Apr 30

Wages, Productivity, and You

Assembly LilePerhaps the most underreported aspect of the past few decades, specifically the aftermath of the financial collapse, has been the extraordinary increases in worker productivity and the accompanying stagnation of wages. Whatever the profession or occupation, employers have been demanding more and more from employees and failing to compensate them for the increased output. The phenomenon is referred to as a “speedup.” Rather than hiring additional workers, employers have been capitalizing on workers’ fears of unemployment by requiring that they do more for less. Ultimately it is a case of supply and demand. A greater supply of applicants than open positions to be filled has allowed bosses young and old to pad their own purses at the expense of employees. It has represented a  near complete break from basic morality.

This is nothing short of a sea change. As University of California-Berkeley economist Brad DeLong notes, until not long ago, “businesses would hold on to workers in downturns even when there wasn’t enough for them to do—would put them to work painting the factory—because businesses did not want to see their skilled, experienced workers drift away and then have to go through the expense and loss of training new ones. That era is over. These days firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity to their workers.”

Real wages and total compensation have also eked along just barely keeping pace with inflation recently, continuing a long term trend that has continued since the 1970′s. While it is true that when total compensation–wages plus benefits–is measured and adjusted for inflation, workers compensation has indeed grown more quickly than inflation, the ultimate effect is less money in the pockets of workers, fewer retirement options, greater debt, increasing number of multi-generational households, and a lower standard of living generally. It is also true that the employer foots the bill for much of the benefit cost, but the added investment ultimately benefits neither the employee or the employer.

Productivity has vastly outpaced real wage growth over the past two decades and the prediction going forward is that the downward pressure on wages will continue.

The income story in America is deeply troubling. Inflation-adjusted average hourly earnings for production and nonsupervisory workers (a category that encompasses 80% of the workforce and leaves out higher-paid managers and supervisors) rose by an anemic 0.1% a year from 1979 to 2007, according to the EPI. A potent combination of economic and social forces has conspired to keep wages down for most workers with the exception of a brief period of white-hot economic growth in 1995-2000. Private-sector unions have largely disappeared. Companies have outsourced all kinds of tasks to cheaper places overseas and low-cost contractors at home. The upward spiral in health-care costs has eroded wages.

What the downward spiral of real wage growth means for the economy is simple–stagnant growth. With less real buying power remaining after fixed costs, retirement savings, and debt service have been factored in, workers will not be able to purchase the necessary goods and services in order to sustain growth in the larger economy. The economy has shown evidence of this recently, with orders for durable goods down and recent manufacturing spurred by a short term need to increase inventories also now trending downward.

I do maintain a certain level of sympathy for employers however, as costs to provide medical insurance continue to outpace inflation by nearly 7% on average. Each dollar spent on inefficient and expensive health care plans is a dollar necessarily unable to be spent on wages employer sponsored retirement plans. While there is no guarantee that employers would pass along any health care savings to the employees should costs somehow be reined in, under the current system employers have not been provided with that option. Obviously, as labor supply outstrips labor demand, employers lack any real incentive to do so even if given the choice, but at some point the labor supply will more evenly mirror demand, yet it is unlikely that reductions in health care costs will have come to pass in the interim.

If you are like me you have a twitter account. If you are are interested in finance you probably also follow several respected economists using that very same twitter account. If you take the time to track back and read the vast majority of posts and links to all of the mind-numbingly dense economic data–charts, charts of charts, charts within charts clarifying other charts, bar charts, line graph charts, area charts, government labor data, Federal Reserve data, Census data, articles, studies, blogs, scholarly publications, and on and on–you will find a dearth of discussion concering real wage growth and inflation. You will be peppered with astonishing amounts of information concerning inflation, unemployment, productivity, compensation costs, among other data sets, but you will not find a bona fide widespread discussion among mainstream economists surrounding real wages and productivity.

Unfortunately the trend should surprise no one. It is a consequence of decades of deregulation, attacks on public sector workers, attacks on labor unions,  and above all an intense campaign by corporate American to manitain the myth of Horatio Alger and the American Dream. Look, I even capitalized it, “American Dream.” I am not certain that it is required, but my very first instinct was to make sure that everyone is able to distinguish the idea from each of the other meaningless words surrounding it. The fact of the matter is that as worker productivity has increases and wages have stagnated, the profits of the employers have not showed a correlative decrease. In fact, profits have increased, as has executive pay and compensation. In other words, corporate America has used your otherwise laudable American work ethic to pound you into dust.

You know the feeling–guilt for not completing a task or set of tasks, no matter how unreasonable. The feeling of anguish at the thought of calling in sick. The overwhelming barrage of conflicting information you are faced with when you dare demand to have a modicum of work-life balance. The idea that working two, three, or four jobs is admirable and worthy of respect and recognition. You’re a hero, because that is what Americans do–we get up every day to make someone else filthy rich and we’re damn proud of it. It has all been orchestrated to brainwash you into believing that you are a failure if you do not do whatever is required of you by your employer. Astonishingly, corporate America has been able to maintain this myth even as it demanded more and more from you for less and less in return. It’s wrong and it has to stop.