The Unemployment Rate and Compensation Growth
Crossposted at The Street Light.
Last week I took a look at the way that higher labor productivity has not translated into higher worker compensation, particularly during the 1980s and 2000s. This is at odds with classical labor market theory, which suggests that as workers become more productive, their increasing value to firms should cause their wages to be bid higher so that their compensation rises accordingly.
There are a number of possible explanations for the divergence between productivity and compensation, and for how this may play into the broader phenomenon of stagnant wages for average workers. Part of the explanation is that an increasing share of worker compensation takes the form of benefits rather than wages and salaries. As shown in the chart below, fully one-fourth of worker compensation in 2010 took the form of benefits. (Source: BEA personal income data.)
This upward trend has been driven almost entirely by the rise of health care costs in the US, and the corresponding rise in health insurance premiums. Note that the one dip in the series in the late 1990s was due to the widespread implementation of HMOs – but they clearly proved to provide a one-time gain rather than a permanent increase in health insurance efficiency. So part of the reason that workers’ paychecks have not been rising is directly attributable to the rise in health care costs in the US.
But that’s not the whole story, and doesn’t address the question of slowly growing total compensation (as opposed to stagnant wages). There are, I think, reasonable arguments to be made about social and political factors, such as the decline in the power of unions. Along similar lines, Mike Konczal recently wondered to what degree this could be due to the Fed’s consistent and explicit desire to prevent wage increases.
And then there’s plain old supply and demand as a possible explanation. What did the 1980s and 2000s have in common from a macroeconomic point of view? One answer is this: multi-year long periods of high or rising unemployment rates.
The chart below shows, in blue, the seven-year moving average of the portion of increased labor productivity that were paid to workers in the form of higher compensation. During the 1960s and 70s, for example, workers typically received around 80% of gains in labor productivity over any given seven year period. Then during the 1980s that portion fell to about 40%. Meanwhile, the series in red is the seven-year moving average of the unemployment rate.
To make it a little easier to interpret, I’ve color coded the 60 years shown in the chart by shading the periods when workers were losing their share of productivity growth red, while the periods when workers were increasing their share of productivity gains are shaded in green. This helps to make it quite clear that “green” times – i.e. times when workers seem to be enjoying more of the gains in productivity – were periods when unemployment was falling. “Red” times (I guess it actually looks more pink than red in this chart) are clearly associated with periods when the unemployment rate was stagnant or rising.
One implication of this is clear: the high unemployment rate in the US right now, which is expected to decline only slowly over the next several years, is likely to mean that it will be a long time before worker compensation begins to rise as rapidly as worker productivity. Put another way, the overall level of high unemployment right now not only has the obviously enormous personal implications for those who are unemployed — it also is likely to seriously affect the compensation of workers who have never lost their jobs, for years and years to come.
My grandfather was a typesetter at a local newspaper. I remember visiting the printing press when he first retired (back in the 80s) and he took me to a workstation. He told me that in one day that single person at the workstation did the work that used to take five or six guys to accomplish (and I believe it took them days to do it, but I can’t remember the details fully). I also saw the new machines that put advertising inserts into the paper and bundled them up for delivery (manned by 2 or 3 people).
When you’re young, you automatically assume the guy at the monitor has to make a huge salary. We now know that he did not. Yet I have no clear answer for where the compensation went. The paper had added revenue from the inserts and lowered its labor costs, yet it was and still is mired in financial woes.
Put another way, high unemployment is not a bug, it is a feature of the current economic landscape from a certain perspective.
It seems to me that in 2000 the conservative government offered an alternative to the previous virtuous feedback mechanism described in your post. That of increases in productivity being partially returned to workers in the form of higher compensation, which then would increase demand etc. That last bit is important for the economy as a whole I should think and I don’t believe that this fact was unrecognized.
But if you overlay asset prices onto the equation it is hard to resist the notion that around this time Wall Street decided that they had hit upon a magic formula. A magic formula that would allow them to pressure firms to hold wages down while encouraging consumption. The ‘wealth effect’. All they had to do was pump up house values and the rubes would think that they had increased purchasing power even if it came in the form of debt. It was a thing of beauty the way all scams are a thing of beauty.
I’ll take a crack at this first comment and maybe you economics wizards can education:
“This is at odds with classical labor market theory, which suggests that as workers become more productive, their increasing value to firms should cause their wages to be bid higher so that their compensation rises accordingly.”
As Kevin points out above. With the advent of the information age the workers output became more productive – but the worker himself did not. He got a better tool that did not require more specialized skill. Heck in a lot of cases the new tools lessoned the skill level of the worker to do the job. So the job ends up requiring less skill to actually accomplish, replaces multiple jobs with just one, yet the output of that one worker is greater than the 5-6 guys doing it before. What used to take months of apprenticships to learn now takes a high school education and a day of OJT and your ready to go – the classic definition of unskilled labor.
The reason the workers are not getting the benefits of increasing productivity is becuase the workers themselves are not getting more productive – their tools are. The actual workers are basically fungible.
So where did I got wrong? From an economics perspective – I don’t care about it not being “fair”.
Islam will change
It is only fungible because of labor law. The ability to organize and with hold labor makes it less fungible. This increases its bargaining power. It is a matter of public policy and law. Your notion of skill is a value judgement that you are convinced you are not making. You are paying the laborer for their time. You are renting a human being. No it isn’t about being fair necessarily, it is about power. A balance of power that is lacking.
“Part of the explanation is that an increasing share of worker compensation takes the form of benefits rather than wages and salaries.” The irony is: Less and less can that compensation meet any realistic need, be it in health care or retirement. In fact, actual compensation both in terms of salary and in terms of benefits is becoming a national joke.
For these reasons, your first graph “Benefits as a Share of Compensation” is easily misinterpreted. Suppose actual income–after inflation–declined and benefits “appeared” to make up more of compensation even as those benefits less and less met actual need?
Better to look at how health care costs are being more and more passed to the worker…as are his pension requirements.
And, yes, mechanization played a part…but it is not the big villain that everyone thinks it is. Do you think China is highly mechanized? or is cheap labor a reality there?
Where are all the corporate producers going? Why to countries with cheap labor–preferably ones where unions are stuffed in a box and deep sixed, while we moan, “Oh it is all that mechanization and computer stuff.”
We really should discuss trade imbalances and why they have occurred…and what that means to the average worker.
Oh…did you see today’s Stanley Fish piece in the New York Times: He wants to be a union man! Not that unionization will help at this point. Hard to bargain when the factory floor vanishes and reappears in China or Vietnam..or Colombia.
The thing that strikes me about graph 1 is – just like every other economic factor you can think of – it shows a major shift in the 1975-85 time frame. Since 2000, all you see are wiggles. As Stormy is suggesting, this curve has peaked, and will be heading down.
As an aside, if Buff is anywhere close to correct, then there could never be structural unemplyment, since most work is unskilled, and should therefore be infinitely fungible.
Yes, I am paying the laborer for his time. Which is no longer very valuable since my 18 year old HS grad can do it with a days training. Basically unskilled labor. What your saying is that the ability to form unions and organize will somehow magically transform a job that requires no skill into one that does.
The ability to withhold labor doesn’t change the equation that the job can be done by almost anyone walking off the street. Unskilled labor is fungible and as we have seen easily outsourced. I grew up in the rust-belt and all the union power got was production leaving – making what was once the industrial heartland of the US now the rust-belt. In the 50-60s people went to Buffalo, Detroit, Akron, Cleveland, Milwakee etc, to make their mark. That’s were the best and brightest went. How many Harvard grads bragged to their classmates about bagging a job in Buffalo? or Flint?
My point is that a lot of the increase in productivity are becuase we have better tools. The worker himself has not improved. An old example. I give the old Greek Peltast iron weapons to replace his bronze ones. The soldier skills did not change but his ‘productivety’ just went up considerably. Computers and automation did this in many, many jobs. In a lot of cases making the jobs actually require less/no skill to accomplish vs. needing an artisan.
Islam will change
More than anything a business needs customers. Henry Ford understood that he needed to pay his workers enough so that they could be his customers. Today’s businesses are so focused on the short term that they are not willing to do what is required to make sure they will have customers.
The US has been a land of good customers because society through the government has educated people, kept them safe, and built infrastructure to get them to businesses where they could spend the money that their educations let them earn. Since Reagan US businesses have cut back on spending on customers (through both wages and taxes). They have kept the gains in productivity within the ownership, but the owners can’t/don’t spend enough of it, so the busunesses are running short on customers.
Each individual business owner is (or appears to be) making profit maximizing decisions, but the overall effect is reduced growth.
buffpilot makes a great point and I would like to add to it from a personal conversation I just had with a friend.
We both interned at an electric utility and senior employees like to tell interns about how things used to be at the company. One of the stories involved the drafters that were employed at every office (each region has an office). When there was a project or new hookup/installation, the customer service rep (after getting the specs, contracts, payments from the client) had a staff of 8-10 people create the required drawings. That entire drafting staff was replaced when AutoCAD was adopted and now the drawings are created by the same customer service rep.
Costs have not gone down for utility customers nor have profit margins increased for utilities, which also have a defined customer base. The reason is due to the addition of IT departments (what buffpilot alluded to in his initial post). Now every employee has a desktop/laptop and enterprise cellphone which requires support. GIS teams are now in charge of modeling the entire geographical area. My friend, who is still with the company, said the IT costs for each employee in that division are more than 20k per year.
The gains we notice in the “productivity gains per worker” noticed in the 80s is due to the wide adoption of the computer across most industries. The added productivity of the customer service rep helps to pay the costs of mainframes, IT departments, software licenses, hardware….
Labor productivity gains have been paid out as profit and/or reinvested in market capitalization. What is the worker going to do about it? Nothing, they have no power. A firm is not a human being capable of empathy, and it would appear the leaders of firms are incapable of empathy (or perhaps skillfully suppress empathy for profit). Leaders reward themselves handsomely for this grotesque philosophy. Any deviation from that is deemed socialist.
Back to the class war front…
I think you need to be careful of Buff’s point. Only valuing a worker for what he can demand in wages in a market where his skills are “fungible,” is the sort of worship of money that we were warned against thousands of years ago. It is easy enough to imagine a world where the only value of a person is how hard he can pull on the rope to put the blocks for pharohs tomb in place.
“Schindlers LIst” touched on this in an early scene where an elderly Professor of Romance Literature was recorded as “labor” by the Nazi masters of economic efficiency. We really don’t want to see that kind of world.
Continuing a trend, the de-skilling of jobs, when the power looms and spinning frames (mules etc) where introduced in England the skills required to keep them running where far less than the old skills needed to do the job by hand. So as a result the workers were paid less. The luddites where stocking knitters in particular confronting the process. Of course there were also a few high skilled jobs in the mechanics required to keep the machines running. Now silicon based workers have eliminated the need for the low skilled minders of the machines. In the cited example above the skills needed to do the task were less than the old system. So its not new its the history of mechanization and automation. Or compare driving a team of horses pulling a plow to a modern GPS equipped tractor, which now is almost a job of just watching to see that nothing unexpected is encountered, you turn when the machine says turn etc.
The comphensation went to the capital required for the new machines, and the bosses who deployed them, nothing new its the same old same old that occured in the clothing revolution 200-150 years ago.
Free! Trade the odds. Complete statistical center for seasonal and statistical patterns for Dow, SP, Nasdaq, Dax… Search your best trading patterns choosing month, day of month, expiration weeks, moon phase, presidential cycle, politics etc. Extra tools: 1) What if… (Return n days after if change is…) 2) Amazing and profitable intraday statistics. 3) Day forecast for Dax and Nasdaq. Try it and profit.
Comments and suggestions are welcome.
All productivity increase is do to better tools. Always has been. Better tools can mean less education needed. Always has been a part of productivity increase.
However, with productivity increase, came a larger market for the product as price declined which also meant more profit. It also, means a need for more workers. In that, the worker shared the productivity gain.
Now the worker does not share the productivity gain. Now, the US worker is less needed as the market size has increased. That is the only difference. That is the issue. Why does the worker not share in the productivity gain.
Labor demand is and has been rising in other parts of the world all along with the improvement of the tools. So, the same equation is still true but for the one part: US labor decline.
Only one answer: Market Power. Market Power is the results of government policy.
Your complaint is more with the fact that we have global arbitrage on unskilled labor. Unskilled labor is fungible and alot of it can be outsourced / off shored. US unskilled workers are competing in a lot of ways with Vietnamese or Chinese unskilled labor. The markets are global in nature and no one cares if that tire you need for your car was made in Germany, Japan, Vietnam, India, or the US. Heck in a lot of cases its hard to figure out where it came from. US unskilled labor demand has been flat or declined becuase it already cost more than its productivity warrented. Even with the machines.
Too many people think that the post-war US economy was normal. The US was 50% of WORLD GDP at that time. We have roughly 5% of the world population, does anyone think that we would be able to hold on to that much of the world GDP? Especially once flattened Europe and Asia got back on their feet? Those productivity gains have been going straight into the pockets of the unskilled in India, China, Vietnam.
So unless you want to instill tariffs and start trade wars, your not going to change the basic fact that US unskilled labor is not worth what we are paying for it – now. My kid works along side an adult at a fast-food place. (not the owner and the only one not under 22 years old that works there). The adult make about 50 cents/ hour more than my 18 year old basically doing the same work. The job took less than an hour to learn.
But as my favorite illiterate blogger Matt Yglesious says we will always need more service sector folks! And you can’t out source the message therapist or sandwhich maker!
I know jobs on the lines in Akron took less than 1 shift to learn. And any HS grad could learn them (heck some of my classmates got jobs back then straight into the UAW). Pure no skill required jobs. So what productivity gains SHOULD the workers be getting? The worker is not anymore productive, has no increas in skills. All he’s selling is his time. Just like the same guy in China or India…
Islam will change
Rdan – Something is getting through the spam filters!!! See the recent comments and the one above this!
I accept your point about a lot of productivity increase being due to better capital goods, but capital is only able to capture most of that increase when the supply of labor outstrips the demand. In your example you say that unskilled labor is fungible, but what you are really saying is that it it is plentiful and that demand for it is decreasing because of the capital goods which allow one unskilled worker to do what 10 skilled workers used to do. That is not always the case. meatpacking is a business that requires a fair amount of not terribly skilled labor. It is horrible and dangerous work and would command a higher wage because a lot of unskilled labor would not do it. Management got around that by hiring undocumented workers and breaking the union strikes with those workers and thereby driving down wages. Health care costs are another example. Health care workers are paid quite wellat the higher skill levels despite vastly more productive technology. The reason is that there is great demand for those skilled workers and a variety of reasons–including the AMA–that the supply of such workers remains tight. Bottom line, I do not think what people get paid has anything to do with what the value is of what they produce and has everything to do with supply and demand.
but they didn’t lay off all the surplus soldiers, or cut his rations.
Who said a worker’s total value is reflected accurately in his wage? The article asks a good question: Why has worker productivity increased not been mirrored in earnings? Some of us are trying to gain better insight.
Going with the point that you emphasize: Organizations are trying innovative ways to give adequate compensation for their employees’ contributions while also being constrained by budgets/revenue. They know that a person’s intangibles (charisma, character) adds to the workplace environment, but higher salaries/promotions are not always the best answer. This is why we’re noticing changing office structures (bring your dog to work, worker defined roles, work at home) and ownership packages.
Businesses that only value work output are losing talent at alarming rates. This is one of the main reasons certain organizations, like water and electric utilities, are having difficulty attracting new workers and keeping them. These century old industries with an antiquated work environment are actually lucky that we’ve had this economic downturn.
If the question is ‘why hasn’t compensation kept pace with productivity’ and the apparent answer is ‘unemployment’, are there other factors to consider?
Shifting a percentage of compensation from ‘salary’ to ‘benefits’ may account for some, however I think there are still some important factors missing.
Outsourcing has been discussed some, but what about the huge shift in compensation to upper management? Doesn’t that account for some of this as well? How do the factors ‘increased productivity’, ‘decreased labor costs’ (through outsourcing and wage suppression), ‘low transport costs’ (through artificially suppressed oil prices), and ‘desire for larger short-term gains’ affect this relationship? Are those the only major factors that have a measurable impact? Are they even factors at all?
Joe C said: “Outsourcing has been discussed some, but what about the huge shift in compensation to upper management?”
Some 15% of national personal income has been shifted to the top 1% since the middle 70’s. They used to receive 7% to 9% of all personal income, and now receive some 24%. That works out to some $7500 for someone (not in the top 1%) earning $50000. Outsourcing, free trade in general, technological advancements, and the unemployment rate, have been the levers our masters have used to squeeze the rest of us. See:
The government has also been an instrument in this, transfering enormous quantities of wealth upwards, while buying votes with the scraps. See:
for just one thing our government does to its people.
Many people who have been involved in such accidents do not have the money to hire a lawyer. They often do nothing about it because they cannot afford to. To make matters worse, they often have to pay for medical expenses and they lose out on work because they are injured. With a lawyer such as this you can afford to claim for injuries and you can do so without any risk to yourself.
No Win No Fee UK