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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
Bingo.
Is it any wonder people want socialism, and more government, and more free stuff?
OK, @rufusrjones and @markcamp, I’ve decided to join the 92 other members in the Ricochet Economics Group, even if it’s months between discussions there!
I think I’m a member but I have no idea what to do.
LOL! That group seemed like such a great idea at the time. But…crickets! I guess Econ isn’t as interesting as I thought it was. Also, I long ago gave up on introducing articles on that or any other Group, except two that folks use for quick “tweets” (“Things I Learned Today” and “Firing Line”). “Groups” are so crippled in function that they effectively block discussion altogether.
I have thought of a way of explaining the Austrian Business Cycle Theory (ABCT) in terms of net present value, if you are a business major and are interested.
Good question. Speculation is a parasite, as you say. Artificially low interest rates do contribute to it.
(It’s related to the problem I was discussing, but not exactly the same. It is another example of problems created by artificially low interest rates. Speculation can never be eliminated even in a healthy economy, any more than poker can).
I can’t believe people even debate this, but they do. Or alternatively, they think the financial regulators or simply the banker’s judgment should make up for it. Madness.
Yes. I think we would be better off with either of Friedman’s theories on money (he changed his mind a bit) than we are with the Fed’s current theory.
I think we’d also be better off with the proposal of White, Selgin, and all–GDP targeting–than with the Fed’s policy, which is just kind of wacky. There is no reason to believe in their policy except that one believes that they have mystic powers of divination, and that the government’s arbitrary economic aggregates have mystic powers over human action.
There are two problems with those beliefs. The second one is just magical thinking (mostly). The first one is too, but it’s worse: the Fed directors intermittently admit that they do NOT HAVE any mystical powers–they are just going with intuition! This is during those moments when they are not acting as if they think they do have mystical knowledge.
All true and I’ll throw in one more. All private money would be better than what has gone on the last few decades. Tell me why legal tender laws have any merit for human flourishing. I’ll wait.
Also, the concept of measuring inflation is a joke. It just ends up being a tool of statist control.
True.