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Why Low Wages?

I'm a little puzzled by Steven Greenhouse's inquiry into the falling wages problem. The bulk of the hypotheses and so forth mooted about seem to suggest that wages are being held down by something or other, with possibilities such as foreign competitition, WalMart's low wages, the possibility of substituting technology for labor, etc. being canvassed. That seems to suggest that, in the past, wages went up when productivity went up because bosses were nice and realized that with productivity on the rise they could afford to raise wages. Now thanks to foreign competition, WalMart, and other low wage sources they "can't afford" pay raises. But that's not how the economy works, now or ever. If productivity is growing much faster than wages, then it should be easy to make a lot of money by hiring new workers.

As people do that, wages should start to go up, until it no longer becomes profitable to add new workers, at which point wages will start levelling off. Wages and productivity can't become de-linked because today's businessmen are greedy or because WalMart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up. So what's going on nowadays? None of the stuff discussed in the article seems relevant to the issue at hand. Professor DeLong is quoted in the article but doesn't have any further comments. I'd be interested to know.

April 12, 2005 | Permalink


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» Why Aren't Real Wages Rising? from Brad DeLong's Website
Matthew Yglesias asks a good question http://yglesias.typepad.com/matthew/2005/04/why_low_wages.html: Why Low Wages? I'm a little puzzled by Steven Greenhouse's inquiry into the falling wages problem. The bulk of the hypotheses and so forth mooted abou... [Read More]

Tracked on Apr 13, 2005 2:47:47 PM

» Are You Ready to Wait Twenty Years for Your Next Raise? from Daniel Starr
Basically, your paycheck is going to get smaller. We don't yet know it for certain -- the latest numbers could be just a fluke -- but it looks as if most Americans working at ordinary jobs may be in for... [Read More]

Tracked on Apr 13, 2005 3:39:26 PM


I'd sort of agree, but add that there is no reason that your expanded workforce can't be overseas.

Posted by: Tim H. | Apr 12, 2005 2:26:36 PM

"So what's going on nowadays? None of the stuff discussed in the article seems relevant to the issue at hand."

The ratio of corporate profits to wages and benefits is at a historic high.

The article is typical of much press coverage on the subject.

Posted by: Petey | Apr 12, 2005 2:35:43 PM

If you can get more work out of the same number of workers without raising wages or benefits because the bargaining power of workers has been reduced because of a weak job market then you will do it. And the bargaining power of the average worker has been reduced by the steady erosion of labor laws and union power over the last thirty years. Add to this the increased power of management to outsource jobs, replace workers with technology, ignore the labor laws that do still exist (especially the right to organize and the ability to fire people who seek to organize), the complete failure of the government to prevent the exploitation of undocumented workers and the attendant suppression of domestic wages, and a really shitty job market (the 5.2% unemployment figure is complete, unadulterated bullshit and does not reflect the actual situation) and management has more power over workers than at any time since the passage of the Taft-Hartley Act. People are literally too scared to complain.

Posted by: Freder Frederson | Apr 12, 2005 2:37:38 PM

Holy, batman! Ygealsaias nippling around at what the debates really about.

My suspicion, total wages are increasing, but its all going to healthcare.

Posted by: Chad | Apr 12, 2005 2:37:41 PM

"If productivity is growing much faster than wages, then it should be easy to make a lot of money by hiring new workers."

I don't think I understand your logic. If productivity is going up, that means that the value of each worker is greater, and you can build as much as you can sell with fewer workers. In such a case it makes no sense to hire more workers as they would only produce more than you can sell. On the other hand, you probably lose more if any of your own workers leave, because it would cost too much to train their replacements to the level of productivity of the old ones.

When productivity is low, each worker adds relatively little to profits and is presumably easily replaced (assuming that the productivity is a result of skilled use of more efficient manufacturing techniques).

It's not a question of "nice" bosses who can "afford" to pay more.

Posted by: russ | Apr 12, 2005 2:37:56 PM

Man, the commenters are even making sense. What's this website coming to?

Posted by: Chad | Apr 12, 2005 2:38:56 PM

Productivity gains are not going to Labor to the extent they used because they are being siphoned off by Capital instead. Ths includes The Rich of course (why else are the incomes of the guys at the top of the heap increasingly so disproportionately?), but it also includes pension funds, 401ks and the like. Get used to it: this is a feature of the increase in the number of retired elderly relative to the number of workers.

Posted by: Jonf | Apr 12, 2005 2:38:59 PM

"My suspicion, total wages are increasing, but its all going to healthcare."

People keep repeating some version of this, but it ain't true.

Posted by: Petey | Apr 12, 2005 2:41:50 PM

What Freder said. They just hold the wages down by hook and by crook, that's all there is to it. They always do, but this time the government's on their side more than usual. Garden variety class warfare.

Posted by: abb1 | Apr 12, 2005 2:44:41 PM

This from the article:

The Sprint workers in Fayetteville emerged from negotiations that lasted months with a contract that left them with a pay freeze for last year and no definite increase for 2005. While the best performers are promised 2 percent merit raises, even those are likely to lag inflation. . . .

Sandra J. Price, a Sprint vice president, took issue with union leaders. She said Sprint sought the freeze not because of low-wage competition overseas, but because benefit costs were soaring and the company felt the call center's compensation was generous for the area.

This is unmitigated bullshit. I worked for Sprint. They are in the middle of offshoring their IT department. More than half their call centers are already overseas. If anyone believes they didn't use the threat of sending this particular call center overseas in the negotiations, then I have a bridge I can sell you. This is also a company that somehow managed to pay its CEO $26 million after giving its prior CEO a $43 million golden handshake after his crowning achievement was guiding the stock from $70 a share to $2 (although he managed to sell his options at $63 through underhanded methods).

Posted by: Freder Frederson | Apr 12, 2005 2:51:17 PM

Because the Supreme Court elected Bush in 2000?

It is called Political Economy for a reason. It is a popular game among the Right-Wing to make the economy into a mysterious "thing" that just happens, a manifestation of mostly hidden, impersonal trends and forces. That's not entirely wrong, in that what manifests in the aggregate is often a complex product of a great many public and private choices.

But, that fact is that Republicans generally want what is good for the very wealthy, and that means higher aggregate unemployment rates, as well as slower (or no) growth in the incomes of the poor and middle class. This is a simple truth, however much the toadies of the Right would like to cover it up.

Look at the unemployment rate in the Clinton years, and you will see a steady decline, with real wages finally beginning to rise for the first time since Nixon, near the end of Clinton Presidency. Bush comes in, and boom, by March, we're right back to the pattern of Reagan-Bush. In the administration of the first Bush, unemployment had been high so long that academic economists had begun to speculate that the so-called full employment rate of unemployment had actually risen substantially since the 1960's.

Politics is fundamentally about the distribution of income, and people -- least of all economists -- should not be surprised when a political party with total power gets the economy they want. What should surprise, is that the opposition should give them a pass, not stating the obvious, which is that this -- this economy, right now -- is exactly what this President wants, stagnant wages, high corporate profits, high oil prices and all.

Is there anything about this economy, which a right-wing S.O.B. would not like?

Posted by: Bruce Wilder | Apr 12, 2005 2:55:19 PM

Maybe the gain in productivity was achieved by automatisation, i.e. instead of bolstering up the workforce the businesses did invest into more efficient machinery (though I think investment is very low right now). Or more probably the higher productivity results from a higher workload. Most businesses still aren't running at full capacity. And it would be interesting to know if there are changes at the average hours/workweek or the status of emloyees illness...

Posted by: Gray | Apr 12, 2005 2:56:06 PM

"If productivity is growing much faster than wages, then it should be easy to make a lot of money by hiring new workers."

If it were the productivity of the workers that was going up, sure. You'd just hire more of those wonderful, new and improved workers, and away you go! But this sort of thinking is just a hangover from that cretinous labor theory of value: It's not the workers that are becoming more productive, it's the MACHINERY.

Posted by: Brett Bellmore | Apr 12, 2005 2:57:29 PM

Bingo FF! A large part of the reason is that workers' collective bargaining power is continuing to fall. Lack of unions means employers have nothing to fear by giving miserly raises.

Posted by: Paleo | Apr 12, 2005 3:00:23 PM

Well, companies being greedy in an era of high productivity could make more money by hiring more workers in India, China, Ireland, or other places that are not the United States as opposed to in the United States.

Posted by: Electoral Math | Apr 12, 2005 3:06:59 PM

Do we have inadeqquate aggregate demand in the non luxury sector?

I'm not sure that I buy the productivity numbers. Are people--salaried people--really getting more work done per hour or are they just being asked to work more hours?

Posted by: Abby (who longs for a cool blog posting name) | Apr 12, 2005 3:15:15 PM

another overlooked aspect is the self-interest of upper management--i'd be interested to see the numbers of upper-level management that were unemployed the past few years, vis a vis the numbers of unemployed 'grunt-level' workers...

imo, in order to 'make the numbers work,' (i.e. keep the company's numbers, as well as their own salary and benefits), management will slice and dice the rank and file mercilessly, while keeping their 'indispensible' management intact.

it's funny how there are all these MBAs and business gurus running around, yet, they really didn't perform well at all during the dot-com boom--for all of this vaunted 'management expertise,' i think there are really very few companies that are well run, with a large majority being run on 'old school' management, aka 'crack the whip!'

Posted by: David W | Apr 12, 2005 3:28:32 PM

Arggg. Why everyone is puzzled is because they're applying very primitive supply / demand curves to things where those primitive supply / demand curves don't really apply.

If they did, an incredibly brilliant economist like Brad De Long would have a preliminary hypothesis within a day or two and be able to prove it and publish a paper within a few months. He's stumped - and that's not just a trivial individual Brad De Long brain-fart problem (all the other economists are largely stumped too).

Labor markets (if, in fact, they are indeed markets) don't function very much like markets for goods. The economic sociologists have pointed the correct way of thinking about this, and have actually made some progress - unlike the economists, who have gone literally nowhere.

In essence, start thinking about it this way: first, throw out everything you think you know about economics (first, they're wrong in general and they don't apply here in specific anyway). Think about hiring firms as organizations: they have many competing and confusing cross-currents within them - some political (both within and without the firm), some organizational, some theoretical, some personal, some external, some legal, and some (but only some) economic (and everything else plays a big role in exactly how that "economic" is interpreted). All of these factors (and their interactions) will determine what the "economic" action is.

Attempting to derive some overall labor demand number from external macro-economic data is not going to get you anything (it's been tried almost innumerable times and led to no real results).

Posted by: burritoboy | Apr 12, 2005 3:29:39 PM

MY, why would you expect higher productivity to cause higher wages in the short run? Wages are determined by supply and demand. If a business can get by with 10% fewer workers because of productivity increases then it can lower wages until 10% of its workers quit.

Business's are inclined to hire more workers (thereby driving up wages) when their profitability increases as the increased margins make adding another shift (for example) more attractive.

Posted by: James B. Shearer | Apr 12, 2005 3:30:40 PM

well, part of this is that the productivity numbers are likely inflated.

Posted by: praktike | Apr 12, 2005 3:33:16 PM

"Wages are determined by supply and demand."

No, they're not. The largest factor in wages seems to be determined by firms' internal organizational needs. Executives have high power and must therefore be paid the most, high status professionals have semi-high power and therefore are paid slightly below the executives, various white collar workers are rewarded according to their respective power within the organization, blue collar workers are either paid by institutional negotiation with their unions or by seniority or other methodologies thought to increase their productivity (but usually lower than the other employees in the firm).

The firm will also undergo various purges dependant usually upon management theory fads (whether outsourcing, quality circles, re-engineering, etc etc etc) and/or internal political victories or losses.

None of this is particularly immediately driven by any sort of raw "economic" pressure or analysis.

Posted by: burritoboy | Apr 12, 2005 3:46:48 PM

Productivity and wage increases aren't linked. When productivity goes up, wages could go up, down, or sideways. There's no necessary correlation. Allow me to use this well-known macroeconomic formula that I made up on the spot:

workers x productivity = supply = demand

If productivity goes up, and workers remain the same, then supply increases. But supply (usually) has to correspond to demand. Say's Law[1] dictates that supply creates demand ("if you build it, they will come") -- but that's not always true. In the short-term especially, demand can lag behind supply. If demand remains constant while productivity goes up, then number of jobs has to go down (this is the classic " I used to have ten secretaries, now I have one secretary and a computer" scenario). In such a case, wages too will fall, assuming that the same number of people are competeing for the same number of jobs (not always true -- people leave the workforce or take part-time jobs).

To make a long story short, if the growth of demand exceeds the growth in productivity, employment and wages will increase; if not, then they will decrease.

[1] In economics, like pirating on the Carribean, a "Law" isn't anything like a hard rule, they're more what you call ... guidelines.

Posted by: Captain Obvious | Apr 12, 2005 3:52:10 PM

In fact, keep in mind that workers aren't interchangable; Productivity can go up because of a weak job market. Because, ideally, you let go unproductive workers first...

Posted by: Brett Bellmore | Apr 12, 2005 4:10:50 PM

Brad's comment was upfront. Real wages are falling because we are so far from full employment. Not WalMart, not free trade, just a week macroeconomy in general.

Posted by: pgl | Apr 12, 2005 4:16:29 PM

Basically I think that for a variety of structural factors, productivity growth by itself is no longer enough to cause wages to increase. You also need a very tight labor market. If and when when the unemployent rate drops to 4.5% or below, companies will need to start paying higher wages in order to attract and keep workers, and wages will rise to catch up with past productivity growth. Until then, higher productivity is likely to only be reflected in higher profits.

Posted by: RC | Apr 12, 2005 4:17:30 PM

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