Data note re WaPo wage story

October 9th, 2017 at 3:47 pm

Here are my thoughts on why wages aren’t growing more quickly, in WaPo.

The model I used is sort of like that of the Fed’s in the Yellen speech cited in the piece. Using quarterly data for the hourly wage of production, non-supervisory workers from 1989q1-2017q2, it regresses year-over-year nominal growth on “slack” (the unemployment rate – CBOs NAIRU), lagged inflation expectations (as in the Fed model), smoothed productivity growth (HP filter; two lags), and 2 lags of the DV.

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8 comments in reply to "Data note re WaPo wage story"

  1. Smith says:

    First, because it is my most original contribution to the debate, consider the effect of an overskilled workforce. In the past, the same level of unemployment might have still left a shortage of higher income, or higher skilled, or higher credentialed (more education) workers. The effect would be to tend to pull up wages due to competition (although I’d still contend wages are not primarily determined by supply and demand). The effect of an overskilled workforce is the exact opposite. The high income worker surplus pushes down their wages, and as they displace lower income workers in occupations for which they are overqualified, they push down those wages, plus the lower high incomes exerts a downward pressure due to the whole wage scale no longer as high. The exception is the top 10 percent and especially the top 1 percent, because they control their own salaries, they are management.

    My calculations show slack in the labor market of even 1 percent less prime age (120 million) workforce participation leaves 1,200,000 waiting to reenter job market. The participation rate is historically low, you have to go back to 1987 to find lower rates for any period of time. It also means 150,000 new job growth trending now leaves two years to go for anything like full employment (100,000 needed for normal population growth).

    Productivity is a useless measure to identify cause if it is really a result of growth. Thus the mention of higher wages pushing productivity and not the other way around is vastly understated. But even growth without higher wages by common sense gives incentive for higher productivity. You need more stuff per person for both, growth or higher wages.

    The whole notion of supply and demand governing wages is wrong. Hence, all sorts of rules and regulations governing wage rates and hours, and norms, and union activity. Business has now gained the upper hand, and gladly sacrifices revenue to maintain profits, meaning no wage increase needed, even though workers don’t have enough wages to buy more (the opposite of Henry Ford story, though he no friend of labor).

    I should add there is an effect of the large immigrant population who don’t have full labor rights (1/3 are employer sponsored, an evil, exploitative, unfair aspect of our system that should be eliminated, not expanded as Democrats propose), and are discriminated against, and also have lower salary expectations due to home country wages, threat of globalization and 50 percent of the workforce being paid less because of their gender.

    How do you leave women’s lower pay out of any discussion of suppressed wages?

    • Smith says:

      For those who wonder why women’s wage gap* would hold down wages now more than previously, as women entered labor force en mass starting in the 1960s, a few things answer the question.
      1) The gap narrowed, as it did, wages rose, once it plateaued, the lower wage acts as a brake.
      2) The gradual increase of women in the workforce meant their lower wages had a greater influence effect as their share of the workforce increased, topping out around the year 2000.
      3) Downward nominal wage rigidity (as well as discrimination and favoritism) keeps men’s wages from dropping to women’s level.

      *the gap that can not be accounted for by less hours, need for flexible work schedule, or career breaks for children, or occupation choice, is still significant, even conservative estimates put at 5 to 10 percent

      • Smith says:

        A worthy read, and globalization is featured also, and plays out differently. Probably a greater disparity between poor European countries in southern and eastern Europe vs northern Europe, compared to expensive coastal and northern states in the U.S. competing against lower wages and cost of living in the southern states. Eastern Europe is more akin to Mexico in a way (or Turkey for Germany).

        Increased immigration, the threat of global competitors both within and outside Europe is suppressing wages of workers in richer northern states.

        At some point workers in richer countries will have to fight for higher wages if they want them. They are there for the taking, even if the only way to do this is with a less global economy. The alternative could otherwise be waiting for 1 billion Chinese, 1 billion Indians, 1 billion in various countries from Africa, to reach developed nation standards of living. HIghly unlikely considering the lack of labor rights in those countries, the large populations, and the starting point, even for China.

        One thing in the article that is self-evident, wages are not governed by supply and demand. Adam Smith knew this, Marx did, Ricardo, a host of others. Why modern economists adhere to this form of non-scientific credo is anyone’s guess. Maybe they can explain wages with epi circles, ether, and acquired characteristics. I’ll go with mostly figuring out who controls the means of production.

        • Smith says:

          To be clear, I’m saying the article shows wages not governed by supply and demand. This is obvious to anyone who has ever looked for a job. I’m saying economists who insist on supply and demand curves and equilibrium theory are talking nonsense and don’t have data to back this up. (I read this in a book too, but don’t believe me, believe every current employment and wage statistic instead).

  2. Smith says:

    While Jared Bernstein says the main causes of continued low wage growth are some slack in the labor market and low productivity growth, one should ask where Mr. Bernstein has been living the past 40 years? From 1967 to 1997, manufacturing employed about 17 million people give or take. Then it fell to 14 million after the 2001 recession, then 12 after the 2007 recession. In our 155 million worker labor market, the loss of 5 million factory jobs has an outsized (disproportionately large) influence on wages. Continued concessions wrung out of workers under threat of closing or relocation means the remaining 12.4 million manufacturing workers no longer fulfill the function of setting a leading position in wages and benefits. Aside from their own stagnant level, they no longer set a floor pushing up white collar wages, they no longer have as much pull tugging along lower scale wages, and they certainly no longer coerce non-union employers to match union benefits to avoid the threat of organizing. Could you possibly pay a little attention to this in discussion over stagnant wages? There’s a reference to historically low union power without explanation. How about globalization? Or exploited immigrant labor that does not have full labor rights, any labor rights, zero bargaining power and faces deportation at their employer’s discretion for any reason or no reason at all, just at the employer’s whim, almost as if they were chattel.

    • Smith says:

      The comment above was motivated from reading this just now:
      My answer to this is first to raise tax rates on the rich so the head of the company can’t make $40 million dollars any more. That much money sets him up as a god, so that the lives destroyed mean nothing to him, don’t affect, and he’s rewarded for his selfishness and disregard. Moreover, the imbalance of the income distribution means the average workers pay and employment no longer matters as much to the economy. GDP chugs along, and corporate profits survive slightly lower sales based partly on higher margins and adequate sales to the top 10 percent now raking in 50 percent of all income.
      Anti trust obviously is been sorely neglected. Larger companies have less regard for workers, and more control over prices.
      Rescind Taft Hartley so unions can cooperate with each other, including secondary boycotts.
      Why even allow profitable factories to close. Just pass a law preventing this because the alternative is a race to the bottom that dooms all workers to the lowest wage anywhere in the world.