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The divergence of wages and productivity growth
#1
From Pacific Standard:

The Future of Work: Why Wages Aren’t Keeping Up

Robert Solow

One of the more puzzling and damaging features of the American labor market in the last few decades has been the failure of real (i.e. inflation-adjusted) wages and benefits to keep up with the increase in productivity. In the years after the Second World War, real wages generally rose at the same rate as output per hour worked. This rough balance was made explicit in what came to be called the Treaty of Detroit: the agreement between the United Auto Workers and General Motors (followed by Ford and Chrysler) that the average annual rate of wage increase would be the percentage increase in productivity plus the percentage increase in consumer prices. This norm spread beyond the auto industry. It had the arithmetic consequence that the share of total value added in industry going to labor would stay roughly constant, with the rest going to the capital side.

This balance no longer holds. To illustrate, in the past 10 years productivity has increased 12.3 percent in the non-farm business sector of our economy while real compensation of labor has increased by only 5.1 percent. One has to wonder why this happened and whether it is likely to continue. I want to suggest one possible cause for the lag of wages behind productivity. It is not the only one, for sure. But it is particularly interesting, and it interacts with another rather unhappy trend in the labor market to suggest that the trend against wages is likely to continue. (During the past year and a half, real compensation has outrun productivity, but it is much too soon to guess whether this reversal merely reflects dismal productivity performance and other short-run factors or something more durable.)

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

Robert Solow, an emeritus professor of economics at MIT, won the Nobel Memorial Prize in Economic Sciences in 1987 and in 2014 was awarded the Presidential Medal of Freedom. He is the Robert K. Merton Scholar of the Russell Sage Foundation.

This is a tricky matter because there is no direct measurement of rent in this sense. You will not find a line called “monopoly rent” in any firm’s income statement or in the national accounts. It has to be estimated indirectly, if at all. There have been attempts to do this, by one ingenious method or another. The results are not quite “all over the place” but they differ. It is enough if the rent component lies between, say, 10 and 30 percent of GDP, where most of the estimates fall. This is what has to be divided between the claimants — labor and capital and perhaps others. It is essential to understand that what we measure as wages and profits both contain an element of rent.

The purpose of the Treaty of Detroit was to freeze that allocation. What happens to it now is not so much a matter of economic law. It depends on bargaining power, business attitudes and practices, social norms and public opinion.

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. This is not to say that international competition and the biased nature of new technology have no role to play, only that they are not the whole story. Internal social change and the division of rent matter too.

Now I would like to connect this hypothesis with another change taking place in the labor market. Lacking anything more euphonious, I will call it the casualization of labor. The proportion of part-time workers has been rising: both those who prefer it that way and those who would rather have a full-time job. So is the number of temporary workers, whether employed through agencies or on their own. So are the numbers of workers on fixed-term contracts and independent contractors, many of whom are doing the same work as they once did as regular employees. These are all good-faith members of the labor force; they are employed but without what used to be thought of as a regular job.

This shift toward more casual labor interacts with the issue of the division of rents. Casual workers have little or no effective claim to the rent component of any firm’s value added. They have little identification with the firm, and they have correspondingly little bargaining power. Unions find them difficult to organize, for obvious reasons. If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.



For the Future of Work, a special project from the Center for Advanced Study in the Behavioral Sciences at Stanford University, business and labor leaders, social scientists, technology visionaries, activists, and journalists weigh in on the most consequential changes in the workplace, and what anxieties and possibilities they might produce.
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#2
Quote:The higher income brackets saw drastic growth in their income while the bottom 90% of us actually saw our real income decline from 1980 until 2013. The average income of the bottom 90% of us fell 5% from $33,478 to $31,652. The average household income of every other bracket rose. The average income of the next 9% rose from 42% from $126k to $178k. The average income of the bottom nine tents of the top 1% rose 94%, up to $657k. The bottom nine tenths of the top 0.1% saw its average income rise 183% to just over $3 million/year, and the average income of the top 0.01% rose a stunning 325% to nearly $25 million per year. This data is drawn from an update that Professor Emmanuel Saez released to data accompanying a paper published by himself and Thomas Piketty entitled Income Inequality in the United States, 1913-2002 (2004).
Income Growth in the United States by Bracket Between 1980 and 2013

Quote:During a recent Bloomberg Television interview, Bill Gross (Pimco managing director) and Larry Fink (Blackrock CEO) concluded that the return on capital relative to labor was excessive. Mr. Gross now expects the nominal return on financial assets, such as equities and bonds, to plummet 50 percent. 

Robert Reich, Labor Secretary under President Bill Clinton, suggests the top 1 percent received 45 percent of the economic gains during the Clinton administration and 65 percent during the Bush administration. In addition, the Census Bureau reports real median wages increased a mere one-third of 1 percent annually during this time.
Reagonomics and Clintonomics Failed the US

Quote:But there are nearly 14,000 tax filers who earned more than $12 million in 2012 as members of the best-paid 0.01 percent of all taxpayers, according to the IRS, and about 1,360 who earned over $62 million that year. Their vast earnings were not taxed any more heavily – and indeed, they paid a lower overall income tax rate than their merely one-percent brethren. It is the first time the IRS has ever broken out income tax data at the very top end of the earnings spectrum. Previous releases have shown the top 1 percent and the top 0.1 percent of filers, but the new data drill deeper. There were a little under 1,400 income tax returns filed in that very richest sliver of data in 2012, the agency reports, with an average income of roughly $161 million for the year.
New Data Offer First Infuriating Glimpse At How The Richest 0.001 Percent Pay Income Taxes | ThinkProgress
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#3
Quote:It’s well documented and widely understood that wage inequality has grown dramatically over the last four decades as productivity and compensation growth have become delinked. Despite an expanding and increasingly productive economy, wages have stagnated for the vast majority. Looking at the most recent data—through the first half of 2016—we see that wage inequality has continued to grow, with top earners faring far better than those in the middle or bottom of the wage scale.

First, the data paints a striking picture of growing wage inequality since the last business cycle peak in 2007. Second, average wage growth overall is slow, and any significant real wage growth continues to be driven by low (and below target) inflation—not meaningful acceleration in nominal wage growth. Last, strong payroll employment growth the last couple of months suggests positive future trends for not only wage growth, but also declining unemployment and rising labor force participation.
Rising wage inequality continues to be a defining feature of the U.S. labor market | Economic Policy Institute
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#4
Here is something interesting. As we reported elsewhere, there is a McKinsey study showing that median wages have been stagnating in much of the developed world since the turn of the century, with some notable exceptions like Sweden. 

How did Sweden do it? 

Quote:Sweden, where median households received a larger share of the gains from output growth in the 2005-2014 period, has bucked this negative trend. In response to the growth slowdown of the last decade, Sweden’s government worked with employers and unions to reduce working hours and preserve jobs. Thanks to these interventions, market incomes fell or were flat for only 20% of households. And generous net transfers meant that disposable incomes increased for almost all households.
The Great Income Stagnation by Laura Tyson and Anu Madgavkar - Project Syndicate

Hmm, government intervention, the stuff market-fundamentalist don't like. But here is the catch. While not as successful as Sweden, government intervention also mitigated the erosion of median incomes in the US..

Quote:To be sure, the US also intervened after the crisis, implementing a fiscal stimulus package in 2009 that, along with other transfers, raised median disposable income growth by the equivalent of five percentage points. A four-point decline in median market income thus became a one-percentage-point gain in median disposable income. But that did not change the fact that, from 2005 to the end of 2013, market incomes declined for 81% of US households.

By the way, the rest of the article also makes a few interesting points..

Quote:Similarly, recent research by Berkeley’s Emmanuel Saez shows that real market income for the bottom 99% in the US grew in both 2014 and 2015 at rates not seen since 1999. Nonetheless, by the end of 2015, real market incomes for that group had recovered only about two-thirds of the losses borne during the 2007-2009 recession. In other words, while disposable income did not fall in either Sweden or the US, the US approach was to compensate for a decline in market incomes, which Sweden had managed to head off.

The consequences of such failures are far-reaching. Stagnating or falling real incomes do not just act as a brake on consumption demand and GDP growth; they also fuel social and political discontent, as citizens lose confidence in existing economic structures.

MGI surveys in France, the United Kingdom, and the US have found that people whose incomes are not growing, and who do not anticipate an improvement, tend to view trade and immigration much more negatively than those who are experiencing or foresee gains. The Brexit vote in the UK and bipartisan opposition to trade agreements in the US are clear signs of this.
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#5
This is pretty interesting and can explain at least part of the anxiety of the white working class:

Quote:The occupations most likely to shrink over the next decade may help explain why older, white American men are signaling greater economic anxiety: They’re most likely to hold those disappearing jobs. Economist Jed Kolko analyzed Labor Department projections andCensus Bureau demographic data and found white men, older adults and the less educated are all more likely to be employed in work that’s expected to decline over the next decade. The analysis shows these jobs have neither the highest unemployment rates, nor the lowest incomes, which may help explain why economic anxiety remains high among those who aren’t necessarily the worst off in today’s labor market. Strong support for Donald Trump among the white working class has produced a steady diet of analyses for what might fuel his riseA Gallup survey last month suggested his supporters are more easily identified by measures of racial isolation and cultural anxiety than by their personal economic well-being. The Gallup survey and others have examined concerns over declining standards of living, including rising mortality and health issues.
How Shrinking Occupations Could Explain Rising Economic Anxiety - Real Time Economics - WSJ
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#6
Finally some good news:

Quote:The median American household made $56,500 in 2015, a 5.2 percent boost over the year before after accounting for inflation, the U.S. Census Bureaureported Tuesday.

[Image: 1*DJUEd--R0aCa8h5ythIJCA.png]
CREDIT: US Census Bureau

It is the first time that real median incomes have risen since 2007. The rich had already seen their earnings climb over the past couple of years.
But the median household saw incomes stagnate and lost ground to inflation throughout the recession and gradual recovery. Tuesday’s figures mark not just a return to growth, but the fastest one-year jump ever recorded in the median statistic.

Inflation-adjusted median household income now stands at the same level as it did before the crash, suggesting that working-class households have only now regained the buying power they lost. Median household income is still below its 1999 levels after the bounce-back.
Middle class incomes finally bounce back
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#7
Rather than trade, one of the reasons for the wage stagnation in the US has been the decline of unions. The Nordic countries are more open to trade but they have not seen anywhere near the same wage stagnation:

Quote:Because blue-collar worker income in Sweden, Norway, and Denmark is so high, Americans are often surprised to learn that none of the Nordic social democracies have minimum wage laws. The truth is that they don’t need them, thanks to the immense (albeit gradually waning) power of Scandinavian labor unions.

Organized labor in that region of Europe has used its power to set a de facto wage floor, rendering parliamentary action superfluous. Danish organized labor, for example, has negotiated collective bargaining agreements that cover approximately 80 percent of the country’s workers. That means even the handful of firms outside those contracts need to keep wages high in order to hire and retain employees. To a great extent, unions set the price of Danish labor, even in workplaces where there are no union members.

New research from the Economic Policy Institute suggests that American unions play a similar role — or at least they used to. An EPI report issued on Monday argues that the decline of organized labor has seriously damaged the earning power of even non-union working men in the private sector.
The Labor Movement’s Decline Has Been Bad For Even Non-Union Workers | Demos
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#8
Apparently, privatization hasn't been good for inequality (according to ITPI) , although it often has been better on other metrics like efficiency and cost.

How privatization increases inequality examines the ways in which the insertion of private interests into the provision of public goods and services hurts poor individuals and families, and people of color. 
                                                       [img=250x0]http://www.inthepublicinterest.org/wp-content/uploads/downloadreport2.png[/img]
In the Public Interest’s analysis of recent government contracting identifies five ways in which government privatization disproportionately hurts poor individuals and families, each of which is explored in greater detail in the five main sections of the report: 
  1. Creation of new user fees: The creation of new user fees to fund public services disproportionately impacts the poor. As government budgets have declined, some jurisdictions have tried outsourcing services to private companies and allowing those companies to charge fees to the end-user to subsidize or completely fund the service. Many of the services that use this contracting and payment structure are those that poor individuals and families must use or are subject to through their interactions with the government. (Download this section of the report.)

  2. Increase in existing user fees: Residents of jurisdictions that have privatized critical public services such as water or transit have experienced steep increases in their rates—such increases particularly harm low-income residents and those on fixed-incomes. (Download this section of the report.)

  3. Privatization of the social safety net: Programs that provide and deliver critical support to the poor are often the subject of privatization experiments, many times with tragic results. Because these programs assist those who have little to no political power, these programs are low hanging fruit for privatization. (Download this section of the report.)

  4. Decreased wages and benefits: Privatization increases income inequality through the decline of contracted workers’ wages and benefits. When governments directly provide a service, they often provide living wages and decent benefits to workers. When private companies take control, they often slash wages and benefits in an attempt to cut labor costs, replacing stable, middle class jobs with poverty-level jobs. (Download this section of the report.)

  5. Increased socioeconomic and racial segregation: The introduction of private interests into public goods and services can radically impact access for certain groups. In some cases, as the public park example in Section 5 shows, privatization can create parallel systems in which one system propped up by private interests typically serves higher-income people, while another lesser quality system serves lower-income people. In other cases, the creation of a private system, such as charter schools in a school district, siphons funding away from the public system meant to serve everyone. In some situations, poor individuals and families can lose access to the public good completely. (Download this section of the report.)
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#9
Quote:I’ve written before on how the decline of organized labor beginning in the late 1970s gave birth to the backlash that fueled Donald Trump’s election. Labor’s deterioration weakened worker protections, kept wages stagnant and caused income inequality to soar to the highest levels in over eight decades. It also made workers feel they needed a savior like Trump.

In other words, his unlikely victory follows a straight line from the defeat of the Labor Reform Act of 1978 to the election of 2016. That bill would have modernized and empowered unions through more effective recognition procedures accompanied by enhanced power in negotiations. Instead, its death by filibuster became the beginning of their end.
American labor unions are about to die - Business Insider
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#10
Quote:Four different measures are all telling the same story: While America's workers keep getting hired at a solid pace, they're having difficulty finding sustained growth in their paychecks. First, January set a disappointing tone for wages at the start of 2017. Average hourly earnings rose 2.5 percent from a year earlier, the slowest since August. That's even as employers added the most workers in four months.
More Gauges Tell Same Story: Lasting U.S. Wage Growth Remains Elusive - Bloomberg
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