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

http://www.psmag.com/business-economics/the-future-of-work-why-wages-arent-keeping-up

by bpolania • 11 years ago

59 90 11 years ago

phreeza• 11 years ago

Please link to the actual article, not the snippet on a blog: http://www.psmag.com/business-economics/the-future-of-work-w...

euroclydon4• 11 years ago

Thanks. That article was pretty short. I can't imagine how short the blog was.

Interesting that the author spends most his words explaining the rent concept, then abruptly ends with speculation that the rise of temp workers, agency workers, part-time workers, basically everyone who is not an FTE, it to blame for labor not capturing the financial benefit of increased productivity.

The only solution to this problem is going to be through the tax system. If you hire me to shovel dirt all day long, and one day an inventor sells you a more productive shovel which you give to me, I don't really deserve more pay because I'm shoveling dirt better.

But commerce and tax laws are the purview of the democracy, how much money the business owners need to pay back to society for the benefits they receive, and also so society doesn't burn their homes and factories down and kill them, is a matter public policy.

logfromblammo6• 11 years ago

I disagree. If I am a dirt-shoveler with a v1.0 shovel, and I can make a hole with volume of 8 cubic yards in 8 hours, that sets the business expectation for how much a typical dirt-shoveler can do, and how much it costs to dig an additional cubic yard of holes. Namely, it costs one hour of dirt-shoveler labor.

If the v2.0 shovel allows me to dig a hole with volume of 10 cubic yards in 8 hours, that reduces the marginal cost of digging an additional cubic yard of holes. It now costs 0.8 hours of dirt-shoveler labor.

In the short term, the demand for new holes is unchanged, but the demand for shoveler labor has shifted left, as its supply is unchanged. In the long term, the marginal dirt-shovelers--especially those without v2.0 shovels--exit the market. The supply curve for shoveler labor shifts left, and price goes back up, as quantity decreases.

Deserving doesn't enter into it. If dirt-shoveler pay per hour does not go up to reflect the increase in productivity, some shovelers will stop digging for their living and go do something else (or remain unemployed), because they will get paid zero for the holes that they are no longer able to dig. The ones who survive the cull will only be able to demand more pay when someone wants a hole dug, but can't get anyone to do it at the offered rate.

The cost of a v2.0 shovel is now a barrier to entry to the profitable region of the dirt-shoveler business. Now extrapolate to mechanized earth-moving equipment. If you need to excavate a basement for a new building, you hire one guy with the $100000 v46.3 shovel, rather than 20 guys with 20 v3.1 shovels. At this point, just owning the shovel is profitable, because that guy can just rent it out to people who know how to dig holes, but lack the necessary accumulated capital to be competitive in the business.

But those 20 guys you didn't hire to dig your basement are still out there, and they're getting hungry. And they're looking at their crappy v3.1 shovels and thinking, "If I sharpened this edge a bit, it would make a decent weapon, and I could take that v46.3 shovel by force."

There are many possible solutions, because the problem is making multiple economic variables (aka human motivations and desires) balance. A change in the taxation regime is only one, and not necessarily the best one.

sctb• 11 years ago

We updated the link from http://economistsview.typepad.com/economistsview/2015/08/the..., which points to this.

littletimmy4• 11 years ago

Why would wages ever keep up with productivity? Wages will always be a race to the bottom between employees who have to work to not be homeless. The capitalists can exploit this to make wages as low as possible.

Productivity has nothing to do with it.

merpnderp6• 11 years ago

The means of production have never been more accessible. The ability to learn new skills/trades has never been easier. If the average person can't take advantage of them, then it probably has less to do with capitalism and more to do with the government and corporatist conspiring to keep them out of the game.

zajd2• 11 years ago

Learning a new skill or trade doesn't give you access to the "means of production", capital does. And inequality is as bad as it's ever been over the past 50 years. A few tech startup darlings doesn't change that.

TheCowboy• 11 years ago

Another possibility: If the ability to learn new skills and trades has never been easier, and there is a surplus of labor that can absorb these skills, this will help keep wages low for an extended period of time. Global and national population growth numbers can support this view.

People point to regional variation, like wage growth in SV, as evidence of real wage growth. But even that isn't so simple when you have high living expenses and the expectation that they will keep going up. Firms need to offer wages that allow a lifestyle competitive with one provided in Anywhere, America.

But it's likely a combination of multiple causes than one factor or another.

angersock• 11 years ago

Counterpoint: while the means of production are more accessible, the demand for unfinished products is greatly outstripped by the polish of, say, an iPhone.

akamaka4• 11 years ago

You're entirely correct, though another factor to consider is the share of economic value that is captured by industries that have enormous capital requirements (e.g. jet engines, semiconductors, oil refining).

Even if all of the monopoly-protecting regulations are eliminated, there will still be many industries where economies of scale favor large-scale capitalism.

My guess is that while capital is increasingly more accessible, the proportion of the economy where big investment make winners is also increasing. The question of which is growing faster is not one that I can answer, but there are some promising areas where the tide seems be turning toward favoring small players, like in electricity generation or the alcohol industry.

unprepare• 11 years ago

The ability to learn new skills/trades has never been easier

Yes, and as soon as a skill becomes easily attained, it begins to lose value.

It only takes a minute to think of a handful of examples:

Photography

Web design

Metalworking

Haircutting

Journalism

Travel agent

Receptionist

Call center

Typist

I don't think the ability to learn new skills is as much of an economic advantage as you are assuming. Today it takes becoming an expert in any of these fields to make yourself employable in them, meanwhile wages continue to fall.

In fact, just look at the value of a bachelor's degree today vs 30 years ago. As the degree becomes more common/accessible, it is less valued

mikerichards2• 11 years ago

Who are not the capitalists? The North Koreans, the Mozambiqueans, The Cubans, and you?

teekert• 11 years ago

Also the banks, who are deeply socialist, many of them have (had) to rely on state support.

littletimmy4• 11 years ago

If you're trying to make an ad-hominem attack here, the argument about labor productivity and wages I'm presenting is straight out of Adam Smith's Wealth of Nations. Would you group him alongside Kim Jong-un and Fidel Castro?

To answer your question. No one is a capitalist, really. Everyone makes compromises between socialism and capitalism, including the high priests of capitalism like banks and corporations sucking on the teat of the taxpayer.

euroclydon4• 11 years ago

Read the longer linked article. It's called the Detroit Treaty. Wages kept up with productivity, because labor and business agreed that they would.

theseatoms• 11 years ago

Productivity has everything to do with it.

Why do people work? To earn wages to buy things that have been produced.

And race to the bottom? More like race to equilibrium between supply of labor and demand for it.. albeit, in a market with plenty of inefficiencies and illiquidities.

littletimmy4• 11 years ago

Demand and supply does not apply when you are talking about involuntary labor. Given that a lot of labor is forced wage-slavery (the "freedom" to choose between working to death and starving to death / being homeless is not freedom), your point about the equilibrium is false. Labor wages are simply the lowest that labor can be paid.

lordnacho2• 11 years ago

A friend of mine has a little dev shop. Some of is customers are private, and some are government agencies.

The private customers use modern agile techniques. They have modern clouds with modern provisioning systems. Their managers get back quickly about changes, and their IT guys set up new servers quickly. The pay x per hour.

The public agencies have old school bureaucratic management. They are slow to respond with feedback. Their IT guys have a 6 month lead time to install Windows XP (yes in 2015), and when the lead time is up, they still haven't done it so my friend has to show up there and do it for them. They pay 3x per hour.

Productivity is not really a factor. Nobody doing the government job could ever in a million years be more productive than the other job, even though any dev could do either job. There's no queue of people for either of these types of jobs.

evanpw• 11 years ago

The point is that if you can produce more value for an employer than you're currently being paid, then in a competitive market, one greedy capitalist will tend to outbid another greedy capitalist to capture that extra value. So there's also a race to the bottom in the direction of higher wages.

lhc-2• 11 years ago

That's the theory, but then you have things like wage-fixing scandals as seen recently in Silicon Valley that conspire to prevent workers from capturing their fair share of the value.

dgreensp• 11 years ago

My thoughts exactly. Why isn't this obvious? There's no invisible hand making wages match productivity. There's unions, and that's about it.

If a new computer system makes my employees deliver twice as much value to me, I don't have to double their salaries.

marcosdumay2• 11 years ago

Capital should also be in a race to the bottom, and has a lower bottom than wages because it has no cost of living.

The only thing that does not race is rent.

jokoon• 11 years ago

We live in an age where technology is always progressing, and it constantly make engineers and technicians obsolete. I think the bottleneck in our economy is teaching higher level of scientific knowledge. The money has always been into technology being a big lever for profit, but it has never been accountable for the social cost.

I do think that people today can't cope with the fact that their work position can be made obsolete and that they should be asked to learn new things again. Obviously it's not anchored in how labor works. I think even workers should spend some time learning new things to not become obsolete, something like 1/20 of their time.

I guess MOOCs will be one solution, but I kinda doubt it. I don't think that most people really like to work in tech, but it's going to be a transformation that will keep happening, and I don't think there will be a stop to it.

richmarr2• 11 years ago

The money has always been into technology being a big lever for profit, but it has never been accountable for the social cost

Totally. A good start might be large companies paying equitable taxes.

paulhauggis2• 11 years ago

Companies already pay a huge amount of taxes. When you see that ge didnt pay taxes, its because of loss rollover.

Thriptic• 11 years ago

The United States already has one of the highest corporate tax rates in the entire world. We also spend more on education per capita than almost any other country. The problem isn't necessarily lack of money. The problem is that our conceptual model of the economy isn't correct anymore. The idea that low skill work will yield a middle class lifestyle is fundamentally not valid anymore; globalization put an end to that model. We have yet to reconcile this fact at a national level or figure out how to deal with it.

prostoalex4• 11 years ago

Totally. A good start might be large companies paying equitable taxes.

That might not be the panacea it's cracked up to be. Most of the US corporate tax argument revolves around the foreign profits US companies stash abroad hoping for a corporate tax holiday, which the government is known to throw in every now and then.

In a fair tax system, profits earned in Italy and Hong Kong would be taxed in Italy and Hong Kong, so the net positive for the US would not add to much.

dataker3• 11 years ago

This is a very simplistic view of capitalism and ignores larger issues.

One ignored issue is inflation itself. Although it had a profound impact in the middle class, it has nothing to do with 'evil business owners' trying to make more money.

Then, unions shouldn't bargain with monopolistic corporations. Why? Because monopolistic corporations shouldn't exist 99% of the time. That's the root of the problem, not the lack of analogous monopolistic labor unions.

pjc503• 11 years ago

While it's convenient to reduce inflation to a single number so that you can summarise an economy with MV=PQ, it's not the full picture. Over the medium to long term, price levels between different sorts of goods drift widely, as do the relative returns of capital and labour.

For example, monetary injection via QE has little effect on retail prices, oil prices (which have been falling), or wages, but tends to inflate financial and real estate asset prices.

dataker3• 11 years ago

Reference to contrast arguments

http://www.worldculturepictorial.com/images/content_3/colleg...

http://i.huffpost.com/gen/926781/thumbs/s-COLLEGE-TEXTBOOKS-...

clownio2• 11 years ago

You realize the person who you accuse of having a "very simplistic view of capitalism" (the author) has been studying economics for most of his life and won a Nobel Prize for it? Currently a professor of economics at MIT? Etc...

dataker3• 11 years ago

Ad hominem.

One could argue the same about Paul Krugman.

sideband2• 11 years ago

I'd argue that flat wages are not (entirely) a failure of the labor market and are partly a consequence of modern life requiring less resources.

Think about it: When was the last time you spent 15 minutes on the phone getting directions to someplace, got lost, had to find a payphone or stop places asking for directions, and then had to ask around to find somebody once you got there? Or paid a travel agent to plan your next vacation? Bought an expensive widget because at the only store you could find it at and were willing to drive to not knowing you could get it for half as much in the next state over? Used up a few hours looking for a specialty contractor in the newspaper classifieds or yellow pages and then had a bad experience because you had no way to know what their previous customers thought of them? These used to be very common experiences.

For many people in America, modern life requires far less time and money to be comfortable than it did just a few decades ago and as a result workers are seeing less and less incentive to push for higher wages.

minikites• 11 years ago

Except the cost of necessities (energy, housing, etc) is still rising: http://www.mybudget360.com/wp-content/uploads/2014/10/colleg...

Computers and TVs are cheap but everything else is expensive.

pjc503• 11 years ago

less and less incentive to push for higher wages

What's most people's biggest expenditure out of wages? Housing. Which has been increasing in price, both rental and purchase.

Besides, higher wages are their own incentive. Nobody says "As a footballer/company director/etc I feel that a million pounds a week is enough, I'm not interested in a pay rise."

sideband2• 11 years ago

For most employed people, more pay == more work. And if their kids are fed and happy, if they get to do the things they love on the weekends, if their house is big enough for a shindig with the whole family, if they're comfortable, then the value of more work might not be apparent to them.

globuous• 11 years ago

I'm not sure I'm convinced by your argument. Think about your cell phone, your cell phone bill, your TV & cable, internet bill, the few subscription services you use (netflix, spotify, etc. Although these pretty much replace libraries), laptop, apps the list goes on. There are so many things we buy now because we borderline rely on these to live that we just didn't need before on top of what we used to buy (housing, car, fuel, electricity, food, etc).

What's great though is that although the price of life has probably gone up over the past few years, sharing is becoming the new norm: a place to stay, a ride in an airplane, clothing, a car ride etc etc.

But in the end, I'm still not convinced the price of modern life requires less resources.

jazzyk3• 11 years ago

You must not be from around here :-)

The cost of the most significant expenses in family budgets: housing, healthcare and education has been rising far, far above (10-15%) the official rate of inflation (2-3%) for years now.

These cost increases have been "remedied" by providing semi-cheap debt (housing and education) and tax breaks (healthcare). Not sustainable.

roymurdock2• 11 years ago

Robert Solow, the author of this article, is one of the most well-respected economists of his generation. He derived the "Solow Growth Model" which underpins a good deal of modern macroeconomics. [1]

Here, he states that it is customary to think of the value of a firm in terms of (1) returns to labor and (2) returns to capital. He argues that there is a third factor, (3) position in the market, that provides a rent to the owners and shareholders of the company. Just as a title/deed provides the owner with a geographical rent opportunity, regulation creates an opportunity for a company to extract an abstract sort of monopolistic rent within a market. Estimates of this component of rent lie between 10-30% of GDP, and it changes as a function of regulation.

He argues that the division of this rent "has been shifting against the labor side for several decades" starting under the Reagan administration, due to (1) the decline of unions and collective bargaining (right to work laws, "hardening of business attitudes") and (2) the "casualization" of labor, i.e. the increase in part-time/contract-based labor that many companies are able to force onto a workforce that would, in many instances, favor full time employment. These casual workers "have little or no effective claim to the rent component of any firm's added value."

In summary, the aggregate workforce is losing bargaining power whereas the aggregate business owners (investors) are gaining bargaining power within the economy, allowing the investors and owners to carve out a larger share of rent profits.

While Solow does point out that international competition and "the biased nature of new technology" both play a role in this phenomenon, he strives to emphasize the importance of internal social change in the division of economic rent.

Personally, I think that he is dancing around a much more controversial thesis: inequality is a direct result of poor government regulation and oversight (starting with Reagan) which is due to a deterioration of the separation of powers between the public and the private sectors as corporate owners and investors have been able to buy influence in Congress and further support/entrench regulation that favors their own interests. Unions/collections of workers no longer have the power to combat corporate interests at the political/legal level and are being dismantled/shafted which leads to many individual laborers being shafted as well, which is the cause of the nonexistent wage growth.

[1] http://www.unc.edu/~jbhill/Solow-Growth-Model.pdf

mc324• 11 years ago

That could perhaps explain this phenomenon in the U.S. but this phenomenon is not solely expressed in The US. It is exemplary in the U.S. but it is also seen in more socialist countries as well. China, Brazil, as well as European economies.

roymurdock2• 11 years ago

I think it would be hard for you to argue that workers have more rights/power in China or Brazil.

China is socialist only in name. They are an economic powerhouse because the ruling class has fully embraced capitalism in order to exploit its large labor force.

Brazil has a long history of corruption and poor regulation/enforcement. Slavery is still a very large issue in the agricultural industry there, which makes up a large portion of the economy.

I'd love to see any data that you have that supports your thesis about the prevalence of this phenomenon in Europe despite a fairer split of economic rent due to fair labor laws.

iamthepieman• 11 years ago

But the point still holds in the countries you mentioned. It may take more political capital than monetary capital for businesses to strip power from workers but the effect is the same.

In the U.S. corruption is built into the governance system via things like citizens united, and revolving door agencies. In a country like China it occurs at a lower level via selective enforcement of regulations, bribery and price fixing.

not saying that these things can't all happen in both countries - they are just some surface level examples that illustrate how the same outcome is achieved in two very different systems.

marcosdumay2• 11 years ago

Why do you think so? The entire world is going trough an increase in government size and interference, and a reduction on unions power.

This is not a US-only phenomenon.

Bartweiss• 11 years ago

I think this is an excellent summary, but I question the assertion that Solow's "monopoly rent" is equivalent to gain from regulation.

That's certainly a portion of rent, especially in intensely regulation-aided markets like cable service. However, I would argue that other anti-competitive forces like cost of market entry and brand loyalty (I'm looking at Apple) also generate 'rent', where that's defined as "profits beyond market efficiency".

The regulatory landscape is certainly a major player in entry costs and market inefficiencies, but it's far from the only one. The labor to capital transfer, then, isn't solvable simply by correcting regulation-induced monopolies - it would require an attack on other forms of rent seeking as well.

lordnacho2• 11 years ago

The negotiation angle has long been missing from economic discussions. The classic line is that you get circa what your marginal productivity is, but that's under some rather stringent assumptions. Also it sidesteps how exactly you calculate marginal productivity. There's very little talk about the dynamics of wage settings, ie how do you actually reach a number?

From what I can see, as a guy who's been in a few businesses, the salary amount starts off with just a simple assumption: we'll pay roughly whatever everyone else is paying for a certain job. You then go and find a bunch of likely-sounding candidates and bring them in to interview. (OT: This is a complete mess, because you're not as good at this as you think, even taking into account lordnacho's law.) You will fall in love with one or two of these people, probably not more. You'll then throw out a lowball number on the game theoretical rationale that they'll either ask for more or be happy with it. If there are special circumstances like the guy being a recent grad, we can say a bunch of stuff like "you're learning a lot from us, you need us more than we need you" (yeah, it's a shitty thing to say) and count on other bosses thinking similarly. The candidate can then take it or leave it, or if they have another offer, use that to get a bit more. But it's really a silly dance around a fairly static anchor, silly because people can get pissed off over small amounts of money. I've worked with more than one guy who thought he was a great negotiator because he managed to talk some guy down by a few grand, even though a $700M hedge fund makes that amount in about three hours.

Now why would wages ever change, if this is roughly what happens? I never came across a situation where there wasn't a huge queue of people wanting whatever jobs we put up. In fact, there was no real rationale for setting any particular salary, other than "that's the market". My thinking is that salaries really only go up when companies find zero suitable people for a given job, or when they get a particularly large number of offerees coming back to them saying they took some other job.

And what would create a situation where there were very few candidates for a job?

1) Collective action. Apart from the London Tube, this seems to be out of fashion. It also seems to be hard to organise something like software devs, given they live in very different cost areas scattered around the world.

2) Growth. When things are booming, companies get desperate. They can see the demand, customers are telling them they want product, but they can't get the staff they need to build the product. But since they can see the demand, offering a bit more to grab those staff is a bit easier on the executive mind.

jazzyk3• 11 years ago

Spot on. I would like to add that the name "labor market" is a misnomer. It is not a market.

On the one hand you have rich capital providers who DO NOT HAVE to invest money - they can live off their capital without doing anything.

On the other, you have labor providers, who HAVE to work to feed themselves.

The solution is to reach the "fuck-you-money" savings level. Not that simple, but not impossible.

mc324• 11 years ago

With globalization and the lifting from abject poverty the greatest numbers and percentages of people, should we continue to see wage growth in areas where people are relatively better off? Should we not expect some normalization, a meeting of levels?

It's a bit selfish to think that the fist world should continue to get richer while the poor remain poor, which is what protectionism would get, alongside stagnation.

Another sidepoint, when people get wealthier the more they spend and the more they contribute to resource depletion. I'm of course in no position to even guess what the optimal average wealth would be but I'm sure having everyone with too much disposable income leads to wastefulness.

On the other hand, let the people at the bottom catch up and let them breathe. That's what we should be pushing for.

jahnu• 11 years ago

I agree that the rich of the world are morally obliged to help the rest catch up. The analysis you put forth suggests the wages that otherwise would go to the middle and working classes are going to people in developing countries but is it not also true that whilst wages are stagnating the wealth generated by increased productivity is largely accumulating amongst the already super rich?

mc324• 11 years ago

Yes some of the wealth which could otherwise could go to the workers of first world countries is going to the upper management of these companies, but I think that is made possible because of globalization. If the domestic costs get too high, they can move production to Mexico, or they can move development to Russia or India. This keeps a lid on wages and at the same time allows more for the management class. If we were to see international competition in management workers, they too would experience stagnation and companies would see increased profits.

Let's look at the wage growth of professionals who implement barriers to entry from foreign trained professionals like doctors, lawyers, etc. Have their wages stagnated?

lhc-2• 11 years ago

This article isn't really arguing what you're arguing though. Productivity (in the US specifically) has continued to grow at a brisk pace, but wages have not. This does not mean that the US has slowed its ascent, and the third world has begun to eat into that productivity; it means that, as wages stagnate, this increased wealth is captured more and more by the top level, the businesses and owners.

If third world countries were eating into this wealth, you would see the entire pie shrinking. As it is, the pie is growing larger, but all that growth is going to the rich owners, and none of it to the workers.

mc324• 11 years ago

So I'm saying the radon they can take more from the top is workers have international competition. Without it workers could demand more. But they can't because ss they demand more their work is off shored -- see garment and footware workers.

serve_yay• 11 years ago

Capitalism involves a struggle between labor and capital. Or perhaps another way to say it would be that if capital could do what it wanted without labor, it would. And capital is winning in that struggle, for most jobs there are more qualified people than jobs. I don't see why it's so bad to say; this strikes me as a predictable development of a capitalist economy.

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