Understanding the Historic Divergence Between Productivity and a Worker’s Pay [pdf]
s1.epi.org
s1.epi.org
The way I see it is that both supply and demand are inelastic in this case, as the world only needs so much oil at a certain time and cannot ramp up easily. Supply is inelastic in this case because much of the production boom was generated by highly indebted frackers. That means they have to pump and sell no matter how low oil goes. These two factors completely kill price rebalancing.
What does this mean for worker's pay? Simple: the effect of offshoring a few jobs has similarly an outsized effect on the negotiation power of employees. If there is always someone out there willing to take a job at breakeven (paycheck to paycheck living), worker pay will never go up.
Anyone who claims it's only a few jobs or that they pay market rates for H-1B's is either ignorant or a crook.
Which is why you don't compete on price, but on service. If you can do for the business what other people cannot, your pay will keep going up and to the right for as long as you want.
Mind you, this could be as easy as rephrasing "I know Ruby" to "I use Ruby to increase revenue".
For instance, I am right now hiring a copy editor. I've spoken to plenty of people with a variety of hourly rates. Some said "I am really good at grammar and I am diligent and very detail oriented". Some people said "I can make your writing clearer".
Who do you think I liked more?
Anyway, consider the following scenario. Bob makes $10 an hour, and produces $100 of value. Obviously, this is a great bargain for Bob's employer. So much so, that another employer should be perfectly willing to offer Bob $11 to lure him away. Another sweetens it to $12 and Bob moves again. Rinse, repeat until Bob is making $100 minus the opportunity cost.
What that suggests is that a large gap between compensation and productivity is unstable, as large forces will be at work to shrink that gap. So why is inequality happening?
I suspect that productivity simply isn't increasing for a lot of jobs. Such as janitorial services - there's no automation there, the janitor with a mop and a bucket is doing the same thing he's done for decades.
The rise of computers and the internet, on the other hand, have caused the productivity of other jobs to soar enormously. For example, slightly improving the speed of the operation of a server farm can produce millions of dollars in value. I would expect that workers who can do that will be highly compensated for such value produced.
In other words, there's a growing inequality in the productivity of different kinds of jobs.
Unless, of course, they manage to keep Bob's productivity a secret, which is possible in the small but highly unlikely over an entire economy.
The only information leak is how much Bob is currently paid. So in some ways it's actually to a company's advantage to basically average out the wages across a level based on the level's entire productivity, because it hides the truly productive from other companies. And this is exactly what we see with modern pay grades and scales.
The entire economy is unstable. Things are never in equilibrium.
The labor market in particular is extremely illiquid. Employees don't change jobs twice a day, and employers don't decide to start new companies just because they saw opportunity on some competent person unemployed.
Also, jobs mostly don't appear by themselves. Enterprises need capital, risk taking, and several other factors that people don't just throw around.
Your completely liquid model needs plenty of adjustment.
Right. But they would if there were a vast number of underpaid and overproductive workers, which is the thesis of the article.
> Enterprises need capital, risk taking, and several other factors that people don't just throw around.
Recognizing that there are a lot of underpaid yet overproducing workers and exploiting that is a form of arbitrage, and you can get financing for such a business plan. It's exactly the kind of opportunity investors are looking for.
"Hello, this is EZ-Financing And Venture Capital. How may we give you money?"
"Hi, this is Bob, Entrepreneur Extraordinare. I have identified a great opportunity that I need financing to exploit. You see, I've discovered eighteen or twenty really bright, competent people who are either unemployed or underemployed."
"What do you mean?"
"Well, there's Bill, who discovered the gene for florescence and is currently working as a pick-up-and-drop-off driver for a car dealer [that one's true], and Frank the MIT PhD mechanical engineer who lives in the ally behind Wal-Mart. There's a bunch more."
"So, what's the nature of your opportunity?"
"I have nothing specific in mind, but I'm sure if I get this group in a room, they'll come up with something brilliant!"
("Oh, and I spell my name Danger."
click
"Hello?")
You'd be right that nobody wants to finance someone who has no plan.
Have you started a company some time? If so, would you ever start one for applying the work of underpaid overproductive third party workers?
I've never gotten a phone call inviting me to join the secret cartel of employers holding wages down. :-)
Indeed, and I now think that intellectual progress in the 21st century must be done with Permanent Disequilibrium models. Equilibrium models have taken us as far as they can. Equilibrium models emerged in the 1600s and they gave us the Industrial Revolution and 300 years of economic progress. But we've gone as far as we can with them.
For educated Western policy-making elites, the world view of the last 300 years were shaped by equilibrium models. Among some of the most important:
1.) the Law of Supply and Demand
2.) Darwin's Theory Of Natural Selection
3.) Newton's Laws Of Thermodynamics
The whole idea that you can take a piece of graph paper and trace some functions on it (functions which have a cross over point) is an idea with vast power, and it created the world we know today. But I suspect that we've also mined that particular style of intellectual research for as much as we can.
The argument against Permanent Disequilibrium models used to be that the math was too hard for humans to handle conveniently. Certainly, that is true. For a point of comparison, I can easily imagine how the Law Of Supply and Demand effects the price of bread. And yet, I am utterly unable to imagine the price of bread in a Permanent Disequilibrium model, for that involves how each persons response to any change in Supply or Demand sets off a new ripple in the Supply or Demand that propagates across the graph.
But now we have computers. And, better yet, we have a paradigm that allows us to make use of those computers: agent based simulations. And agent based simulations gives us an easy way to see the outcome of Permanent Disequilibrium models.
More so, we are lucky enough to have a generation growing up that has grown up playing video games. And the better video games (massive online multi player etc) are agent based simulations. So we have a whole generation coming along that has an intuitive feel for the advantages offered by agent based simulations.
The future of economics will be created by those who grew up playing World Or Warcraft and Starcraft and so many other games. And this generation will free us from the tyranny of idiotic equilibrium models, such as the one posted by WalterBright.
In fact money isn't reified political power - we simply treat it as if it is, unconsciously, because we've never considered the alternatives.
The real drivers of economic activity are collective intelligence and organisational ability. Politics is a subset of organisational talent, but it's typically a toxic instantiation of a principle that has many other possible expressions.
I think useful models are going to have to work back from that. By the time they're done, contemporary models of economics will have gone the way of phlogiston and epicycles.
In Bob's scenario, maybe Bob doesn't know his value and is happy to take the job at $10 per hour. Bill, who works with Bob, negotiated $50 per hour. Bill has no idea how much Bob makes. Bob took $10 per hour because he compared that to a market rate for workers in that industry. Bill knows that their skills are relatively rare and that their work creates a lot of value.
It is a lot simpler:
What happens when you have fixed demand combined with huge increases in productivity?
If an individual has enough leverage they can capture the extra value.... otherwise they will actually find themselves worse off.
For example, a cleaner today can handle roughly 3-4x the floorspace (etc) compared to a cleaner 50 years ago. That is a clear productivity increase. And I'd argue people still value clean shops etc as much as they used to.
> I would expect that workers who can do that will be highly compensated for such value produced.
It's more because as a group they tend to have better leverage and they aren't currently demand constrained.
For example I have enough cash in liquid assets to cover 12 months living expenses, and I work in a field where I'm unlikely to be out of work for more than a month. Even more importantly a good chunk of the other workers with my skill-set also have lots of leverage.
So if my job adds $1 million to the bottom line I'm in a good position to negotiate for a decent chunk of it. Especially because demand far outstrips supply.
I don't think that is true. Look at the tech and machinery a janitor uses to day vs what would have been used in the 70's. Plus, nowadays buildings are often designed to make janitorial work in them as efficient as possible. There are certainly many fewer janitors / m^2 building area today than in the 70's so in a way you can janitors productivity has increased a lot.
In my apartment a water pipe broke recently which required immediate attention from a repairman otherwise it would have caused a flood. The closest one working standby which was dispatched by the landlord was over 20 km away. So for an apartment population of 200k+ you have only 2-3 repairmen servicing emergency problems. That's incredibly efficient.
Furthermore, their argument continues to assume that the increasing productivity of an entire business can be assigned more or less equally across all of its employees. However, this is not true by inspection - how did the janitorial staff's productivity improve? The productivity increase of the entire business may be the result of the efforts of a very small number of the employees, such as one who improved the manufacturing process.
And lastly, it assumes that being better educated means more productive. This is not necessarily true if one is in a job that does not make use of that education. For example, it's hard to see how having a degree makes one a more productive cashier.
Heck, I'd do it myself if I could find such opportunities!
When labor was given control of the central banks after the Great Depression we had 40 years of massive growth in productivity and wages. Once the capitalists took back control in the 1970s (after the threat of expropriation had receded) they quickly got things back on track and ever since wages have stagnated while profits have soared.
Hey, hey now. The ruling class doesn't disproportionately influence/control the market. It's the magic fairy dust of the Free Market that keeps the Just World as it is. /s
Are you questioning the accuracy of the data? Perhaps it's not been measured correctly and wages actually HAVE been going up in proportion to productivity since 1973.
In particular, they did not identify any particular job or category where productivity of that job was far higher than the pay. I do not believe it is accurate to assess the productivity of a job by dividing the productivity of an entire business by the number of employees, in fact, I suspect it to be a fundamental mistake in their methodology.
They did! Of course, this is just one example, but they did attempt to point out an industry where productivity growth has been very high but wages have not.
I would agree that it is complicated to do the accounting for this, and it's easy to get confused.
Easier just to pay the janitor to mop the floors.
You could do away with Janitors if you designed the space specifically for the robot cleaning technology. But that would be designing with the object of robot cleaning in mind, which would mean ensuring no inaccessible corners, wall-hung furniture, charging/storage points. Maybe that will happen in the coming years.
Except if the companies in question are Google, Apple...
Rising wages means that people are being paid more than they're worth as an economic unit. Unless you're willing to take the position that people should be paid more than they're worth, you can't expect wages to rise.
Unions once explicitly took that position. A century ago, when Samuel Gompers was asked what he wanted for his union members, he answered "More". That's really what unions are for. In the 1950s and 1960s, not only did unions take that position, many manufacturing companies had come around to agree with it. It was a basic bargaining position in UAW negotiations of that era that wages must rise with productivity. The auto companies went along with this. That drove wages up across the US.
That ended in the 1970s. It was the result of explicit policy decisions.[1] Ronald Reagan is called the "Great Communicator" because he was able to sell some of those policies.
The value that he can add to the business.
What do companies want? Uh, more. It's not unreasonable to guess that all actors will look out for their own hide in matters like this.
* End of the Vietnam war. Deep reductions in the draft released many young men into the workforce and allowed them to start businesses. During the war, only being an exempt student or employed in an essential job could keep you out of the way of bullets.
* The beginning of mass immigration. After the long pause between the 1924 immigration act and the 1965 act, immigration ramped up again. Mass Latin American immigration stepped up -- documented and undocumented -- in the 1970s and continued rising. Dozens of work visa programs brought in Asian and European workers.
* End of the gold exchange standard in 1971. Gold didn't actually circulate but was a synecdoche for the Bretton Woods system of fixed exchange rates. Bretton Woods kept world currencies stable and made trade very hard to sustain because currency values couldn't adjust to compensate for imbalances. Soon the European currencies would float entirely free and world trade would be able to take advantage of differential wages more easily.
* China opened. Mao Tse-Tung was getting senile by 1970 and progressives in China opened up the economy under his nose. By the late 1970s, radical leftist Deng Hsiao-Ping had seized control of the country and implemented the wholesale neoliberal reforms that have turned China from a land of North Korean and Mauritanian backwardness into a modern wealthy nation leading the world. Competition from China could be affecting wages all over.
* The first Mideast oil crisis was in 1973. The USA reached peak oil production in 1970 and started to decline, though Prudhoe Bay created a brief recovery later on.