Productivity up, not wages II

The evidence keeps growing that economic growth is increasingly going to capital not labor. And that unless that changes most Americans are facing a declining standard of living.

David Brooks is right when he writes in a column: “For example, we are now at the end of the era in which a rising tide lifts all boats. Republicans like Mitt Romney can talk about improving the overall business climate with lower taxes and lighter regulation, but regular voters sense that that won’t necessarily help them because wages no longer keep pace with productivity gains. Americans are still skeptical of Washington. If you shove a big government program down their throats they will recoil. But many of their immediate problems flow from globalization, the turmoil of technological change and social decay, and they’re looking for a bit of help.” (Emphasis added.)

Thomas Friedman explores this disconnect between productivity and labor in a column about the new skills needed to be successful.  He writes based on an interview with Erik Brynjolfsson, co-author of “Race Against the Machine”:

“So most economists have had this feeling that if you just boost productivity, the pie grows, and, in the long run, everything else takes care of itself,”explained Brynjolfsson in an interview. “But there is no economic law that says technological progress has to benefit everyone. It’s entirely possible for the pie to get bigger and some people to get a smaller slice.” Indeed,when the digital revolution gets so cheap, fast, connected and ubiquitous you see this in three ways, Brynjolfsson added: those with more education start to earn much more than those without it, those with the capital to buy and operate machines earn much more than those who can just offer their labor, and those with superstar skills,who can reach global markets, earn much more than those with just slightly less talent.Put it all together, he added, and you can understand, why the Great Recession took the biggest bite out of employment but is not the only thing affecting job loss today: why we have record productivity, wealth and innovation, yet median incomes are falling, inequality is rising and high unemployment remains persistent.

How bad is it? Steven Greenhouse in a New York Times article entitled Our Economic Pickle provides the data:

Wages have fallen to a record low as a share of America’s gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation’s G.D.P., but last year wages fell to a record low of 43.5 percent. Since 2001, when the wage share was 49 percent, there has been a steep slide.

“We went almost a century where the labor share was pretty stable and we shared prosperity,” says Lawrence Katz, a labor economist at Harvard. “What we’re seeing now is very disquieting.” For the great bulk of workers, labor’s shrinking share is even worse than the statistics show, when one considers that a sizable — and growing — chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes. The share of wages going to the top 1 percent climbed to 12.9 percent in 2010, from 7.3 percent in 1979.

Some economists say it is wrong to look at just wages because other aspects of employee compensation, notably health costs, have risen. But overall employee compensation — including health and retirement benefits — has also slipped badly, falling to its lowest share of national income in more than 50 years while corporate profits have climbed to their highest share over that time.

If you care about –– as almost everyone claims –– the American middle class, figuring out how to be more worker friendly rather than business friendly is the policy priority. The assumption that by being business friendly –– the core of supply side economics –– it would benefit American workers is increasingly unsupportable.

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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.