The Future of Work: Why Wages Aren't Keeping Up
psmag.com
psmag.com
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.
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.
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.
This is not a US-only phenomenon.
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.
Productivity has nothing to do with it.
To forstall the next likely objection, no, of course it is not the only form of capital. And "less so" != "completely the opposite of". And further, obviously, learning a trade isn't millions and millions of dollars worth of capital, nor does it instantly catapault you into the leagues of the wealthy, just because you learned how to fix plumbing or write code. And it obviously isn't liquid.
But it is a form of capital.
If you don't understand this, you can't understand unions. If labor doesn't have this capital, then unions can't work, because if labor really are just interchangable cogs that bring nothing but mere clock time to the equation, then labor has no bargaining position whatsoever. Unions only work because labor has this illiquid capital to bargain with.
(There are some obvious further elaborations on this theme, such as the way the capital gets devalued by increasing the supply by globalization, and the continuous importation of cheap labor via illegal immigration. IMHO there's a certain amount of contradiction in being shocked at how labor is devalued in the market place and being pro-"open borders". It may not be the only cause and effect, but it's certainly involved.)
It feels like you're going with the "Everything is capital" route, which devalues the word in the first place.
https://en.wikipedia.org/wiki/Human_capital#Background
The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor
Sort of yes, sort of no. It's important to understand that "physical capital" isn't some sort of magic pathway to wealth, either. If by some weird turn of events I suddenly came into possession of a 20-ton press, it isn't going to do me any good, and just about my only avenue to producing money from it is to sell it to some entity that does know what to do with it.
A great deal of "capital" in the industrial world is relationships, organization, and the ability to apply human capital. Simplifying that to "physical goods" leads to weak thinking and bad policy.
This is interesting, in terms of debate. Where we're talking about "means of production", refuting the claim that workers don't have "capital" by referring to the broader use of the term capital does dip a toe into the fallacy of ambiguity. However, as a stand alone point, a related argument stating that the workers are more powerful than you'd think due to human capital they hold, yeah, I think it's a reasonable thing to point out.
Both the academic and business worlds acknowledge that skills in the brain are capital. Like the other poster mentioned, the academic world labels it "human capital". The business world also acknowledges it by investing in people and not necessarily factories. This business behavior refutes the other poster's point that it is "ultimately is traded on the market for wages". Wages are not the only endgame.
YCombinator is an example of investing in brains, not factories. What is the "means of production" of a YC2016 company?!? The amazon AWS credits? The laptop that the programmer types on? No. The "means of production" is the programmer's brain. This is why the YC application has questions probing the founders' backgrounds and has zero questions about what gigahertz+RAM+disk of the laptops the programmers use.
What is the songwriter's "means of production"? (It's not the pencil and paper.) What is the dentist's "means of production"? (It's not the reclining chair or drill.)
He was lucky in hearing about the need for the bracket at the right time. But he was not lucky in being able to go to votec or to secure a minor loan for the machine shop. Everyone else around him could have done that.
I'd go out on a limb and suggest that most people on HN have never been in situations like that, where losing a minimum-wage job meant not being able to pay rent and ending up homeless. That's why success stories like the one parent told are common here.
Decided I was sick of it. Went back to school, took out some loans, but worked my ASS off, trying to get as many hours as possible so as to take out as few loans as possible. Kept communication open with my bosses and with my professors: I'm not making shit, I have to keep this job, but I want to make a better life for myself.
It was hard. Hardest thing I've ever done. Realized that I couldn't rely on the cook income, so I started a side business JUST IN CASE they decided to fire me (building websites, took one class that had a week long section on HTML in college). Hustled. Replaced my income. Kept the two jobs, took a full course load. Awful. Hated my life, always tired. I graduated with $10,000 in debt from my bachelors and a post-bacc certificate program. Could have been a lot more, but I saw what happened if I went down that route.
But you know what? I did it. It is possible. I am not a millionaire, but I have a great job, and am working on launching another company, so that I and my family can have an even better life.
Everything we put in front of ourselves is an excuse. It IS possible. If I would have lost my job, I would have found a new one. Kids add difficulty to the situation (trust me, I know), but it is still possible.
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.
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.
To give an example of my thinking, I predict that Uber, once it defeats the incumbents in a fair fight, will contribute to keeping wages down, by capturing most of the value in the taxi industry. Customers will be satisfied to have just one or two taxi-hailing apps installed on their phone, so that even though anyone can theoretically create a competing app, there will be a single dominatant brand that will have much greater power over drivers than the existing local taxi cartels ever did.
Overall I'm optimistic about a future where more and more people are empowered start businesses and break down barriers, but I see a lot of bumps along the way.
The network effect alone is a huge barrier to entry. Second, the only obvious way to undercut Uber on prices would be by being bigger. There are significant fixed costs in software and analytics, and with Uber's profit margin being quite thin (compared to the fat economic rents imposed by the incumbents), it would be near suicidal to compete directly. Even if you could be twice as efficient as Uber, the price difference for the customer might be measured in pennies for each ride.
As for low wages for the drivers, I think that won't be a problem that disappears on its own, but I'm strongly against solving social problems by trying to keep wages up artificially.
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
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.
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.
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.
If a new computer system makes my employees deliver twice as much value to me, I don't have to double their salaries.
The only thing that does not race is rent.
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.
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?
But the reasons are entirely different - the cause is the growing, cancerous (and greedy) layer of bureaucracy on top of actual producers (doctors). But that's yet another topic.
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.
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.
Computers and TVs are cheap but everything else is expensive.
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."
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.
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.
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.
Totally. A good start might be large companies paying equitable taxes.
It would likely be preferable to instead tie the effective tax rate more directly to those activities that actually address useful economic activity. I am leaning increasingly towards the fairest tax being a function based upon one's increase in wealth (subtracting some fixed amount for actual humans--probably median household income) that asymptotically approaches 50% as your positive change in wealth approaches infinity.
If you earned $10000 and spent $10000, any tax would just have to be offset by a subsidy somewhere else. If you earned $100000 and spent $100000, you're at least stimulating your local economy, and probably making wiser choices while spending your own money than anyone else would in spending other people's money. If you earn $100000 and spend $20000, that leaves $80000 that you didn't actually need to use this year. Everyone else would probably prefer that you had spent it. So maybe you're allowed a tax-free increase of $50000, and you lose $10000 of the remaining $30000 to taxes. If you earned $10M and only spent $100k, you might pay $4.925M for the tax. The same equation would still work for corporations, because paying dividends would count as spending for them. You end up only taxing the winners in the economy--those who are getting richer--and never more than they could reasonably afford to lose.
How could such a system be subverted? You would have to set up a system where you could control property for your own benefit without legally owning it. You'd probably see a resurgence in executive perks, such as company-provided housing and cars. It would definitely blow more air into the education bubble.
No. It means, you don't pay taxes on a loss.
"You end up only taxing the winners in the economy--those who are getting richer--and never more than they could reasonably afford to lose."
You mean the people making a profit? Yes, this is how it should work...and who really cares if they can 'reasonably afford' to lose it? Taxes aren't punishment..but the tone of your post makes me feel like that's what you think it is.
The US already has one of the highest corporate tax rates in the world. If many corporations are trying to subvert it, it's a message to lower that rate.
The top 10% pay ~90% of the all the federal taxes. I'm not sure why there continues to be complaints about not paying a person's "fair share". It's already more than fair.
GE pays less in taxes because they employ a legion of experts that know the code and can follow the proper rituals. They are not taxed proportionally to their ability to pay, or the degree to which they enjoy the benefits of a well-funded government, but proportionally to their ignorance of the tax code. They know it well, so they pay relatively little in taxes. They are acting appropriately in the interests of their business in light of the circumstances they face. It isn't GE's fault that they can legally pay so little. Nor should we shame them for doing so. They are merely an illustrative example that the US corporate tax code is broken beyond any reasonable expectation of repair.
The "fair share" of taxes is zero. All taxation is inherently unfair, as a violation of one's right to property. The unfairness is [sometimes] justified by spending the tax revenue upon preservation of the commons and projects that serve the common good. But collection is more often motivated by whether it can be done rather than whether it should be done. There is no absolutely fair way to levy a tax, but some taxes are still more unfair than others.
Taxation is not necessarily similar to punishment. It is merely an economic discouragement, with an unavoidable deadweight loss from economic distortion. The net effect is largely the same. People avoid doing the thing that triggers the tax, because the tax makes it more costly or less beneficial.
Income taxes and sales taxes punish useful commerce. Property taxes punish land improvements. Liquor taxes punish recreational drug use. Poll taxes punish being black in the South. Congestion taxes punish driving downtown at the wrong time. Recreation taxes punish having fun in Chicago. Hotel room taxes punish tourism.
So what behaviors would everyone want to discourage by levying a tax? Which of those could actually yield a significant amount of revenue? Those would be the "fairer" taxes.
I'm not sure why you're talking about the top 10% at all. The breakdown of who pays the most is not relevant to what I was saying.
Tax system are lenient on the wealth (vs income) as one is expected to accumulate wealth and exit the workforce. Taxing wealth seems like a working idea when you're 20 and have job offers chasing you, less so when you're 70 and plan to spend the next 20-30 years in retirement.
The deduction for living people was intended to account for a reasonable rate of retirement/emergency saving. Corporations don't need to retire, so they don't get it.
Doesn't this result in all sorts of bubbles, as people scramble to manufacture consumption, from real estate to precious metals?
Also, taxing the increase seems to benefit wealthy offsprings and trust fund babies in general.
For most Americans a change in wealth is also tied up to non-liquid assets, like their house. Let's say you're a retiree living in an area that's been lucky to undergo a real estate boom this specific year. Your house wealth went up 7-10%, yet there's no extra cash flowing in to account for this tax bill, now what?
Moreover, with housing being the focal point of wealth accumulation, the government would receive its tax revenue when the things are up in economic cycle, but come the first recession/correction, and not only there are problems with the economy, the source of government revenues has dried up as well.
To avoid stupid government accounting rules, the value of assets would have to be fixed at what you paid for them until they are sold in an arm's-length sale on the open market. So if you're a retiree and you never sell your home, you would not be taxed on its increase in value. There would probably be something made available like a less-parasitic version of a reverse mortgage, to absorb increases in value gradually, so that it could work with the annual real person deduction.
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.
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.
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.
One could argue the same about Paul Krugman.
And yes, one could and should argue the same about Paul Krugman. Of course it's possible that someone like Solow or Krugman is terribly wrong, but barring traumatic brain injury or something it's absurd to suggest that either is wrong on account of not understanding basic economics.
... Of course it's possible that Solow or Krugman understands something very well but then chooses to present an oversimplified version (for honourable reasons, like not intimidating their readers; or dishonourable ones, like wanting to hide something that works against their arguments). If that is what you were suggesting -- not "Solow's understanding of capitalism is simplistic" but "Solow probably has a sophisticated understanding of capitalism but is presenting a simplistic version, and a better one would invalidate what he says" -- then indeed pointing out that all the evidence suggests he's an extremely skilled economist isn't to the point. But what's wrong with it still isn't that it's "ad hominem".
There are plenty of eminent CS prof's that couldn't push a HellloWorld to Heroku, or competently perform entry level software development tasks.
Like the SE vs CS divide, "job creators" disagree with academic economists on the axioms of "basic economics".
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.
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.
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.
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.
If you own your own tools that you use for work, you're probably an independent entity like a contractor, not an employee. You seem to confirm this at the end of paragraph six with the example of a homeowner hiring twenty shovel laborers -- surely this homeowner does not intend them as FTEs.
By the time you get up to giant mechanized excavators, the barrier is so high that a guy with just a spade and a dream can never get that far, because anyone either renting or owning a better tool can outcompete him at every turn, and the rent on a better shovel may be such a large proportion of the cost of shoveling that the laborer using it could never accumulate enough savings to buy his own tool.
That's where you have to rely on an external force to change the status quo, "force" being the key word. The guy who doesn't play nice gets metaphorically whacked in the head with a shovel. Taxes are just one of many ways to do that.