Thursday, April 23, 2015

Increased Productivity has No Affect on Wages

Or very little — at least, not so much these days. Jared Bernstein, former economic adviser to Vice President Joe Biden, recently writes:

"A number of economists and commentators have suggested that faster productivity growth would be a big way to boost the income of middle-class households ... There is a large and persistent gap between productivity growth and middle-class incomes: we cannot realistically assume that faster productivity growth would reach the middle as opposed to doing an end-run around them on its way to the top."

Increased productivity no longer has an affect on raising wages, because all the gains go to the top — and the decline of labor unions plays a big part; as well as a tax code that Congress has skewed to mostly favor the very wealthy and large corporations.

Via the professor of economics, Mark Thoma: As noted by the Economic Policy Institute, since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth:

"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 ... So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality, so long as we fail to recognize that workers need a level playing field when bargaining over wages, inequality will continue to be a problem."

The President’s Council of Economic Advisers tells us that "if productivity growth from 1973 to 2013 had continued at its pace from the previous 25 years, incomes would have been 58 percent higher in 2013 — and if these gains were distributed proportionately in 2013, then the median household would have had an additional $30,000 in income" — raising the current "median household income" of $54,000 [whether with single, dual or multiple incomes] to $84,000 a year. But people such as Jared Bernstein, Mark Thoma, and many others tend to disagree. From Bernstein's paper:

"There are numerous problems with the assumption that faster productivity growth will raise middle-class incomes: Rising inequality has sharply lowered the correlation between the two variables, so we cannot assume that faster productivity growth will necessarily reach the middle class; while we don’t know how to reliably generate faster productivity growth, we have a better idea of policy interventions to boost the bargaining power and earnings of low-and middle-class worker."

Comments from Mark Thoma's blog:

  • Productivity growth combined with more labor union power and a commitment to infrastructure investment is a better combo!
  • Add in increased taxation on high incomes and capital gains and you may have a winning strategy.
  • If full employment won't boost middle class wages then the definition of full employment needs to be revised.
  • Agreed. It's not full employment if you're not seeing labor share in productivity gains.
  • Institute a 15-1 rule on the allowable size of the gap between the top compensated employee and the least compensated employee.
  • More taxes on those receiving the benefits of productivity growth could indirectly boost the well being of everybody if it were put into social programs to reduce college costs, reduce insurance co-pays, reduce school class sizes...
  • The contrast with strong productivity growth in China suggests the importance of infrastructure development in spurring productivity growth, just as the U.S. experienced strong and lasting productivity growth in the wake of infrastructure development during the 1930s [And I would add, all throughout WWII and Dwight D. Eisenhower's interstate highway system.]

Here's an interesting concept (that I excerpted and edited from another Thoma commenter): Using RICO, the Racketeer Influenced and Corrupt Organizations Act, a federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.

"America is never going to restore economic and political balance until we restore labor unions (which is not a problem in other modern economies). The biggest roadblock: Republicans are capable of blocking any restoration of labor unions at the legislative level — at least with today's American ignorance and complacency on the topic — so what can we do?

My first thought is some progressives (somewhere, somehow) have to invoke RICO against union-busting. An employer can fire you for having a grease spot on your tie — and can hire a replacement worker after they fire you if you go on strike — but it is definitely illegal to fire you for organizing a union.

Systematically and illegally firing employees to keep them from carrying out a federally prescribed process of establishing a collective bargaining agent (to deprive them of compensation they might have won in a truly free market) sounds like the definition of racketeering to me, as an on going enterprise, it surely is.

Somebody has to try to outflank the Republicans in this one move — and restore the proper place of unions in the public mind by focusing on the criminality of busting unions.

Alternately, in states where it is still possible to pass progressive legislation, a movement to criminalize union-busting has to be implemented. Blocking collective bargaining also blocks political and economic equality — and should be punished as a felony. State prohibition would also automatically set up RICO prosecutions as well. This is the alpha and the omega of everything we have to do."

While it may not be legally possible, or even feasible, to attempt to use RICO to stop union-busting (because probably someone, somehow, would have already tried), it's clear that workers no longer have strong bargaining power to get raises (A typical Wal-Mart or McDonalds worker just can't march in the manager's office and demand a raise and expect to get one).

Even the better-paying manufacturing jobs (not including the ones that were outsourced to Asia, Mexico, and elsewhere) have been under fire — just ask the union workers at GM and Chrysler after the auto bailout (Although, Ford is now giving their workers a raise). Or the union workers at Boeing in Seattle, when Boeing threatens to move to anti-union States. And even the paltry raises that Wal-Mart and McDonalds recently proposed aren't actual "living wages" — even the $15/hour they're asking for barely meets the definition of living wage.

So even if "worker protectively" were to increase by 1000% (e.g. one worker doing a task that 1,000 workers used to do), what kind of jobs are the other 999 workers going to find if all the cost of labor-saving technologies, machines and robots consistently goes to the very top of the income ladder?

From a post at the New York Times by Eduardo Porter ("Comparing Real Wages"), in referencing a recent NBER study, he writes:

Even before the financial crisis struck, the McWages of McDonald’s workers in the United States, many Western European countries, Japan and Canada went nowhere between 2000 and 2007, a period of steady, though unspectacular, economic growth in most of the developed world. In the United States, real McWages actually declined. Faced with a tightening labor market and besieged by a vocal, combative movement demanding higher wages for America’s worst-paid employees, McDonald’s, Walmart and other large employers of cheap labor have offered modest raises to millions of workers scraping the bottom of the job market.

The battle for public opinion is fought mostly on ethical grounds — pitting the healthy profits of American corporations and the colossal pay of their executives against bottom-end wages that force millions of workers to rely on public assistance to survive. A combination of sluggish employment and stagnant wages has forced more families to rely on the public purse in many developed nations.

Globalization, which has moved a large share of industrial jobs to China and other cheap labor markets, has clearly played a role, what if robots — information technology generally — are inexorably taking over? The idea, once considered heretical among mainstream economists, has gained some credence in recent years, as the share of income accruing to workers has been shrinking in many countries, rich and poor.

While the reasons for these shifts are still intensely debated, the changes suggest that education, the standard prescription, may not be enough to secure a good job ... Still, even if the prescription of more education remains sound, it might not hold forever. And while more education might be necessary, it seems insufficient.

Lawrence Katz, a professor of economics at Harvard, noted how some 40 years ago, the compensation of American workers became decoupled from productivity growth, which continued to advance even as wages stagnated [and] argues that more must be done to ensure work pays — including achieving higher minimum wages [and] suggests infrastructure investment and public employment also could help.

The Middle-Class Squeeze

The Middle-Class Squeeze

According to another New York Times post ("The Republican Recipe for Widening Inequality"), House and Senate Republicans are calling for cuts of about 40 percent (on average) by 2025 in programs for low and moderate income households — forcing sixteen million more Americans into poverty, or deeper into poverty after 2017.

"At the same time, the Republicans budget and tax plans leave untouched nearly $1 trillion worth of annual tax breaks that overwhelmingly benefit the top 20 percent of households ... Separate from the budget plans, nearly all House Republicans and seven Democrats passed a bill to repeal the federal estate tax on inherited wealth. Repeal would benefit the 5,500 wealthiest families in America each year and would do nothing for everyone else, because the estate tax applies only to those at the very top of the wealth ladder ... The Republican budget plans obviously tilt the economic playing field in favor of the wealthy by cutting tax credits for the poor while leaving intact tax breaks for the wealthy."

The Brookings Institute recently wrote: "House Republicans recently approved the “Death Tax Repeal Act of 2015.” If we care about our debt obligations, social mobility, or equality of opportunity, we should consider doing just the opposite: raising the tax and applying it to more of the super-wealthy."

And from The Hill: "Wall Street’s Stealth Tax Break" — the biggest tax break of all: "Stock market losses turn into tax breaks when the losses are written off against gains on tax returns. This costs the Treasury revenue, and effectively shifts part of the cost onto other taxpayers. All tax breaks do likewise, but this one has bells and whistles."

With the new TPP trade agreement that Obama is pushing, we could probably see another uptick in offshoring — especially since our political leaders won't force the repatriation of offshore profits for taxation. Then add to that, further advances in technology and robots displacing even more workers, and forcing them into even lower-paying jobs that robots can't yet do (like hairdressers or bartenders).

And then there's this —> New Flexible Economy is Making Worker's Lives Hell, by Robert Reich:

"Just-in-time" scheduling is another part of America’s new “flexible” economy – along with the move to independent contractors and the growing reliance on “share economy” businesses. New software is behind all of this — digital platforms enabling businesses to match their costs exactly with their needs. Businesses used to consider employees "fixed costs". That meant steady jobs. And with steady jobs came steady paychecks, along with regular and predictable work schedules. But employees are now becoming "variable costs" of doing business — depending on ups and downs in demand that may change hour by hour, possibly minute by minute. American workers can’t simultaneously be variable costs for business, yet live in their own fixed-cost worlds. We need a federal law requiring employers to pay for scheduled work. Alternatively, if American workers can’t get more regular and predictable hours, they at least need stronger safety nets. These would include unemployment insurance for people who can only get part-time work and a minimum guaranteed basic income.

While the number of jobs, and the number of hours at those jobs (and the wages for those jobs) are decline, and when a person's only recourse is to turn to government programs for survival, what will they do when these "entitlements" (Social Security, unemployment insurance, food stamps, healthcare, etc.) are also cut? Will these beasts finally starve?

P.S. — Here's one machine that won't take anybody's job. When ctrl + alt + delete doesn't work, just shoot the darn thing. That's what one man did, and was later cited for discharging a weapon within city limits after he took the fight to his computer (and got the revenge that most of us only dream about).

Related Post at the Fiscal Times: "Here’s an Economic Agenda for Hillary Clinton"


  1. Economist Robert Hall (after we partied like it was 1999):

    * The standard of living stopped growing around 2000.
    * The decline in the labor share seems to have started around 2000.
    * Capital per household rose more slowly after 2000.
    * Hours per household grew rapidly until 2000.
    * The decline in hours since 2000 is the single biggest factor in the decline in household earnings.
    * Participation rose during the 1990s, but has fallen since.

    The LFPR peaked in April 2000, and has been in a steady decline ever since. In the last year of his presidency Bill Clinton called on Congress to help him change China’s normal trade relations status with the U.S. to permanent. Clinton signed on Oct 10, 2000. Coincidence?

  2. Free trade killed the middle class (or most of it) ... I witnessed many factories being closed down in the former manufacturing state of Connecticut even before the ink was dry on the NAFT bill. And with MFN status with China, dead in the water.

    the only people doing well in connecticut are wall street people and super rich entertainment people who have the country house an hour away from NYC (Keith Richards being one of many).

    Many companies that are left are doing 4 times the work with 1/10 of the staff of 20 years ago, talking about productivity. And you will only get a 2 or 3 % raise if any at all.

    check out


    thanks again Bud

  3. Thanks for the links. I used to live up north in Mass.