US workers not getting the benefit of increased productivity

A couple of years ago, blogger Angry Bear posted an essay demonstrating that US workers have been getting a smaller share of the benefits from productivity growth in the US(my highlights):

“If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity.”

“This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor’s share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.”


“If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.”

The point is that holders of capital (i.e. investors) are getting a greater portion of the benefit of technological innovation and have been able to prevent wage growth due to globalization of the labor market.  Workers are not getting paid for their increased productivity.  Of course, much of the capital that’s been invested to generate this increased productivity has come from the pension and benefit funds of workers’ groups.  In theory, workers will realize the gains at retirement time when they tap into those pension and benefits they are owed.

If productivity goes skyward and wages remain stagnant that means labor’s negotiation leverage has been completely eroded. There are several key factors in this

  1. Union busting
  2. Due to the fall of communism a much bigger global qualified labor pool
  3. Automation/Robotics

The fact that wages remain this low over such an extended period should tell you that it isn’t inflation that is a likely problem but deflation. Every year there is more slack in the system. The housing boom with its extremely labor intensive marketing and production lines simply masked an hugely more serious trend.

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