Monday, September 4, 2017
American Workers Still Lashed To The Productivity Treadmill - Wage Stagnation
In a WSJ piece from five days ago on declining worker productivity, we learned that "productivity growth, though volatile in the short run has slowed markedly since the information technology fueled boom of the late 1990s and early 2000s." Why is this? Why are American workers, though they are underpaid and work more hours than ever before, still held to unrealistic productivity standards by the economic pooh bahs and gurus?
Northwestern University's Robert Gordon has posited that the Industrial Revolution (at the turn of the 19th century) had a vastly bigger effect on productivity, economic growth than the so-called "PC revolution" in the 20th. Think about it! The former meant transition from the impossibly laughable energy of whale oil to kerosene, coal etc., a mammoth jump in the EROEI of available energy sources. The latter transpired over a period of roughly 20 years over which the EROEI of oil actually decreased from 16:1 to roughly 10:1. Translation: More work over more hours was needed to get the same 'bang for the productivity buck.'
Little wonder wonder that even millions of computers were not able to match the sheer change in productive output that accompanied the Industrial Revolution- and within the scope of the latter's purview we include the internal combustion engine, electricity, and indoor plumbing. Gordon argues, and he's correct, that by the time the digital revolution got under way- say in the 80s- the big payoff in productivity began shrinking. Meanwhile, the PC-computing payoff basically has "come and gone" dissipating by 2004, when EROEI reached below 10:1.
Energy efficiency continues to decline and yet the econ genii still can't fathom why labor productivity is in decline, nor identify the things gov't can do to slow it. For the worker himself, any such claim is taken as nonsense because he is working harder than ever and merely treading water.
Less noted, but an equally important factor is how productivity is gauged. We are informed (WSJ, op. cit.) that labor productivity is tied to economic growth, i.e. the GDP. The GDP in turn is dependent by nearly a 75% proportion on consumption. The growth "rate" however seems to be stuck at 2 percent per year and no more. Indeed, in a number of quarters since the credit meltdown we've barely seen 1-1.5% per year. In addition, we've been informed (op. cit.):
"If labor productivity grows an average of 2 % per year average living standards for our children's generation will be twice what we experience... If labor productivity grows an average of 1 % per year, the difference is dramatic. Living standards will take two generations to double."
Is this all bad? And what is the root cause? A major clue is provided by authors William Wolman and Anne Colamosca.in their (1997) book, The Judas Economy: The Triumph of Capital and the Betrayal of Work in which we learn that productivity in relation to GDP has increased more than 40% in the interval since 1973 even as wages-salaries have remained almost stagnant.
From this it emerges that labor productivity is ebbing because wages have stagnated so workers have not been able to earn enough to spend - to contribute to the 75 percent consumption part of the GDP equation. The inherent problem then appears to be tying labor productivity to economic growth. TIME economic columnist Rana Foroohar reinforces this aspect by noting (p. 20, Sept. 5, 2016):
"Nobody us suggesting that productivity isn't rising because individuals aren't working hard enough. On the contrary, most economists believer the American blue and white collar workers alike are firing on all cylinders."
So what the ivory tower economists are really telling us when they bitch about "moderate productivity" or "labor productivity too low" is that it isn't being translated into economic growth. But that elicits the question, why not? The answer again, is because workers are not being paid enough to purchase most of the goods they make. Unless it's via credit card debt, of course,
Is this poppycock? Let's delve into it further. Half of the jobs in the U.S. currently pay less than $18 per hour, according to Labor Department data. That's about $37,000 a year - assuming someone works full time. Meanwhile, forty percent of jobs pay less than $15.50 per hour according to the Economic Policy Institute. How far do such incomes go?
In the Denver area the average rent is currently $1,350 a month. Not including utilities that would be over 50 percent of $2620, the monthly income after taxes, for the earlier class of worker named above. In terms of home ownership., 6 of 10 homes in the Denver area are over $400,000. The annual income needed to qualify for a mortgage for such a home - assuming a 10 percent down payment and 4 percent interest rate - would be $94,000 a year. This is over two and a half times more income than half the jobs in the U.S. currently pay.
It doesn't take a rocket scientist or math whiz to figure out the disposable income available to those with the lower incomes (than $37,000/ yr.) would not entice them to spend on very many things - whether goods (e.g. new HDTVs, cars) or services (dining out). Hence, to avoid overstocked warehouses companies must cut production of goods. This in turn leads to a problem with aggregate demand.
Meanwhile, we learn hourly earnings for private sector workers "increased 3 cents last month to $26.39 an hour." This is better than more than half U.S. workers but still not sufficient to rent an apartment or get a mortgage for most homes in Denver. Not to mention, Miami, LA and San Francisco.
Aggregate demand is composed of two parts: 1) demand generated by consumers for goods and services, and 2) the demand for investment goods. When the level of aggregate demand is high, both these components are generally equally high, and the levels of production and employment are high. On the other hand, when aggregate demand is low - or even one of the components (e.g. (1)) is very low, then levels of production plummet.
Quick and stupid fixes will not solve the situation. Thus, Columbia Business School Dean Glenn Hubbard (the guy who conceived the Bush tax cuts) and his "solution" of "rolling back regulations" (WSJ, op. cit.) will not increase productivity. It will only make more workers ill when they drink degraded water or get exposed to harmful chemicals because regulations (read protections) have been eviscerated.
A more sober and sensible take (ibid.) is provided by Federal Reserve Vice Chairman Stanley Fischer who observes that policies work best when areas are addressed that the private sector neglects. These include: "investment in basic research, infrastructure, schooling and public health"
Imagine how much more productivity could be improved if roads, bridges were properly maintained - existing ones with issues repaired- enhancing manufacturing to retail outlet times. Imagine also how it could be improved if workers' health was improved, causing fewer work days missed.
The only way in the meantime to increase productivity tied to economic growth is for employers to increase worker wages. They can then achieve greater purchase power, and a higher standard of living and keep those warehouses filled with product. This is even more critical now given the weakening of the dollar's value. As per John Tamny's WSJ article ('Trump Is Wrong - A Weak Dollar Doesn't Make Strong Economy', Aug. 9, p. A15):
"American workers are paid in dollars. Devaluing the currency erodes their ability to buy the necessities and pleasures of life, whether they're created across the street or on the other side of the world. This obvious truth has long eluded proponents of a weak currency who are prone to limiting their analysis to first stage implications".
In like manner, one could say the obvious truth of hiking worker wages to enhance productivity (as currently defined) has also eluded the proponents of low wages - who are only obsessed with controlling inflation. But as Mr. Tamny also writes, applicable here as well:
"The reality, seemingly ignored in the discussion of economic growth is that workers produce in order to consume. The making is all about the getting."
But what if the connection is ruptured? Then so also is labor productivity ruptured from GDP and economic growth. In this case we may have a more objective measure for productivity not based so much on worker consumption.
For now, because wages are so stagnant, workers are again tapping homes for cash (WSJ, 'Tapping Homes for Cash Is Back', Aug. 28, D1) and maxing out with credit card debt. ("Home equity line originations rose nearly 8 % to almost $46 billion in the 2nd quarter- the highest level since 2008".)
In addition, too many American workers now appear to have '"settled" meaning they've lowered work satisfaction levels to the bare minimum or close to it (WSJ, 'Expecting Less Jobholders Cheer Up', Sept. 2-3, p. D1). Thus we learn:
"A decade of bruising job cuts, minimal raises and lean staffing has led workers to lower their expectations."
"The average employee today shoulders more risk for retirement and health care than in past generations, and enjoys less job security.."
Meanwhile, Donald Trump has proposed massive corporate tax cuts, i.e. effectively for the CEOs, companies, while trying to make employees believe this will translate to a few extra nickels for them.
More than ever, Dems need to make the case that American workers need support, and also expose Trump's idiotic tax "reform" plan for what it is - sheer exercise in fantasy. I will have more to write about this and why his idiocy now presents a "red flag" to the bond market.