Friday, January 16, 2015

The Theory of Everything on Wages

From VOX by Dylan Matthews (posted on January 8, 2015)

You can divide up the economy into two parts: money that goes to workers in the form of wages and benefits, and money that goes to owners of capital in the form of corporate dividends, bond payments, rent to landlords, etc. And according to a number of different data sources, the share going to workers is on the downswing, and has been for decades.

This isn't the only reason inequality is growing in the United States. Inequality in wages themselves — between highly paid executives and low-income workers — has grown a lot, as has inequality in capital income. But given that capital income has always been less equally distributed than wage income, if more money is going toward capital, that's going to exacerbate the inequality problem. And according to the Economic Policy Institute's Lawrence Mishel, the declining labor share was the single most important factor driving inequality growth from 2000 to 2011.

A declining labor share of income also makes it possible for labor productivity to rise without average wages rising in turn. That is, it means that workers can get more productive without seeing the fruits of their labor.

Then the VOX article goes on to list other things that might be keeping you from getting a raise:

  • The rise of the machines: Robots, computers and other information technology have reduced employers' need for labor. Reduced demand for labor then translates into a lower price for labor — that is, lower wages and compensation.
  • Globalization: Offshoring jobs — the movement of manufacturing, textile, and other labor abroad is behind much or most of the fall in US labor share.
  • Declining bargaining power and deunionization: Workers with less bargaining power have less ability to demand raises, which can depress the labor share of income over time. This is compatible with both the technological and globalization hypotheses; after all, technological change that reduces demand for labor reduces bargaining power, as does a decline in demand for US labor in sectors engaged in offshoring. But policy factors — like deunionization, or an eroding minimum wage — can also weaken bargaining power.
  • Financialization: A number of changes in recent decades have led the financial sector to take on a much larger role in the economy than it once did: finance income grew disproportionately fast, household debt increased, non-finance companies increased their financial investments, etc. This can erode labor's share of income in a few ways. For one thing, when companies have more kinds of capital to invest in, using income to buy up capital rather than on wages becomes attractive. Second, shareholders have become more powerful, putting pressure on firms to pay out dividends and do share buybacks rather than raise wages.

Below are edited excerpts from an article by Nick Bunker at the Washington Center for Equitable Growth who references the VOX article (posted on January 15, 2015)

Quite a number of researchers find that the share of income going to labor has been on the decline over the past several decades. Researchers posit a variety of hypotheses, among them the financialization of the U.S. economy, which benefits the owners of capital over wage earners, the downward pressure in U.S. wage brought about by globalization, the decline of labor unions, and the growing accumulation of capital.

One hypothesis finds that the decline in the price of investment goods, such as computers, has led to the decline in the labor share of income. Firms have responded to this price decline by substituting capital for labor, meaning firms are investing more in technology and less in the size and remuneration of their workforces.

This result implies the ability to substitute one type of input [people] for another [computers, robots, etc.] in the making of a good or the delivery of a service.

New research shows there are two ways for labor’s share to decline. The first is for the price of a factor of production (labor or capital) to decline. The other option is that technology has changed so much that capital is more productive now when invested in new technology, so more firms are investing in technology at the expense of labor — and what’s causing the decline in labor’s share of income isn’t cheaper capital or more capital accumulation, but rather a technological shift toward using capital more.

What’s interesting is, when the researchers say the cause is "technology", they broadly define this to include the offshoring of jobs — and that the technology required to offshore production is a form of capital substitution for labor in the United States.

Yet they also point out that their results don’t point toward a simple offshoring story — and that what’s happening is quite nuanced, they argue, involving investments in new technology and new workers overseas.

Is this new research just a distinction without a difference? Not at all. Our understanding of how technology is changing our economy, the causes of rising inequality, and the proper policy responses are all influenced by the outcomes of this kind of research.

In my posts, When Human Labor becomes Obsolete and The Devaluation of American Workers, I discuss robots and the best case that anyone could ever make for a Guaranteed Basic Income (and helicopter drops) — because technology will continue to advance, and offshoring domestic jobs to low-wage countries will continue as well. So American workers will continued to be displaced and the Republicans will continue to deprive them of any means on which to subsist  (starving the beast).

Now the only question is, when will the revolution begin?


  1. One article at 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"

  2. 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."

  3. From a reader's comment at Mark Thoma's blog:

    USA Today: Bill Gates' tech worker fantasy (July 27, 2014)

    New York Times: America’s Genius Glut (February 7, 2013)

    75% of those with a tech degree can't find a tech job and salaries in tech have not increased in 16 years. It's a lie that STEM is a good field to go into. The propaganda is being pushed by the industry in an attempt to boost h-1b quotas.

    Go to YouTube and do a search for "How to not hire an American" and you'll get a good rundown on the various strategies used by "shortage shouters".

  4. Economic Policy Institute: "Average Real Hourly Wage Growth in 2014 Was No Better Than 2013" (Posted January 16, 2015)