New productivity numbers came out this AM showing, among other things, just how weak the expansion has been in terms of real compensation. I’ve featured this at OTE for a while now in posts on surging profits (the growth has to going somewhere, right?), but these data reminded me of the ongoing productivity/comp split.
Before I get into the evidence, a few points. First, it’s been the pattern in recent expansions for productivity to start out growing faster than average compensation (and average comp tends to grow faster than median and lower wages, of course). The result is related to jobless recoveries, where real output starts to rebound yet labor markets remain slack, boosting productivity and leading to low pressure on wage growth and quickly recovering profit rates.
In this climate, firms squeeze as much output as they can out of their workforce before committing to any new hires, as they try to maintain profit margins by holding down labor costs.
Eventually, average comp tends to accelerate, but, as I’ve discussed with economist Larry Mishel, there’s been a much longer pattern of productivity diverging from median comp (implying growing wage inequality and a shift from wages to profits).
But in this recovery, real compensation was particularly stagnant, flat in real terms by the productivity account measure. The figure below compares productivity growth to real comp in the first three years of the past three expansions.
Source: BLS, Nonfarm Business Sector
In every case, there’s a productivity/average comp gap, implying more of the economy’s growth went to profits, though that gap too is wider in this case. (For those following from the technical seats, the pattern implies a shift in factor shares away from labor toward capital, contradicting a constant-shares, Cobb-Douglas production function.)
What happened? Of course, this recession was much deeper and longer than the previous ones, and for the last few years, policy measures to help have been eschewed. (Here’s where the caveat re pinning this outcome on Obama gets injected—this is precisely the dynamic that his proposals like the American Jobs Act were designed to avoid.*)
Labor market slack is implicated in that nominal compensation growth was about half as fast in this expansion compared to the last two. And since unit labor costs = nominal comp – productivity (all in growth rates), their growth has been very slow, leading Moody’s.com to conclude: “The data suggest the U.S. labor force is competitive and is contributing little to inflationary pressures.”
That’s one way to look at it. Another is to point out that policy is not helping at all to ensure that the benefits of productivity growth are more broadly shared. And that, in turn, is also making it a lot harder to “grow the economy from the middle-class on out.”
*From an earlier post this AM: Silly season warning: this is the part where some R operative writes a press release saying some former Obama official just criticized the administration. Nope…we took action in all of those areas, as did the Federal Reserve…obviously, there are good arguments as to whether the admin’s responses went far enough, but that quickly gets entangled with the political gridlock that’s blocked so much of their agenda.