Relevant and even prescient commentary on news, politics and the economy.

Wages, prices, "profit", and productivity…and Black Friday too

Black Friday around here in New England begins to night in stores about 8 P.M. On the internet Black Friday’s discounts began last week as the competition heats up between companies with stores and internet based sales. Stores have responded with aggressive discounts, especially visible is Walmart.

This post is relevant to the issue of wages at Walmart, and points to deeper economic issues one has to keep in mind when reading about the economics overall versus a company policy.  This becomes especially poignant as some Walmart workers attempt to draw attention to wages, benefits, and hours the company paints as necessary.

Demos has some figures for thought in How Raising Wages Would Benefit Workers, the Industry and the Overall Economy.   Here’s a summary of the study from Demos:

This study assumes a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation’s largest retail companies, those employing at least 1,000 workers. For the typical worker earning less than this threshold, the new floor would mean a 27 percent pay raise. Including both the direct effects of the wage raise and spillover effects, the new floor will impact more than 5 million retail workers and their families. This study examines the impact of the new wage floor on economic growth and job creation, on consumers in terms of prices, on companies in terms of profit and sales, and for retail workers in terms of their purchasing power and poverty status.

“There is a flaw in the conventional thinking that profits, low prices and decent wages cannot co-exist,” says Catherine Ruetschlin, study author and Demos Policy Analyst. “The findings in the study prove the country’s largest retailers are in an ideal position to launch a private sector stimulus, leading the way towards a new model for American prosperity.”

Robert Reich offers his viewpoint below the fold:

Most new jobs in America are in personal services like retail, with low pay and bad hours. According to the Bureau of Labor and Statistics, the average full-time retail worker earns between $18,000 and $21,000 per year.

But if retail workers got a raise, would consumers have to pay higher prices to make up for it? A new study by the think tank Demos reports that raising the salary of all full-time workers at large retailers to $25,000 per year would lift more than 700,000 people out of poverty, at a cost of only a 1 percent price increase for customers.

And, in the end, retailers would benefit. According to the study, the cost of the wage increases to major retailers would be $20.8 billion — about one percent of the sector’s $2.17 trillion in total annual sales. But the study also estimates the increased purchasing power of lower-wage workers as a result of the pay raises would generate $4 billion to $5 billion in additional retail sales.

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Guest post: Top 1% Reduced Taxes in Last 3 Years but Probably Gained Income Share

Guest post by Kenneth Thomas

Top 1% Reduced Taxes in Last 3 Years but Probably Gained Income Share

Citizens for Tax Justice came out with a nice report today showing that the overall U.S. tax system is just barely “progressive,” which is to say that as your income goes up, so does your tax rate. While the federal income tax is progressive in this sense, many state and local taxes, such as sales and property taxes are regressive in that lower income people pay higher percentages of their income than do higher income people. The following table from CTJ makes this crystal clear:
   

As the right-hand portion of the table shows, as income rises federal taxes (individual and corporate income, estate tax, etc.) increase as a percentage of income, from 5.0% of income for the lowest 20% of earners to 21.1% for the top 1% of taxpayers. Meanwhile, state and local taxes move in exactly the opposite direction, from 12.3% of income for the lowest 20% to 7.9% for the top 1%. As CTJ further points out, for every income group the share of total taxes they pay is extremely close to their share of total income (in fact, the biggest difference is 1.7 percentage points).

We already knew, thanks to Emmanuel Saez, that in 2010, the top 1% got 93% of all income gains. With the new 2011 data, we find that the top 1% has continued to make out like gangbusters. As I reported in August, using data from the conservative Tax Foundation, in 2008 the top 1% earned 20.00% of all income. As we see in the table above, just three years later that has grown to 21.0%. Considering that the 2011 data is estimated, perhaps this change is not too significant. But what is really striking is that the top 1% paid only 21.1% of its income in all federal taxes in 2011, whereas in 2008 it paid at a rate of 23.27% for personal income tax alone.

Since the top 1% gets an even more disproportionate share of corporate income and taxable estate income than it does of personal income, this is solid evidence that it’s a real reduction we are seeing. I hate to sound like a broken record, but it’s really true that there is one tax system for the 1% and another one for the rest of us.

crossposted with  Middle class political economist

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The ATM Myth

Brad DeLong cited this passage from Ron Suskind’s latest book on Monday:

Both [Christina Romer and Larry Summers], in fact, were concerned by something the president had said in a morning briefing: that he thought that high unemployment was due to productivity gains in the economy.

The same meme spread across the economics spectrum: Scott Sumner was horrified. Mike Konczal’s reaction (on Twitter) was restrained (“This is…depressing”) by comparison.

In the context of Suskind’s book, we might just assume that Obama was, as usual, being gulled by his handler Rahm and his Svengali, Timmeh Geithner. However, via Karl Smith, we can set to rest any doubt that Barack Obama is just being misled. Matt Yglesias catches a lazy piece of  “thinking” from the President—who has had Austan Goolsbee, Larry Summers, Peter Orszag, Alan Kreuger, Jason Furman, Jason Bernstein, and several others (even dissing Christina Romer, as the Now-Sainted-by-the-Press-for-his-Fairness-to-Women Obama explicitly did) to correct him:

In a June interview with Fox News, President Obama appeared to argue that the country is suffering from high unemployment because productivity enhancing technologies such at ATMs have reduced the need for work.  It wasn’t clear to me at the time if the president really meant that or if it was just a bad moment in an interview,  . . .

Team Obama has, I think, landed on a more sophisticated version of this theory, and that explains some of the reason why Romer & Summers aren’t in the administration anymore and haven’t been replaced by like-minded people. [link in original]

Now, Barack Obama “might not be particularly well-informed about economics” (Sumner), but I never would have thought he was that obtuse.

Let me talk for a moment about our shared experience. Obama was a year behind me in college. As a transfer student, he didn’t start with on-campus housing; he got a room in a flat in the mid-100s.  So he walked to school—past several banks, one of which was undoubtedly more than happy to open an account for a never-attended-public-school Ivy Leaguer who, even then, knew how to manage up. (Heck, they opened one for me, and I fail miserably at most of that description.)

And the one thing you got—whether it was Chase (back before Manny Hanny acquired it) or Citibank (before it became The Big C)—as a student, no minimum balance required, was an ATM card, usable (in the case of Chase) virtually any time in one of the three (3) enclosed ATMs.  They dispensed $5 and $10 bills.

(The “enclosed” is essential, not just for nighttime safety, but also for days of rain and snowses. Years later, in MBA school, we attended the presentation of a guest speaker, a prominent Georgian who had founded an “Internet bank.” He freely stated that he didn’t understand why some companies enclosed their ATMs; I put the now-bankrupt company on my “short” list immediately.)

That was thirty (30) years ago. Putting this as politely as possible, that’s a heckuva long time for “structural change” in employment to take effect.  To put it in context, I know hot type setters who have been out of that business for less time.

It would take someone who was completely unaware of the world around him to point to the ATM as a ca.-2007 cause of structural unemployment in the United States.

Now, you may, correctly, note that there are Many More ATMs in 2011 than there were when Barack H. Obama moved to Morningside Heights in 1981.  And I will certainly agree with you: after all, if you spend 25 years privileging capital investment over labor—not to mention thirty attacking labor—you should expect capital growth.

But that doesn’t mean that capital growth is welfare-enhancing, or even necessarily has a positive ROI.

At Bear Stearns’s main building, 383 Madison, there were two Chase ATMs on the second floor. Those who know NYC will note that there are not one but two Chase branches across the street, but traders and senior executives require convenience, not crossing a NYC street (which they only did to cash/deposit their bonus checks) or, especially, standing in a queue behind people whose time is much less valuable.

(Tone notwithstanding, the last part of that is rather serious: if being away means you or your firm might take a loss in the mid-five or low-six figure range, your work time is more valuable than that of a Claire’s Stores saleswoman. Much better when the worst-case scenario is to be stuck behind one or two of your fellow traders, who wouldn’t waste their time not knowing exactly what they intend to do before getting to the machine.)

And, since the traders and executives weren’t willing to be personally ripped off, the ATMs were no-fee, even for non-Chase cards.

And here is where an alert economist will say cui bono? The answer is: the firm paid $1.2MM ($1,200,000; $600,000 per machine) for those two machines to be there, be maintained, and be fee-free.

So when you point to those ATMs in the grocery store, I point to the 99 cent ($0.99) fee for a $40 withdrawal and say glibly, “Yes, usury is alive and well; you don’t even need to be in a counting house.” 

How many jobs does that ATM destroy?

And—again, if you’re able to think about it, the way some economists (mostly health economists and econometricians, it seems) are able to do—you look at the proliferation of ATMs and realize that each of them needed to be stocked with bills (now $20s and $50s), have their network connections maintained, be repaired, have (a portion of) a staff member available to deal with customer complaints and issues, and be installed based on an initial capital outlay/agreement that covers all of those costs.

If we treat the Bear Stearns arrangement—and Bear and Chase were tight even before the latter “paid the two dollars”—as a benchmark, a semi-full service (as with the ATMs in most grocery stores and Duane Reades, they didn’t take deposits) ATM costs a lot more to run than a bank teller does. As a ballpark, it may be an order of magnitude more, and that’s rounding the ATM costs down (ca. $500K) and the teller expenses up ($50K).

All of the above is even ignoring The Baumol Problem.  You can provide most of your services through an ATM, or a group of ATMs, if it/they work(s) perfectly, but you cannot eliminate the “teller” role completely. You can redefine it: a bonded employee to restock the bills being dispensed is needed, so you can take a teller away from a “window” for an hour a day: seven hours as a teller, one in service of the ATM. And you can move new bank branches into slightly smaller spaces (based on not needing so many tellers), but you’re more likely to convert some of that space in old branches to space for HNW banking efforts, concentrating on areas that require greater customer service.

So the specific, limited job of “bank teller” might have been reduced (assuming bank branches remained constant; anecdotally, I would suggest they expanded significantly)—unlike hot type, it didn’t go away. But the skillset required for tellers is mostly transferrable: excepting any specific licensing/bonding requirements, if you can be a teller, you can be a cashier or a customer service representative or a sales assistant or a realtor.  It’s not like hot type in that respect—the initial skillset is transferrable.

Add the jobs that become available—network engineers, security people, drivers, system administrators, and people to build all of that equipment—when an ATM is installed and reduce that by a fraction of the tellers who won’t get hired.  Throw in an adjustment for the deadweight loss that is added to the economy via the ATM fees (which is at least partially balanced by the expansion of the ATMs themselves), and overall you have to conclude that the ATM increased the number of jobs available.

Economists often call it “creative destruction,” and you would think that the Goolsbees and Summerses of the world would have explained it to Obama.  In fact, you would think it would be something about which a community organizer would have heard, since much of the effort required there is making it possible for your clients to find retraining opportunities.

That he would speak so absurdly so recently reflects poorly on the economists who advised him (not to mention those who still believe his explanation),

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Japanese style economics…lifted from comments

Lifted from comments from Spencer’s post on Productivity and the stock market

Dan Becker:

Mike Panzer at Financial Armageddon has been on the issue that the “street” is missing all that is going on around them. From his blog: http://panzner.typepad.com/

However, I wonder if a new paper, From Keeping Up with the Joneses to Keeping Above Water: The Status of the US Consumer from the BlackRock Investment Institute,

If long-term leverage sustainability is assumed to reside near 1990 levels, then the bulk of the deleveraging process remains ahead of the American consumer, regardless of the income measure used…

We think that these trends, coupled with stubbornly high unemployment, higher commodities prices, and slower growth in wages and salaries, will likely contribute to a lower level of personal consumption growth over the next few years. Moreover, since consumer spending is a key component of the GDP growth rate, this would argue for generalized economic growth levels that are, at best, modest for years to come, and may in fact appear anemic when compared to pre-crisis growth rates.

Spencer

I have believed for years that the US is following the Japanese model.

But note that while the general belief is that the Japanese government policy has not stimulated the economy, the alternative might very well (be the) belief that Japanese policy may be preventing a depression.

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Growing Productivity, Stagnating Compensation

Crossposted at The Street Light.

Yesterday Ezra Klein had a chart (from a paper by Larry Mishel and Heidi Shierholz at EPI) showing that both private sector and public sector wages have been stagnating for the past several years, and have certainly not kept up with productivity growth. I think it’s useful to look at the relationship between productivity and compensation over a longer time horizon.

The following chart shows labor productivity and real hourly compensation since 1950. (Data from the BLS.) Two things strike me particularly about this graph. The first is how closely the two series track each other between 1950 and 1980. During those 30 years labor productivity in the nonfarm business sector of the US economy rose by 92%; real hourly compensation paid to workers rose by a nearly identical 87%. Classical economic theory says that is exactly what we would expect – as workers become more valuable to firms by producing more output with every hour of labor, firms should compete with each other to employ them, driving up wages by an equal amount.


The second striking feature of this picture is, of course, how much the two series have diverged since the early 1980s. Output per hour of work in 2010 was 87% higher than in 1980, while real hourly compensation was only 38% higher.

The table below shows changes in labor productivity and hourly compensation by decade. Again, let me draw your attention to two features. First, this data confirms that the “great productivity slowdown” of the 1970s and 80s seems to have been vanquished; over the past 15 to 20 years US businesses have been improving productivity at rates as high as during the 1950s and 60s. Yet more evidence that Tyler Cowen’s “Great Stagnation” is not a productivity story.


The second remarkable feature of this table is that the vast majority of the gap between productivity and hourly compensation comes from the 1980s and 2000s, while during the 1990s workers shared in productivity gains nearly as fully as they did in the 1960s. And that, of course, leads us directly to the $64,000 question: what was it about the 1980s and 2000s that made it so difficult for workers to reap the fruits of their more productive labor?

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Productivity Growth

By Spencer,

Third quarter nonfarm productivity rose at a 9.5% annual rate as output rose 4.0% and hours worked fell at a 5.0% rate. Historically, productivity has been a very good leading indicator of real GDP growth lagged two quarters.

Productivity is also highly cyclical and the first year of a recovery typically experiences the strongest productivity growth.

Compensation jumped to a 3.8% annual rate, but on a year over year basis it is only up 0.5%.
Consequently, the year over year change in unit labor cost was -5.2%, the largest drop in recent years. With productivity growth this strong and such weak compensation growth it is hard to see how anyone can be seriously concerned about a resurgence of inflation. Except for oil, even surging commodity prices would not have a significant impact on the overall price level since they account for such a small share of final prices. Moreover, since potential GDP is a function of productivity growth and labor force growth the argument that the very large GDP gap is overstated does not seem to hold much weight as long as productivity growth is so strong.


I also updated the chart on Labor’s Share to show that this trend is actually accelerating.

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LABOR’S SHARE

By Spencer (2009)

 

The issue of a jobless recovery is getting a lot of attention recently.

I’ve found the best way to look at the issue is to compare the change in real growth and productivity over the long run. There have been three periods of different productivity trends in modern US economic history.

Prior to about 1973 productivity growth averaged 2.8%. In the second or low productivity era, running from 1974 to 1995, productivity growth slowed to 1.5% before rebounding to 2.4% since 1995.

But real GDP growth also slowed over this period. As a consequence, the ratio of real GDP growth to productivity growth fell from 68% in the early strong productivity to 50% in the weak productivity era before rebounding to over 80% in the most recent era. Basically, real GDP growth equals productivity growth plus hours worked or employment growth. A consequence of stronger productivity in an era of weaker GDP growth this suggests that each percentage point increase in real GDP growth generates a much weaker increase in hours worked or employment. Currently, a percentage point increase in real GDP growth now generates under a 0.2 percentage point increase in hours worked versus 0.3 in the pre-1974 era and 0.5 percentage points in the low productivity era.

But to a certain extent comparing productivity and real GDP is comparing apples to oranges. To be accurate one should look at productivity versus output in the nonfarm sector. GDP includes the farm sector of course, but also the nonprofit and government sectors where productivity is assumed to be zero.

If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity.


This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor’s share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.


If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.

additional chart in response to comments.

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