The Wage-Productivity Gap

[unlawflcombatnt]

WAGE--PRODUCTIVITY GAP

The most damaging factor to our economy today is the Wage-Productivity gap. This refers to the increase in the hourly output of workers vs. the increase in hourly pay. This concept is described quite well in Chapter 6 of economist Ravi Batra's book, "Greenspan's Fraud." During times of true economic prosperity, wages have kept pace with productivity increases. Workers have shared in the benefits of their increased productivity. The result is that wages remained sufficient to purchase our nation's industrial output. Borrowing, or debt-financed consumer spending, was unnecessary to maintain sufficient consumer spending to purchase our production. More production can be purchased because more wages are paid. Demand, created by wages, matches supply, which is created by productivity. This creates a balance that makes massive borrowing unnecessary. And such balance maximizes economic "growth."

This balance has not been maintained, however, during recent years. It has worsened greatly under the Bush administration. Productivity has increased significantly during the Bush years. In contrast, wages have actually decreased. This trend started before Bush took office, but I'll confine the time frame to December 2001 through March of 2005. These are years for which records are readily available from the U.S. Bureau of Labor Statistics. Below is a graph from the New York Times showing how productivity is outpacing wages.



Starting in January of 2003, productivity (or output per hour) has increased 11.2% thru the 1st quarter of 2005. In contrast, hourly wages have declined 2.3% over the same time period, from an inflation-adjusted $8.32/hour in January, 2003, to $8.13/hour in June, 2005. Production has exceeded the ability of wage earners to purchase the production by 13.5%. This gap has been filled by consumer borrowing. The amount borrowed must steadily increase, in order to keep pace with our increasing industrial production. If it did not, our economy would sink into recession. However, maintaining demand through borrowing is not a sustainable path.


Sometimes the effect of the wage-productivity gap can be seen better from a distance. An example of the effect of the wage-productivity gap can be seen with Japan's economy. Again, this was described by economist Ravi Batra in Chapter 6 of his book, "Greenspan's Fraud." Dr. Batra makes a very compelling case that Japan's economic problems resulted from the increasing gap between Japanese wages and productivity. I will paraphrase his explanation here.

Japan experienced extremely rapid growth between 1960 and 1975. During that time there was a 168% increase in per capita GDP. Their per capita GDP increased from $2,139 in 1960 to $5,750 in 1975. Real wages increased 217% during that time. Manufacturing productivity increased 264% during these 15 years. Japan prospered and its economy grew during this period because wages, which create demand, kept up with productivity, which creates supply. There was sufficient WAGE-FINANCED demand to stimulate production. And the necessary demand was maintained by consumer income, not consumer borrowing.

After 1975, productivity growth began to outpace wage growth. The result was a much slower growth in GDP. Between 1975 and 1990, productivity increased 3% more than wages per year. During that period, wages increased 27%, while productivity increased 86%. The per capita GDP increase was 64% from 1975 to 1990. Less of the wealth produced by Japanese workers was being shared with them. As a result, business profits soared, increasing money available for investment. This caused Japanese investors to over-invest in both the stock market and housing. Japanese stock markets and real estate values soared as a result of this over-investment. Meanwhile, there was insufficient wage-financed demand to keep up with this capital investment.This necessitated increased levels of borrowing to maintain the demand that wages could not maintain.

By 1990 there was a huge Japanese stock market bubble and real estate bubble. And in 1990 this overvaluation all came crashing down. The Japanese economy has still not recovered 15 years later. By 2003, the Japanese stock market was still 80% below its peak in 1990. From 1990 thru 2002, per capita GDP increased 13%. Compare that with the 168% increase between 1960 and 1975. Compare this latter 15-year increase with the 59% increase during the 27 years from 1975 to 2002. Japan's per capita GDP increased 3 times as much during the 15 years prior to 1975, than it did during the 27 years after 1975. The pre-1975 rate of increase was 5 times faster than the post-1975 increase.

What caused this slowdown? The rise in the wage-productivity gap. Worker income that could have been put to good use buying Japanese goods was siphoned off as corporate profits. Since the benefits of investment capital are limited by consumer demand, the result was over-investment of Japanese stock and housing markets, and maintenance of consumer demand by borrowing.

Does this situation describe any other economy you can think of?

unlawflcombatnt

[busterb]

Welcome! And your point is? Other that this whole administration is fucked up.

[smoothmoniker]

wow. I feel like we just met, and now all the sudden I'm supposed to grade your senior economics paper?

[busterb]

[slang]

Originally Posted by unlawflcombatnt

......... It has worsened greatly under the Bush administration.

Wow, this looks familiar. Everything is Bush's fault and the post is as long as a novel.


Does TW have another login?

[xoxoxoBruce]

There was sufficient WAGE-FINANCED demand to stimulate production

I'm not convinced it will help us by increase US wages to stimulate Chinese production. That's the fly in the ointment.

Of course somes wages are increasing.

Harry Stonecipher, the former Boeing Co. chief executive who worked less than three months last year before he was ousted over an extramarital affair, received nearly $11.5 million in salary and stock awards in 2005, according to a filing with the Securities and Exchange Commission. Stonecipher got $496,422 in salary and $11 million from incentive stock awards. The firm also contributed $694,000 to his retirement and 401(k) plans, according to the filing Monday.

Stonecipher's take-home pay topped that of all other executives at the Chicago-based aerospace giant, including W. James McNerney Jr., who replaced him as chairman and chief executive.

Boeing in July hired McNerney away from 3M Corp., where he was chief executive. Based on a prorated annual salary of $1.75 million, McNerney was paid $847,346 and awarded a bonus of almost $2.3 million. He also received $25.3 million in restricted stock to match what he would have made at 3M.

James Albaugh, head of Boeing's defense business, earned $806,923 in salary last year, up from $725,000 a year earlier, pius $693,000 in bonuses in 2005 compared with $647,000 the year before.
He also had $6.9 million in incentive stock awards in 2005, up from $2.7 million a year earlier, and $114,568 in other compensation, including personal use of company aircraft.

Alan R. Mulally, president of Boeing's thriving commercial airplane business, was paid $825,000 in salary last year, a slight increase from $819,692 in 2004, plus $736,300 in bonuses, versus $469,000 a year earlier.
Mulally also had $7.58 in incentive stock awards last year, compared with $2.7 million in 2004, plus $119,654 in other compensation for personal use of company aircraft and tax reimbursements.

James Bell, Boeing's chief financial officer who temporarily served as CEO last year, was granted a special restricted stock award of $2 million.
Bell, who is from South Los Angeles, earned $640,962 in salary and received $550,000 in bonuses.

[Kofi Annan]

Of course everyone knows that this ( and everything else ) is Bush's fault. Just ask Saddam.

[unlawflcombatnt]

Originally Posted by busterb

And your point is? Other that this whole administration is fucked up.

That pretty much sums it up.

[wolf]

I'm pretty sure that the real experience in the United States is that as wages increase, productivity decreases.

[unlawflcombatnt]

Originally Posted by wolf

I'm pretty sure that the real experience in the United States is that as wages increase, productivity decreases.

No, that's not the case. That's what's shown by the lower graph. And this information can also be verified by BLS statistics comparing both real wages and productivity (though I have the links too verify this information, I'm not allowed to post them as per the rules of this board.)

If you're interested in verifying these numbers, go to the Bureau of Labor Statistics site and look up "real wages" using series CES0500000049, and look up "productivity" using series PRS85006092. From these you can see real wages have increased almost none since Bush took office, while productivity has increased dramatically.

[wolf]

I don't care what the graph says. I know that my boss gets paid more than I do, and does less work. His boss gets paid WAY more and does WAY less.

This has been the case in every organization I have worked in, as well as those of my friends and coworkers.

[wolf]

Oh, and dude ... you directlinked the graph from the New York Times. If you're going to steal someone else's work, at least do them the courtesy of rehosting the image yourself, even if they are a large, reprehensible, moneymaking organization.

Did they write your article as well?

[Undertoad]

Why use wages and not personal income for the comparison? Almost everyone in the country, from rich to poor, receives non-wage income.

[tw]

Originally Posted by wolf

I don't care what the graph says. I know that my boss gets paid more than I do, and does less work. His boss gets paid WAY more and does WAY less.

This has been the case in every organization I have worked in, as well as those of my friends and coworkers.

And then we apply numbers to those subjective claims. Whereas the boss once got 14 times more money than the average employee, now that wage (and bonuses) has long since surpassed 140 times. I lost track when the number approached 300 times.

Even worse, the greater that disparity, then the worse the company. Where executives are paid most, the company (and its long term stock price) have been laggards.

I have a problem with the economist cited by UT. For once they use money as the reason for a problem, then I know they have confused symptoms with cause. Too many economists do this because they cannot really measure productivity nor reasons for that productivity. They can only measure cash flows. Those monetary figures are reporting events that occured four and maybe twenty years earlier.

The Wall Street Journal had a classic example of this economist problem. Air conditioners using tighter tolerances - manufactured using new and much more expensive machine tools - increased their productivity 8%. But this productivity increase never appeared in economic data. So much more costly machine tools did - as an expense. Therefore what only increased costs on economic reports instead, in the real world, caused significant productivity increases in America.

This is the conundrum demonstrated in Clayton Christensen's two famous books "Innovator's Dilemma" and "Innovator's Solution". Fundamental tools used in economics cannot measure innovation AND cannot measure good innovation verses irrelevant and unproductive. It is why some innovations are so disruptive. If innovation could be measured, then DEC with wave after wave of new ideas and new products would be dominating the computer industry.

Dr. Batra does identify a serious and worrying trend in America. And then I look to others who have been stating same from an innovator's perspective. On Charlie Rose, Azim Premji of Wipro (India) noted how severe America's technology base is so short of competent workers. He also notes how George Jr's policies in the name of security only aggrevate that problem. He (and to a lesser extent Nanbdan Nilekani) noted how their growth comes at the expense of America's diminishing technical competance.

It was no accident that Barbie said, "Math is hard". I see that in literally every teenager and college student I know. What does everyone want to be? A communications major. It's no secret that too many if not most American science and math teachers were not even math or science majors in college. The naive creating the naive. This even observed in two students in a hyped Charter School (finally returned to public school where they are doing better).

But again, where is any of this measured by economists. It gets measured ... but twenty plus years later. And what does an MBA president do to solve this? More testing. "No child left behind". So much testing that children are taught how to pass a test rather than learn science. GM does same to maximize their EPA mileage numbers rather than make decent products.

What we do know - a separation between wealthiest and poorest among us has never been this large - even just before a 1920s great depression. We also know that corporate profits are growing at record rates. From the Economist of 23 Feb 2006:

Decoupled
Fatter profits are supposed to encourage firms to invest more, to offer higher wages and to hire more workers. Yet even though profits' share of national income in the G7 economies is close to an all-time high, corporate investment has been unusually weak in recent years. Companies have been reluctant to increase hiring or wages by as much as in previous recoveries. In America, a bigger slice of the increase in national income has gone to profits than in any recovery since 1945. ...

Workers can still gain from rising profits if they own shares, either directly or through pension funds. There is reason to think that the share prices of large listed companies will fare better than their home economies. Economic theory and historical experience argue that, in the long run, profits grow at the same pace as GDP. However, if the profits of big companies are increasingly linked to global production, then the profits of listed companies in developed economies could rise faster than domestic GDP for many years.

Demonstrated is why creditors are becoming so much more wealthy at expense of debtors. A little secret. I was never so foolish as to take out a car loan or maintain any debt on a credit card - ever. In this changed society, creditors are now even better rewarded. As more try to become creditors, we have the example of Capital One desperately sucking up as many debtors as possible.

What also confounds economists is the inverted yield curve. When long term interest rates are less than short term, recession is predicted. A recession that should be expected many years later because of what tax cuts do to an economy and due to excessive government spending. Why does this current inverted yield curve preceed recessions. Again, no one knows (from what I have read). But to suggest an inverted yield curve causes recession is absurd. That unfortuntately is what too many economist do when they try to explain an economic future in terms of current monetary trends. Money does not create or avert recessions. But monetary statistics can be a precursor of past and maybe of future problems.

Again, The Economist:

A more promising way of allowing workers to share in companies' prosperity is to encourage firms to introduce profit-sharing schemes for employees. But perhaps the most useful thing that governments can do is to ensure that consumers (ie, workers) benefit from lower prices as a result of the shifting of production to low-cost countries.

But only top management gets that increased share of corporate profits. In GM with no growth, that was only four hours from bankruptcy in 1990, and that makes some of the world's worst automotive products; top management continues - even this year - to recieve large bonuses and other compensations. Employees get virtually nothing. Something has indeed changed. Economists only worthwhile task at this point has been to record events. Neo-classical economics does not know what to make of this current world wide economy. Even services cannot be measured reliabily which is part of a larger arguement about Dark Matter - investments and incomes completely unknown to neo-classical economics. All this because, using neo-classical economic standards, a high tech company such as steel is instead called a 'smoke stack' industry.

Of course all this is quite technical. Therefore The Economist would use a serious picture in their articles:

[Undertoad]

Originally Posted by tw

I have a problem with the economist cited by UT.

Not me dude. (Am I everyone you argue with now?)