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Higher Wages Are Great, But We Also Want Faster Productivity Growth
The good news on take-home pay isn’t limited to faster wage growth, though that is certainly welcome. The new Employment Cost Index report for the third quarter showed private-sector wages and salaries rose 3.1 percent from a year earlier, the best pace since 2008. I mean, who doesn’t like nominal wage growth? But real wages — wages adjusted for inflation — are growing, too. The PCE price index (the Fed’s favorite inflation gauge that measures a broader swath of personal consumption than the CPI) for Q3 — it’s right there in last week’s GDP report — increased 1.6 percent. In other words, worker pay is rising faster than costs. And that has been happening quarter after quarter since mid-2012 and more clearly since mid-2014.
Now one can question why real wages aren’t growing even faster, given labor market conditions, but there are real gains being had. And tomorrow’s October jobs report is also expected to show 3 percent or higher wage gains.
Of course what we want is sustained higher wage growth, not just a few blippy quarters or even a year or two. One way of making that happen is higher productivity growth. Unfortunately, productivity growth has been anemic for over a decade. Two views on this issue. Here is a bit from American Action Forum economist Douglas Holtz-Eakin, former CBO director:
Now comes the hard part. Sustained faster compensation growth means one of two things: (a) firms accommodate the higher costs with thinner profit margins and lower earnings (other things equal), or (b) upward pressure on prices. Neither prospect is uniformly appealing. The way out of this economic box is more rapid productivity growth. As each worker produces more, it is possible to use this greater value to cover the compensation costs. On this front, labor productivity grew 2.9 percent in the second quarter and was up 1.3 percent over a year earlier. This is good news compared to the 0.7 percent annual average since 2010. Too much attention has been paid to the growth rate of wages. The much more important issue is the future path of productivity.
And this from a recent podcast I did with Moody’s economist Adam Ozimek:
Pethokoukis: Productivity growth has been very low during the economic expansion, and it had been low before the financial crisis. If productivity growth were stronger, would wage growth also be stronger?
Ozimek: Productivity growth definitely matters in the long run, and I’m kind of an optimist in the short run right now because I think that there’s room for improvement in the labor market. But in the long run, that low productivity growth is going to be binding. Either productivity growth is going to pick up because there’s some cyclicality to it, or it’s going to be a limit on how fast wage growth can go. But in the near term, I’m not sure it’s entirely relevant, because when you’re talking about bargaining between firms and employees and that bargaining being affected by cyclicality, I think that there’s room for wages to go up without running into that binding productivity growth problem because we have had this slack for so long.
Now hopefully we are facing at least a cyclical upturn in productivity growth. A secular upturn would be even better, perhaps driven by advances in AI technology and businesses’ ability to employ it efficiently.
Published in Economics
The people who claim that Artificial Intelligence and Robots are going to result in 80% of the population being permanently unemployed rarely try to reconcile these assertions with the modest rate of actual productivity growth.
Increases in purchasing power > wage growth.
Except the Ruling Class is against this
With increased purchasing power, demand goes up. Higher demand means more product. More product means more jobs…
So I was wondering today… what if we just eliminated income and corporate taxes and raised tarriffs and turned off welfare?
What would happen if that was done simultaneously?
Taxing consumption is the only way to go especially now that so many goods can be produced so cheaply overseas and robots are replacing people. Taxing business activity is 100% stupid. There should be no taxes on business income at all.
I keep trying to tell people this: we’ve had an inflationist government since 1914. Because of the increases in global trade and robots, all of that is toast. Deflation–increases in purchasing power–is the way man was intended to live by God.
There are a bunch of people on this board that are way smarter than me and they are way better citizens and they’re going to tell me I’m all wrong. I don’t think so. This will end the hard way. Inflationist big government is toast. Someone tell Ben Sasse.
Honestly, it’s impossible top switch to consumption taxes, but the paradigm survives.
Without working through the numbers, I doubt if the tariffs could possibly generate enough $ to come anywhere near funding the government, even assuming the total elimination of welfare spending. Remember, there is elasticity…the higher the tariffs get, the more goods will be sourced domestically, which tends to limit the amount of money that tariffs can raise.
Which proves that the government should stick to actual “public goods”. Everyone will learn this the hard way in a few years
This article is a good insight into how the real world looks through the kaleidoscopic filter of Keynesian economics when you smear some populist Vaseline on it to hide the wrinkles.
JamesP,
And just why do the economists think that they know what is the productivity of the workers better than the market does. Maybe the economists are measuring productivity all wrong and have been for a long time. What if there’s dark productivity, you know, like dark matter.
Growth + Higher Wages = Good enough for me.
Regards,
Jim
6% of GDP is related to trade. we need 24% of GDP to fund spending. We can’t tariff our way out of domestic taxes.
Productivity is defined as the amount of stuff produced per hours of labor. putting a value on the stuff is hard (how does a 2019 mustang compare with a 1965 mustang? a 2018 Iphone verse a landline). To have more/better stuff we need to improve our collective productivity. Productivity growth has been remarkable consistent for 200 years (until a few decades ago) at 1.5%/year. Thus real wages could grow at 1.5%/year. Lately it has been close to 1%/year. A big difference over time.
It is my opinion that the decrease in productivity growth is due to our economic mix being more government services and less making widgets. Government services are resistant to productivity gains. Financial services are also challenging to measure to productivity gains and healthcare (big) is also resistant to productivity gains thanks to govt. regulation.
The good news is that the tax changes should result in more capital investment. Capital (tools) allow people to be more productive. Lets hope we can return to 1.5% or better!
There is no pleasing you Pethokoukis.
In a perfect world I would prefer the “fair tax.” In the real world I am all in for the flat tax; however in any world, I would love either over the present abortion.
Better citizens? Have you met any of these people? ;-)
Seems like productivity growth isn’t the key; that assumes that excess capital would be diverted to wages, when it’s typically not. It’s re-invested elsewhere.
Volume growth in sales would provide more capital and keep everything else the same, and could result in higher wages and/or incremental capital investment. Funny thing is, if companies just do capital investment, they might hire more people but at lower, introductory wages, which would dampen wage growth. Bigger pool of people.
There’s no one or two or forty-seven things that increase wages. It’s lots of things. How would decreasing regulatory overhead affect wages?
I dunno, because that ratchet only turns in one direction. But it begs the question: How much money is our government costing us?
Every thing the Federal Reserve and the government is doing right now favors capital over people now for no good reason. It’s outrageous. Of course people are swallowing opioids and voting for Trump.
The complexity and the progressiveness of the tax code is value negative not value added. What good does it do for politicians to point a gun at our heads and force us into a bidding war on tax brackets and deductions? It’s as stupid is anything Chairman Mao ever dreamed up.
Here’s another one: who pays business income taxes? Whose hide does it come out of? What account does it come out of, ultimately? Business taxes are regressive and redundant. Another stupid idea.
Let’s just hope the government doesn’t decide to make the fixes. Instead just let it emerge by ceasing to do dumb unfair things like the progressive income tax, the payroll tax or the profits tax. Make it flat, low with no income level excluded, replacing all with a VAT and a low uniform across the board tariff. Give low income folks a tax credit based on the VAT level to reduce the arguments about regressive consumption taxes. The VAT gets Democrat voter support by eliminating the payroll tax and is necessary to privatize SS for younger workers without running up the deficit. This isn’t unrealistic, but must become part of the conversation over multiple election cycles. Nothing works if few understand it. The young will support privatization, the old will support choice for young workers and a VAT to assure there are funds for them , moreover they already own most of the big stuff that might buy. The upwardly mobile middle class will support eliminating income and profits taxes. Only the Democrat party will oppose all of it with their usual demagoguery and our people, being clueless won’t know how to answer them. That’s what we have to change.
Here are my opinions.
I disagree that more capital investment is necessarily a good thing for the economy. A given investment can be good or bad. More capital investment is good for the economy if the additional good investments outweigh the bad.
But if the bad additional capital investments outweigh the good, then it is bad for the economy.
Let me give you an example.
Suppose that this year, someone buys current labor hours and current real capital (like land rent, steel, electricity, legal services, and architectural services) to build a strip mall. That means that over future years, its owners will need to steadily buy more on future labor hours and future real capital to keep it producing value to people.
Suppose that it turns out to be a really bad investment. High vacancies, mounting losses every year, for 20 years, until finally the buildings are torn down and an apartment complex and some offices are built.
The investment in year one was a bad thing for the economy in that case. Not a good thing. That’s because that stream of valuable labor hours and real capital would have been better allocated to consumption, or to shorter term investments.
I think that there is only so much labor available in a given year, and only so much real capital. Dedicating a 20 year stream of these valuable things means that they were not available to other business people who wanted them.
@markcamp
That’s why the Fed shouldn’t force fake interest rates down our throats. Forced lower rates = bad capital and asset decisions.
Exactly what I was thinking, even though I decided not go into it. Just the suggestion that not all investment is good is a bit shocking for most Ricocheteers :-)
I think a different (possibly better) example would be windmill electrical power. Due to government mandates, the electric companies must accept x amount of power at y price even if it is not needed. If the wind doesn’t blow, the electric companies still need other capital to cover peak demand. A guaranteed waste of “capital.”
In the case of the strip mall, the owners made a bet, and lost. In the windmill case, we all lose.
P.S. I agree with your analogy Mark, just had to get my 2 cents in.
Thanks, Vectorman, for a thought-provoking reply.
In what follows, I will omit the “IMO’s” but I’m sure you know that everything I write on economics is only meant as an expression of a layman’s opinion.
Yes, this is a very good example of a bad investment.
It is not a better example of the same kind of bad investment, though. It is a good example of a different kind of bad investment. I will explain this opinion below.
This example is an example of involuntary saving and involuntary investment.
The investment (allocating labor and current capital to building windmills, for example, instead of something else) is involuntary because it is funded by involuntary tax payments (speaking loosely, but truthfully enough for the moment.)
Involuntary investment wastes resources because it provides products that less valued than those which are preferred by customers to the products that were not produced, but would have been in a free market.
If savings was voluntary, then yes, only the owners lost. To the extent that the savings were involuntary (as a result of monetary inflation), we all lose. This is the part that @rufusrjones was referring to. I didn’t go into it but if you’re interested I’ll explain what he and I meant.
Got it!
No shock here. IIRC, the business cycle is based on overinvestments, especially in the latest fad – tulip bulbs, oil, Y2K, tech stocks, etc. Low (real) interest rates make it much worse.
Yes, mal-investments are said to be a major contributor to the business cycle, by Mises, Hayek, and the other Austrians. It makes sense to me…I’ve read a fair amount of criticism of the Austrians, but I’ve rarely seen this idea challenged directly.
George Selgin, a prominent, well-respected and pro-free market economist whom I admire greatly, recently dedicated a two part series of papers specifically dedicated to disproving the Austrian position on fractional reserve banking which I don’t think ever directly took it on. He attacked pseudo-Austrians. He attacked the Austrian Rothbard, but on law/morality, not on economics. And so on. He also held a debate with a well-known Austrian recently, but once more, the heart of the matter was avoided.
In a paper from the late eighties, Selgin briefly and plausibly attacked the heart of Mises’s argument about the cause of the business cycle, but nowhere have I seen him or others develop this point of attack.
The Keynesians and their kin have won the day almost entirely by political subterfuge, not by economic arguments.
I recall that the pro-freedom economist Milton Friedman, who unlike Keynes was neither professional liar nor or leftist ideologue, said that he simply couldn’t understand what Mises was talking about. That is a fascinating tidbit that I’d like to learn more about. He was probably being characteristically modest, and actually had specific objections. What were they?
If the growth of the money supply always matches the population growth you aren’t going to have destructive deflation or asset bubbles.
If you try to do something else, well good luck. Central planning: proven stupid, over and over, since the beginning of time.
Shades of Milton Friedman, right?
Is another example of this mal-investment buying up houses for the sole purpose of selling them when the housing market appreciates? Especially if the act of purchasing the supply creates the scarcity that drives up cost (but not value), making it difficult for those in the market for a domicile to be able to purchase one?
I don’t know. My beef is with these guys pushing everything around so much with their damn interest rate guesses. That is what it is. I just watched an interview with a retired central banker, William White. He almost flat out said they just made it up as they went along over the decades. It was on Real Vision.
If there was an advantage to society by trying to have constant 2% CPI inflation, there sure as hell isn’t one now. How are you going to cope with all of the deflation from global trade and robots?
The reality is this stuff is all about geopolitical hegemony and the ruling class ripping everyone off.