Wednesday, January 14, 2015

Rising Wages Predicted (In an Imaginary World)

Per Gad Levanon (January 12, 2015): In November 2013 Larry Summers proposed that the inability to reach full employment in the U.S. stems from chronically weak aggregate demand [and] aggregate demand will continue to fall short of supply, which effectively prevents the economy from reaching full employment or exhibiting significant demand...

Then Levanon writes: "Fast forward a year, and the argument that we will not be able to reach full employment looks almost silly. The unemployment rate stands at 5.6%, just 0.1% above the CBO’s 5.5% natural rate. And with the rapid job growth seen in recent quarters, we are about to zoom towards full employment on the way to a much tighter labor market in 2015 ... Fast forward two years and consider what kind of labor market and economy we may be operating in if these trends continue:

* In early 2017, the unemployment rate will likely be close to 4%.
* The “war for talent” will be at full swing, with quit rates close to their late 2000 peak.
* Wages and salaries will grow at 3-4% annually.
* Profitability will be declining as labor costs grow faster than revenues.
* Some operations will no longer be profitable and will close down, leading to slower economic growth.
* The rise in labor costs will gradually be passed on to the consumer, and inflationary pressures will develop.

Gad Levanon predicts stagnation by 2017, and then says: "On top of that, in early 2017 we would still have in front of us more than a decade of massive retirement of baby boomers and almost no growth in labor supply. We are just at the beginning of a very long labor supply squeeze."

(MY note: Oh really? We currently have 92 million "not in the labor force" because many of them can't find jobs.)

Per Mark Thoma (January 12, 2015):

The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages ... Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize. I fear this trust that market forces will eventually raise wages will lead to disappointment.

Until workers recover the bargaining power they lost with the decline of unions and the rise of globalization, it’s hard to imagine a reversal of the forces pushing us toward stagnating wages and ever higher inequality. It’s not market forces alone that are determining the split of income between those at the top of the income distribution and those below, it’s also the institutions that determine who holds the cards in negotiations over wages. Presently workers are not faring well ... The ability of traditional unions to negotiate over wages has been undercut by globalization, technology, and the threat of offshoring."

Per Robert Reich (January 13, 2015) Why Wages Won’t Rise:

There’s reason to believe the link between falling unemployment and rising wages has been severed. For one thing, it’s easier than ever for American employers to get the workers they need at low cost by outsourcing jobs abroad rather than hiking wages at home. Outsourcing can now be done at the click of a computer keyboard. Besides, many workers in developing nations now have access to both the education and the advanced technologies to be as productive as American workers. So CEOs ask, why pay more? Meanwhile here at home, a whole new generation of smart technologies is taking over jobs that used to be done only by people. Rather than pay higher wages, it’s cheaper for employers to install more robots. In addition, millions of Americans who dropped out of the labor market in the Great Recession are still jobless. Employers know they can fill whatever job openings emerge with this “reserve army” of the hidden unemployed – again, without raising wages. Insecure workers don’t demand higher wages when unemployment drops. They’re grateful simply to have a job. Workers used to be represented by trade unions that utilized tight labor markets to bargain for higher pay. Today, though, fewer than 7 percent of private-sector workers are unionized. The growing use of outsourcing abroad and of labor-replacing technologies, the large reserve of hidden unemployed, the mounting economic insecurities, and the demise of labor unions have been actively pursued by corporations and encouraged by Wall Street. Payrolls are the single biggest cost of business. Lower payrolls mean higher profits. As corporations have steadily weakened their workers’ bargaining power, the link between productivity and workers’ income has been severed. Low unemployment won’t lead to higher pay for most Americans because the key strategy of the nation’s large corporations and financial sector has been to prevent wages from rising. And, if you hadn’t noticed, the big corporations and Wall Street are calling the shots.

Is higher education the answer to reducing income inequality?

Research increasingly shows that boosting education levels might not live up to the hype. Recent research finds that the demand for skilled labor appears to be on the decline. Now this is not to say that education is irrelevant or undesirable. A more educated workforce is likely to be more productive, leading to faster economic growth. And, securing a college education has other economic and non-economic benefits. For example, a college degree may act as a shield against dropping out of the labor force as the economy becomes a “cruel game of musical chairs.” But the sad reality is that higher levels of college education, once thought of as the best tool to reduce inequality, may no longer live up to the hype.

Higher Education, Wages, and Polarization

Holding a four-year college degree gives a worker a distinct advantage in the U.S. labor market. The wage gap between college-educated working adults and those with high school degrees is large and has grown steadily over the past 35 years. This gap appears to be bolstered by technological advances in the workplace, notably the ever-growing reliance on computers, because the skills needed to apply these technologies are often acquired through or associated with higher education. Since 2000, however, this trend has altered. Increasingly, the U.S. labor market favors workers who hold a graduate degree, while the wage advantage for those who hold a four-year college degree has changed little. (My comment: In other words, you now need a masters degree to get a job that someone with a GED could have had 20 years ago, displacing high school grads and dropouts. 20 years from now one will need a PhD to flip burgers.)

USA! USA! USA! --- Since the 2008 recession, 1.7 million more kids (ages 0 to 18) in the U.S. have fallen into poverty, for a total of almost 15 million. The official child poverty rate in the U.S. now stands at 20 percent, the second-highest among developed nations.

Quote of the Day (Bloomberg): "Instead of developing realistic and testable theories like those in biology or physics, [economists] often aim only to develop 'theoretical cases' -- imaginary mathematical worlds with their own rules of cause and effect."

* I believe what Mark Thoma wrote makes a lot of sense. And Robert Reich hit a home run. Whereas, Gad Levanon (who makes absurd predictions) lives in an imaginary world.


  1. STUDY: Higher Wages for Low-Income Workers Lead to Higher Productivity

    Stephanie Hoopes Halpin, research professor, Rutgers University: "We’re finding a growing problem with people who earned college degrees and graduate degrees falling into poverty because they cannot get work."

    According to scientific research, humans tend to turn down a sure reward if this derives from an unfair distribution of resources, whether the individuals themselves or others are the target of the unfairness.

  2. UPDATE:

    Still No Sign of a Skills Mismatch — Unemployment is Elevated Across the Board -- "One of the recurring myths following the Great Recession has been that recovery in the labor market has lagged because workers don’t have the right skills ... There are more unemployed workers than jobs openings across the board .. . The main problem in the labor market is a broad-based lack of demand for workers — not available workers lacking the skills needed for the sectors with job openings."

    Little Change in Hires, Quits, or Layoffs -- "Businesses are no longer shedding workers at an elevated rate ... However, not only do layoffs need to come down before we see a full recovery in the labor market, but hiring needs to pick up. While the hires rate has been generally improving, it’s still below its prerecession level."

  3. Gad Levanon is full of sh!t. Really, there are so many people that aren't being counted in the "official" U-3 number the statistic itself is just absurd.

    "free trade" killed the middle class. NAFTA and the MFN status given to China. The politicians and business leaders sold out the middle class 20+ years ago to fatten their own bottom lines period. I'm an engineer and have seen the factories that existed in some cases for over 100 years shut down and sent to China.

    It's not rocket science but for people approaching 50 years of age and older, if you are lucky enough to have a job. This will be your last middle class job.

    thanks for all you do Bud.

  4. The New York Times claims that wages in the U.S. will rise because: "The most interesting piece of evidence for rising wage pressure was in an announcement by Aetna, the giant health insurer. The company said it would set a minimum hourly pay for its workers at $16 an hour starting in April."

    But according to Glassdoor, those Aetna workers are already earning an average of $15.52 an hour. (And how does this translate to wage hikes for everybody in the U.S.?)

    Another New York Times article (Re: The Fed’s Beige Book Survey) says that: "Reports of rising wage pressures were less prevalent in the latest survey than in its previous report, although there was continued upward pressure for high-skilled labor in such areas as high-tech."

    That same article also says,"Many private economists believe the big drop in oil prices will provide a boost to the overall economy by giving consumers more money to spend on other products." But a different New York Times article says: "Americans Pocketing What They Save on Gas, Retail Data Suggests"

  5. Trying to Solve the Great Wage Slowdown (At the New York Times by David Leonhardt)

    "While wages and incomes have stagnated in the United States, they have not done so everywhere. In Canada, a broad measure of incomes has risen about 10 percent since 2000, even as it’s fallen here. In Australia, it’s up 30 percent."

    Leonhardt cites a report that says: “Today, the ability of free-market democracies to deliver widely shared increases in prosperity is in question as never before. This is an economic problem that threatens to become a problem for the political systems of these nations — and for the idea of democracy itself.”

    Then David Leonhardt writes: "Yes, some unstoppable economic forces, namely technological change and globalization, have played a role in the [wage] slowdown. But those forces have also brought great benefits to billions of people" [in countries like China and India, where U.S. jobs were offshored].

    Then Leonhardt latter goes on to say, "Beyond education, these other countries [Canada and Australia] do more to intervene in the free market on behalf of the middle class and the poor ... Their tax policies demand relatively more of the affluent. Canada, in particular, appears to have stronger financial regulation ... The countries where the middle class has fared better are countries where workers have more power. The share in labor unions is higher, much as unionized workers in this country make more than otherwise similar workers."

    Leonhardt says the report "also proposes a middle-class tax cut and fewer tax breaks for executive compensation."

    Then he reminds us: "The defining features of national success were broadly shared prosperity and political participation. When countries are organized to deliver good, improving lives to the masses, they succeed. When they don’t, they decline."