Monday, February 13, 2012

Nice graph showing the historical relationship between wages and productivity and 3 reasons why wages are/may be stagnating

Historically, worker wages have been closely tied to worker productivity--the more you (on average) produce, the more you earn (on average).  This direct relationship is represented in the graph below.
Source: Tim Taylor at The Conversable Economist
However, the tight relationship starts to sever around 1980 and productivity begins to increase faster than wages .  Professor Taylor at The Conversable Economist narrows the culprits down to 3 factors (he reverses the order from a source he cites at the link above):

1.  Technological change connected with improvements in information and communication technologies, which has raised the marginal productivity and return to capital relative to labor.
2. Increased globalization and trade openness, with the resulting migration of relatively more labor-intensive sectors from advanced economies to emerging economies. As a consequence, the sectors remaining in the advanced economies are relatively less labor-intensive, and the average share of labor income is lower.
3. Decrease in the bargaining power of labor, due to changing labor market policies and a decline of the more unionized sectors.
Numbers 2 and 3 have lots of politics mixed in with them.  If you think about the news you watch or read these ARE the major focus in some form and are easily exploited by politicians.

Number 1 not so much, if any, politics. 

Output is derived from a combination of Labor and Capital (machines, tools, processes, infrastructure, etc)--People using the latest available technology to make "stuff".  The value of that output over time is increasingly coming from the Captial side of the equation and is eroding the overall contribution that Labor adds to the good/service. 

Three things seem to result from this:

1. Workers at the margin are squeezed out of an industry altogether because they are adding little to overall productivity that the employment of capital and technology creates.  Not saying this is right or wrong, just the way it is...

2.  A subset of semi-skilled/low(er) educated workers that are still employed in the industry are not seeing wage gains, perhaps because they are more remote from the gains created through the use of capital/technology.

3.  A subset of skilled/high(er) educated workers who are directly involved in the gains created through the use of capital/technology are going to benefit the most from the gains in productivity.

Not a perfect list but I think it is a good outline...Any comments?

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