Blog on the Run: Reloaded

Wednesday, August 30, 2006 8:23 pm

An economics question

Filed under: Geek-related issues — Lex @ 8:23 pm

Someone who isn’t a wild-eyed raving lefty please help me out here.

I understand that wage growth has to be tied to productivity growth or else we run the risk of inflation. But when productivity is growing, why aren’t workers sharing in the benefits, in the form of higher wages?

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. …

… even though overall growth has been healthy for much of the last five years.

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. UBS, the investment bank, recently described the current period as “the golden era of profitability.”

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, according to government data.

At the very top of the income spectrum, many workers have continued to receive raises that outpace inflation, and the gains have been large enough to keep average income and consumer spending rising.

Now, I know what the lefty take is on this:

This is one of my favorite movie scenes. It’s from the 1991 film “Grand Canyon” where the car of the character played by Kevin Kline breaks down in a crime-ridden neighborhood in L.A. The tow truck, driven by Simon (Danny Glover) arrives, but not before they’re visited by the neighborhood gang members, one of whom draws a gun. Simon asks the head Gangbanger to just let them go:

    Gangbanger: I’m gonna grant you that favor, and I’m gonna expect you to remember it if we ever meet again. But tell me this, are you asking me as a sign of respect, or are you asking because I’ve got the gun?

    Simon: Man, the world ain’t supposed to work like this. I mean, maybe you don’t know that yet. I’m supposed to be able to do my job without having to ask you if I can. That dude is supposed to be able to wait with his car without you ripping him off. Everything is supposed to be different than it is.

    Gangbanger: So what’s your answer?

    Simon: You ain’t got the gun, we ain’t having this conversation.

    Gangbanger: That’s what I thought, no gun, no respect. That’s why I always got the gun.

Now, suppose Simon is the employer and the Gangbanger is the employee, and then replace the word “gun” with the word “union.”

Is that the only answer to my question?

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15 Comments

  1. NY Times reporter off the reservation:

    http://www.nytimes.com/2006/08/30/us/30census.html?ex=1314590400&en=4a15be96c2575e71&ei=5090&partner=rssuserland&emc=rss

    And John Wixted , a liberal Democrat explains why Americans hate their fabulous economy:

    http://engram-backtalk.blogspot.com/2006/08/americans-hate-their-fabulous-economy.html

    Comment by Phred — Thursday, August 31, 2006 1:20 am @ 1:20 am

  2. Well, that doesn’t answer my question.

    The Times article says median household income is up … because people are taking second jobs. When my first job already requires 50+ hours in a SLOW week, I don’t see that as an improvement.

    And the Wixted piece just skips right over stagnant or falling real wages for 80+% of the work force, when that is the single most important answer to HIS question. (Commenter Wolfwalker in that thread adds some important context.)

    Comment by Lex — Thursday, August 31, 2006 6:10 am @ 6:10 am

  3. One of my main suspicions is that worldwide competition is holding wages down. US companies are still dominate in many areas, but not like in the twenty years following WWII. The discrepancy in the standard of living between the US and Western Europe and the rest of the world has created an arbitrage situation.

    Did you see the WSJ front pager a couple of days ago about a fella in India (richest man there I believe), backed by Chevron, who has plans to build the world’s largest refinery (by 40% I think) and ship gasoline to the US? Used to be that refining margins were low and it didn’t make sense to ship refined products. Now that that equation has changed, the folks in India are willing to trade jobs and commerce for environmental concerns. Just a small example of high paying jobs that previously would have been done here now able to be done somewhere else.

    So why have profitability and productivity continued to go up then? Innovation has been powerful lately. What if the Internet hadn’t happened when it did? Things were rough in the early nineties. However, technology has allowed us to unlock a lot of value. Innovation is the golden goose.

    Comment by David Boyd — Thursday, August 31, 2006 8:30 am @ 8:30 am

  4. That’s certainly plausible, David, although for reasons I can’t quite put my finger on, I’m not sure it’s the entire answer.

    Comment by Lex — Thursday, August 31, 2006 8:43 am @ 8:43 am

  5. I don’t think it’s the entire answer either. Nothing is ever the entire answer when it comes to economics.

    I’m really interested to see how this housing bubble thing plays out. There seems to be a big fear out there that folks have been subsidizing their lifestyles with the ever-increasing value of their homes and the somewhat new ability to easily get at that increased value through new loan products.

    No question some people are in this predicament. The question is how many and is it enough to make a difference.

    Comment by David Boyd — Thursday, August 31, 2006 9:43 am @ 9:43 am

  6. It’s not only a union problem (as you well know). I think employers remember the leverage that employees had in the late 90s during the tech bubble. That bubble popped, taking down raises, etc. We still don’t have a “sellers market” as it were – in other words, people can’t just jump to a new job easily because job creation is down. Therefore, the employers don’t have to give big raises in order to keep employees, because employees can’t afford to lose their jobs. And job creation is stalled out because of two factors: to allow employers leverage over their employees and prevent having to offer good raises, etc., AND because employers were overleveraged on hiring in the late 90s and don’t want to have too many employees now. They’d rather work their existing force harder. Thus, my husband works 70 hour weeks and gets paged at 3am because his company doesn’t want to hire another person to do a 2-person job.

    Comment by liz — Thursday, August 31, 2006 5:48 pm @ 5:48 pm

  7. So what you’re saying, Liz, is that it’s a conspiracy. :-)

    Comment by Lex — Thursday, August 31, 2006 7:37 pm @ 7:37 pm

  8. “We still don’t have a “sellers market” as it were – in other words, people can’t just jump to a new job easily because job creation is down. Therefore, the employers don’t have to give big raises in order to keep employees, because employees can’t afford to lose their jobs.”

    Not true in some industries. Nuclear engineering and aviation engineering come immediately to mind.

    Comment by Bubba — Thursday, August 31, 2006 8:52 pm @ 8:52 pm

  9. And job creation is stalled out because of two factors: to allow employers leverage over their employees and prevent having to offer good raises, etc., AND because employers were overleveraged on hiring in the late 90s and don’t want to have too many employees now.

    Uh oh. The Man is going to be upset that this is being discussed openly. Better lay low for a few days until this blows over.

    Comment by David Boyd — Friday, September 1, 2006 8:53 am @ 8:53 am

  10. Type louder. The NSA can’t hear you.

    Comment by Lex — Friday, September 1, 2006 10:09 am @ 10:09 am

  11. This part caught my attention:

    “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, according to government data.”

    To me the problem with benefits, especially healthcare, is that the increase in monetary value (i.e. it’s more expensive for the employer to provide) is of less perceived value to the employee. The employees don’t really get to realize the full value of the benefit unless they have a negative life event like an illness. It’s really a risk aversion measure, not income that can buy more food, shelter, etc. AND, since the rate of healthcare inflation has been so great in recent years the employers are increasingly shifting more of the cost to employees, many of whom are just now realizing how “valuable” that benefit is or was.

    I’m becoming more and more convinced that if the healthcare industry would realize some productivity gains of its own the ripple effect on the rest of the economy would be tremendous. Imagine if you could cut just $100 off of the average employee’s healthcare costs and turn it into wages? What could someone who makes $45,000 a year do with an extra $1,200?

    Comment by Jon Lowder — Friday, September 1, 2006 10:42 am @ 10:42 am

  12. The missing link is corporate profits. If productivity goes up, wages stay relatively flat, the piece of the pie increasing is profit. Profits are way up from 2001-2002 time frame, and a lot of big companies have gone bankrupt along the way. Aside from certain industries, there isn’t a whole lot of top-line revenue growth going on. So to increase profits/stock price, executives are in cost-cutting mode. Problem is, you can only do that for so long.

    Comment by Jim Caserta — Friday, September 1, 2006 11:32 am @ 11:32 am

  13. Not really a conspiracy so much as a lack of market for other job opportunities creating an environment in which the employer is not required to exert much effort on employee retention.

    Comment by liz — Saturday, September 2, 2006 12:15 pm @ 12:15 pm

  14. Update on an oldie. Who was right ?

    http://www.opinionjournal.com/editorial/feature.html?id=110009435

    Comment by Fred Gregory — Tuesday, December 26, 2006 9:29 pm @ 9:29 pm

  15. Just one little flaw in this scenario, Fred, and I’m sure there are others: The unemployment rate, nominally 4.5%, actually is higher because so many people have left the work force (i.e., given up looking for jobs).

    Comment by Lex — Thursday, December 28, 2006 4:37 pm @ 4:37 pm


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