton University

[A quick read of the paper, suggests an interesting and provoking thesis that is worth considering carfully.]

[anne]

Suppose then, as an hypothesis, we look more carefully at the possible of trade and offshoring than is done by opponents of globalization and focus on domestic labor policy and labor-management balance and relations in explaining the current difficulties of labor. Looking at what I take as comparative well-being of labor in Europe, I am more or at least as concerned with domestic policy than or as with trade and offshoring.

[CaptainVideo]

"So when we see that, on the net, management (with government help) has succeeded in keeping labor costs low,
as economists shouldn't we celebrate?"

If the low labor costs were sufficiently reflected in low prices, real wages would be increasing when productivity is increasing. Instead the lower labor costs are reflected in high corporate profits and exhorbitant wages for top management.
There is ABSOLUTELY NO reason why economists should celebrate such a state of affairs.
Bush and the econonic conservatives in the Republican Party, whose objective is to redistribute income and wealth upward from working people and the poor to the haves and have mores will celebrate such a state of affairs.

THERE IS A CLASS WAR GOING ON, AND THE RICH ARE WINNING!

[CaptainVideo]

"The Times article clearly states that overall compensation has kept up with inflation until very recently (the past year), and that's only because of rising energy prices."

When productivity is increasing real wages (with the value of compensation included)should be increasing, which implies that money wages should be rising FASTER than prices. This is happening for only the very top of the economic ladder, whose real wages are actually increasing.

THERE IS A CLASS WAR GOING ON, AND THE RICH ARE WINNING!

[kharris]

Slocum,

Trust the data if you wish, but don't trust Russel Roberts. In his critique of EPI data, he points to a particular paragraph as saying that "labor is getting an increasinly (sic) small share of the economic pie" when the paragraph is specifically about wages and salaries, rather than overall compensation. Since Robert's entire argument hinges on the distinction between overall compensation on the one hand and wages and salaries on the other, pretending that EPI is referring to total compensation when it is referring to wages and salaries seems...odd.

He goes on to offer us a chart from the St. Louis Fed which shows total compensation at the low end of its ranges since the late 1960s, and claiming that the low end is the level at which labor's share has held virtually constant. The chart, as Roberts notes, ends in 2003. EPI is looking at more recent data and claiming the share has gone down further. How does the chart Roberts offers do anything to counter a claim about things that have happened in a period not covered in the chart? Roberts just says the chart makes EPI's conclusion seem unlikely. Starting at the low end of the range since the late 1960s in 2003, and claiming that is evidence enough we haven't reached a lower point in the interim is just plain jiggery pokery.

And when I do the end-2000 to end-2005 calculation of the change in real workers' compensation, I get 7.1%. If I compare full-year to full-year, I get 7.4%. There is nothing in the 10% range in sight.

[anne]

KHarris, nicely argued :) There is still much to consider here, as I find the more I read through the New Deal.