Economics

Workers Don’t Need Government’s Help to Earn Higher Wages

Compensation is actually very closely tied to productivity.

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Workers
Dreamstime

One of the assets of the American economic model is a relatively flexible labor market, especially when compared with labor markets in many European countries. It explains some of the consistently lower U.S. unemployment rates and higher economic growth. Unfortunately, this flexibility is increasingly threatened by government policies that would increase the cost of employing workers. These policies include the Department of Labor's recent overtime rules, the call for employer-paid family leave, and a minimum wage increase.

Some of these calls are driven by pure politics and self-interest. The typical union business model, for instance, is built on the notions that workers are treated unfairly by employers, that abuse is systemic to the labor market and that things get worse over time. The argument is that hamstringing employers into paying workers more for the same amount of work would be beneficial to workers, in spite of evidence to the contrary.

Sometimes the support for intervention in the labor market is based on widespread beliefs that are quite wrong. Take, for example, the idea of a large "productivity-pay gap" in the marketplace—meaning that workers' productivity rose at a high rate over the past four decades but real earnings growth failed to keep pace and instead was nearly flat.

A popular chart produced by the Economic Policy Institute shows that net hourly productivity has grown by 91 percent since 1973 while hourly compensation has only grown by 10.5 percent. The data, EPI believes, prove that most employers unfairly force their employees to work long hours, at a much higher productivity level, without adjusting compensation appropriately. Many people, from President Barack Obama to Labor Secretary Tom Perez, have used the data to make the case for the DOL overtime rules that expand the scope of coverage of employees eligible for overtime pay and other labor market restrictions.

This would be disconcerting if the data were actually accurate. Thankfully, this terrible portrait of American workers' standing in the labor market is only the product of errors and poor methodological choices, e.g., comparing the pay of just some workers with the productivity of all employees, counting productivity growth of the self-employed while excluding their pay growth, and using different measures of inflation to calculate pay growth and productivity growth.

If you want to understand why comparing apples and oranges (whether talking about inflation or workers) is a big no-no or why the world is a better place to most workers than we are often led to believe, you must read the new paper by labor economist James Sherk, called "Workers' Compensation: Growing Along with Productivity."

When you adjust for the problems listed above and a few others, Sherk finds that since 1973, net hourly productivity has grown by 81 percent while hourly compensation has increased by 77.7 percent. In other words, contrary to conventional wisdom, worker compensation is actually very closely tied to worker productivity.

Sherk is far from being the only one making that claim. As his paper reminds us, "academic economists largely reject this analysis and the conclusion that salary no longer grows with productivity." That's true on the right of the political spectrum, as well as the left. The paper references the work of Dean Baker, the director of the Center for Economic and Policy Research, and Harvard professor Robert Lawrence, who served on President Bill Clinton's Council of Economic Advisers. They found, in Sherk's words, that "pay growth tracks productivity growth when comparing the same groups of workers and using the same measure of inflation." Sherk adds that after examining the apparent gap between pay and productivity, "George Washington University professor Stephen Rose—a former Clinton Administration Labor Department official currently affiliated with the Urban Institute … concludes that productivity growth continues to benefit working Americans."

Setting the record straight is important to reassure workers that there's no widespread abuse by American employers. It's also important because false claims such as this one are used to justify the implementation of such idiotic regulations as the overtime rules—which will most likely turn salaried employees into hourly workers and lower base compensation over time. Increases in the minimum wages also keep lower-skilled workers out of the workforce. Armed with Sherk's new paper, we will better be able to fend off future attempts to turn our labor market into its more rigid European cousin.

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63 responses to “Workers Don’t Need Government’s Help to Earn Higher Wages

  1. Great post.

    Setting the record straight is important to reassure workers that there’s no widespread abuse by American employers. It’s also important because false claims such as this one are used to justify the implementation of such idiotic regulations as the overtime rules?”which will most likely turn salaried employees into hourly workers and lower base compensation over time.

    It will also encourage companies like ours to continue our aggressive outsourcing and partnering. Employees are just too much hassle.

    1. idiotic regulations as the overtime rules?”which will most likely turn salaried employees into hourly workers and lower base compensation over time.

      Nothing to worry about here, the $15 an hour minimum wage will make sure those workers don’t exist at all. Problem solved.

      1. I fear for the world my six year old daughter will face when she reaches working age. How will she get her first job without any experience, and how will she get any experience without a job? If the government keeps making it more expensive to hire people, especially young people or people without experience, an entire generation is going to be completely fucked.

        1. I don’t fear for the world (though I kinda do being that she’s my spawn), I fear for her.

          My kingdom for an edit button!

        2. I thought that was the point of all the regulation, executive orders, “guidance” and legislation. She and everyone else will be govt workers and we will have full employment! And at least she will have a free college education and that nasty Social Security hole will go away once everyone gets a gummint retirement.

  2. Shut up, kulaks, wreckers, and robber barons!

    They’re taking our jerbz!

    Get the pitchforks, stop the tractors drones!

    The drone technology will be replacing the jobs of inventory quality assurance employees, cutting inventory checks across massive distribution centers (the one in Bentonville is 1.2 million square feet) from one month down to a single day.

  3. Anyone else following the women’s soccer suit?

    They’re suing for wage discrimination because the men are paid more–even though the men’s team “performs” worse in tournaments.

    “U.S. Soccer officials pushed back forcefully on the players’ claims in a conference call Thursday night, citing figures that the federation said showed the men’s national team produced revenue and attendance about double that of the women’s team, and television ratings that were “a multiple” of what the women attract, according to Sunil Gulati, the U.S. Soccer president.”

    http://www.nytimes.com/2016/04…..plain.html

    Yeah, it’s a function of productivity, but productivity isn’t always about everyone’s idealized concept of “performance”.

    If the men can generate more ad revenue and sell more tickets–even when they lose–then they’re being more productive than the women–even if the women are “outperforming” them on the field.

    P.S. I bet the women’s figure skating team generates more revenue than the men’s.

    1. Look, my pony just won the pony race in Bumfuckistan. He won 5 straight races! I demand I get as much money as the owner of the Triple Crown Winner, who only won three races! So what if only 3 people showed up for my race and I took in a total of $4.90. Racist bigots! Equality now!

      /More economic stupidity.

    2. I’d like to see them play the German men’s national team and then claim they perform better than the men’s team.

      1. That’s only cause the Men’s team are racist and won’t let the women play on the team!

        1. but at least they can use the same locker rooms now

        2. Wait, this is a joke? Racist? Woosh…

      2. I’d like to see them play the top boys high school team in the nation. They’d get obliterated.

        1. That’s surely an exageration. But if they played the shittiest MLS side in the country, they’d take a serious pasting.

    3. Wages are directly tied to the marginal revenue product of labor, theoretically equal to it, i.e. the amount of revenue their unit of labor produces. So yes, wages are dependent on revenue.

      But their wages were agreed to in the last collective bargaining agreement. It was probably a good deal at the time.

      They cite in their argument their 2015 season when they won the Women’s World Cup, setting records in tv viewership, gate receipts, and attendance, according to the article, though it doesn’t say if the records are for US soccer or women’s soccer. Either way, it sounds like a good starting point for negotiating higher wages in the next agreement, which is currently being discussed and US Soccer says it is willing to visit. This lawsuit is a ploy to garner public support to put pressure on the management side.


  4. Workers Don’t Need Government’s Help to Earn Higher Wages

    Workers do need some basic labor laws, safety laws, etc. The government does these things.

    There is nothing that government can do to help workers earn higher wages.

    Compensation is actually very closely tied to productivity.
    Ma.
    A business owner wants to pay as little as possible and get the most productivity as possible.
    Don’t get me wrong, if one is not productive, they will lose their job or at least not get any raises.
    But keeping expenses and salaries low raises owner equity.

    1. “A business owner wants to pay as little as possible and get the most productivity as possible.”

      And workers want to get paid as much as possible while investing as little resources of their own (effort, time) as possible. Since the labor market is not a monopsony, the buyers don’t magically have more power than the sellers. Wages settle at the marginal productivity of labor.

      1. I’ve been running into Bernie bros who will tell you that there is a monopsony in the American labor market, and they will use as proof…the size of American banks!

      2. “Since the labor market is not a monopsony, the buyers don’t magically have more power than the sellers.”

        While the labor market isn’t a monopsony per se, I would argue that it does suffer from an imbalance in power, mainly because there are more sellers of labor power than buyers (in most labor markets, at least). When unemployment (i.e. the overproduction of labor power) is high, wages are depressed and workers are forced to accept certain “policies” that they otherwise would balk at: lower wages, less flexibility on hours, more work duties, etc.

        “Wages settle at the marginal productivity of labor.”

        In a perfectly competitive labor market, yes. In real-world labor markets, not so much. Wages would have to be negotiated by two equal partners in order to settle at the “marginal productivity” of labor, rather than between a (relatively) powerless unemployed worker and a boss.

        1. Workers have power. They can walk.

          1. “Workers have power. They can walk.”

            And the US can nuke ISIS if they shoot another hostage…

            Seriously, the ability of workers to leave their jobs only works as a bluff; that’s how the nuclear option works, after all. If the worker could easily be replaced by another worker (as is common in low-wage sectors), leaving solves nothing, as the work and pay conditions in McDonald’s (for example) don’t vary that much from those in Taco Bell. That also presupposes that there’s a plethora of jobs to be filled in a given sector or region, which isn’t always the case.

            1. And the examples of McDonalds v Taco Bell aren’t even really the issue. Outsourcing overseas is much bigger. And that was not based on any Ricardian notion of comparative advantage – but on a business school idea of undermining market competition itself.

              If bigco is locked into a competitive environment with smallco by ‘following the same rules’ (eg hiring from the same pool); then the solution to kill smallco is to change the environment and have a different set of rules that advantage bigco. Coopt govt to protect their capital investment outside the country; get the credit industry (already cartelized via grants of primary dealer status) to finance their move of capital; and then reimport to kill smallco. Not only does this end up forcing the lower-skilled American to compete with the lower-skilled Chinese. It also kills off the ability of all but the most revolutionary Schumpeterian smallco to compete away the rent-seeking profit of bigco CEO pay. Smallco can’t possibly compete in the supranational ‘market rules’ pond. And the most revolutionary Schumpeterian smallco quickly (like potentially before it even ever turns a profit) becomes coopted into the bigco world via the same credit cartel financing VC pools and IPO’s.

              Basically all the ‘free market’ models and assumptions of competition end up getting turned into nothing more than useful idiots for the already big and established.

              1. Science H. Reason, you two are a couple of bloviating know-nothings. Literally nothing you two said is correct. Read a book. One by a renowned economist, not some journalist or socialist idiot.

        2. A high-supply market is not nearly the same thing as a monopsony. In the latter, prices are fixed by the buyer. In the former, wages still settle at the marginal productivity of labor, but it’s a lower value because more labor has been sold relative to demand.

          I’m open to arguments that the lowest rungs need some help even in the second scenario, but let’s not misrepresent the way these markets work.

    2. Competition is the key to all positive market-based results. If the argument seems to conclude that teh market yields a bad result, you probably forgot the effect of competition somewhere.

      If a firm is earning high margins by underpaying workers, then competition can come along and hire the workers away to do the exact same thing for slightly higher pay and slightly lower margins. Repeat until the productivity baseline is reached, plus a little margin for the risk.

      Unless of course the govt protects the first firm as a monopoly.

  5. Workers’ Compensation: Growing Along with Productivity

  6. I’m not sure “yeah wages are stagnant relative to productivity growth, but that’s because you’re only looking at the compensation for normal workers; if we count senior executive compensation they’re very much in sync” is the big political winner de Rugy seems to think it is.

    1. May not be a political winner – but it will work for the next fundraising drive.

    2. That’s not the argument presented. And if you took that from it, you can’t read or you’re dishonest.

      1. Maybe you should read the actual report — an excerpt

        The shaded rows in Table 2 show how examining all workers and including performance-based pay changes the picture. The table uses total employee compensation data from the National Income and Product Accounts (NIPA). This change increases compensation growth from 10 percent to 47 percent between 1973 and 2014. About two-fifths of this difference comes from including irregular performance-based payments (such as bonuses and stock options), while just under three-fifths comes from examining the entire workforce instead of primarily hourly employees.

      2. It’s the argument the study she’s linking too is making. It complains that the measure of wage growth doesn’t include supervisory workers and thus misses the rapid wage growth among senior executives and then goes on to complain it doesn’t include non-wage compensation, which it again notes is rapidly increasing among senior executives.

        It even specifically mentions Steve Jobs as the sort of person being left out of the wage growth compensation.

  7. The average poor person in the US has a cell phone (likely a smart phone), a home computer connected to the internet, a flat-screen television, air conditioning, and a host of other things that either didn’t exist or were luxury items in 1973.

    Of course in 1973 vehicles didn’t have all of the government mandated gizmos that cost money, and housing codes weren’t such that only the wealthy could afford build a home that was in compliance.

    So some things that are now considered to be basic needs didn’t even exist, some things that were taken for granted now cost a lot more thanks to government, while other things cost a lot less in the number of hours worked in order to buy them (air conditioners for example).

    It’s a complicated picture.

    1. Everyone is very quick to bring up salary stagnation and completely ignore the fact that the standards of living have gone up for the poor.

      1. You mean money and wealth aren’t the same thing?

    2. Not to mention that the average poor family of 4 in the USA weigh in at close to a ton. We’ve gotta get the gummit to subsidize better shocks on those Escalades.

      1. That’s because of greedy corporations creating food deserts and forcing the poor to eat unhealthy, prefabricated food!

        1. I know, I too hate it when evil corporashuns force people at gunpoint to buy stuff they don’t want.

        2. Obviously we need the government to subsidize organic farming. Sure we couldn’t possibly feed the world that way, but that’s ok because, as every prog feels, we need to reduce the human population by a couple bil anyway, starting with other people, of course.

          1. And let’s just ignore the fact that organic means whatever large corporations and their cronies in DC say it does. IOW, you aren’t going to be growing anything ‘organic’ or the goon squad will show up and break your knees and take all your stuff.

        3. “food deserts”

          Fun fast: I live in an officially designated USDA food desert. Within said desert is:

          – A Kroger that just went through a huge expansion and now has more fresh produce and a large health foods aisle
          – A family-owned meat market that sells mostly stuff that the owner produces himself at a farm on the outskirts of town
          – A farmer’s market in the summer months

          Some fuckstain “researcher” with an Ivy-league education probably sucked up tons of your tax dollars to sit on his ass and calculate that residents of this town are horribly deprived of wholesome food.

      2. You think poor people weigh, on average, 500 pounds?

        1. Only in the USA. Poor people in other countries have difficulty getting enough food. Here poor people are so fat they can’t even walk, which is why Walmart needs an armada of fat people carts that can support the weight of your average elephant.

    3. It’s a complicated picture.

      Yes. https://www.youtube.com/watch?v=Xe1a1wHxTyo

      The poor today have it so easy.

  8. It’s also important because false claims such as this one are used to justify the implementation of such idiotic regulations as the overtime rules?”which will most likely turn salaried employees into hourly workers and lower base compensation over time.

    Let’s see the process here:
    Progressives complain about compensation stagnation
    Progressives agitate for more labor laws to “help the workers”
    Politicians pass more labor laws
    Cost of labor goes up
    Compensation gradually declines
    Can anyone say “self-fulfilling prophecy”?
    Thanks for actively lowering our wages, progressives.

    That probably explains the 81% / 77.7% discrepancy.

    1. Look, we just haven’t went far enough yet. The Soviet Union, where they went far enough, was a paradise before evil capitalist pigs undermined that great nation. Same is going on now in Venezuela. The capitalist pigs are so jealous of the paradise there that they gave Chavez cancer and are now lying about how great it is there.

    2. The focuses on wages is bullshit for another reason. A lot of benefits included in overall compensation aren’t taxed. They have incentivized employers to offer them, and they’ve grown disproportionately compared to wages over time as a result. The average wage is ‘stagnant’ at $20 or whatever. Average compensation per hour is $32 and has grown right along with productivity. The left is just cutting up numbers to emphasize what is politically expedient to them.

    3. So much this.

  9. “Some of these calls are driven by pure politics and self-interest.”

    Too kind.
    Every single one of them is a blatant attempt to buy votes with taxpayer money. Every one.

  10. There is also the fact that increases in automation boost productivity and the rate of adoption of automation is increasing.

    Making labor more expensive is a sure fire way to speed that adoption rate up even more.

    Furthermore, the reward for the increased productivity due to that increased automation rightly goes to those who provided the capital to purchase the equipment (the stockholders) – not every worker who is employed by the company.

    There is no reason why the guy who attaches the wheels to cars on the auto plant assembly line deserves a share of the reward for the increase in productivity in the paint shop because all the paint shop workers were replaced by robots.

    1. automation has nothi…wait a minute my secretary’s ribbon came off her Selectric in the typing pool

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  13. Look at this horse shit from The New Yorker: “Libertarians have homed in on an income guarantee as a low-friction, low-bureaucracy way to take care of the poor.” They actually brought up an obviously nonlibertarian example, unprompted, in order to make a case for a guaranteed income. It shows that progs fear us. They actually want to hang with the cool kids and pretend that they are libertarianish too. Also, they know they need to confront us early. Before our newfound popularity converts too many voters to think rationally.

  14. Hazlitt crushed all of this bunk in the first 2 chapters of Economics in One Lesson.

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