Productivity and Wage Stagnation

Annual wage growth has been an anemic half of one percent for American employees in the period 2007 to 2015.  In that same period, labor productivity crawled at a 1.2% pace, down from the more typical 2.6% pace during 2000 to 2007.  Wage stagnation was more intense for those in the middle income strata.  Over the 14-year period 2000 to 2014, income grew by just 1.8% per year for those in the 2nd wage quintile, but grew by 2.5% for those in the 4th quintile.  Wage stagnation explains much of middle income voters’ sour mood, and it calls for candidates to offer a plausible plan for economic growth.

Short term government programs such as “shovel-ready” construction jobs can foster temporary growth by infusing cash into the economy via labor waiting for jobs.  That doesn’t work when there are no such projects or when unemployment is a meager 5%.  Populist antics like doubling the minimum wage may land some workers a better paycheck, but it will lead other employers to displace workers in favor of outsourcing or new equipment and software that is more productive than a marginal worker.

Tax incentives such as accelerated expensing for some investments are already in place.  If there is a viable project, depreciation will not stand in its way.  Consumer spending accounts for two-thirds of the GDP but it increased at a chilly 0.1% in each of January and February 2016.

Consumers are not happy with the economic outlook and they are inclined to spend aggressively.  That attitude will not encourage employers to lift wages.  Government interventions to boost wages will require a lot of thought.  Sound bite proposals are not up to the task.  Absent consumer spending, increases in exports and retention of high paying jobs are our best hopes for better wages, but those gains are difficult to achieve and cannot be made quickly since they require advances in labor quality.  Education takes time.

To justify more pay per hour, labor needs to show higher productivity.  That can be encouraged through advanced education and relevant job experience.  On the other hand, if the demand for workers’ products declines, so will the value of their labor.  That is what Intel acknowledges in its 12,000-person layoff.  Most of those workers are associated with the PC product line, a segment that faced chronically declining demand.  Intel will focus away from PCs and toward “cloud” and Internet-of-Things products, but not toward mobile chips.  Intel expects the upheaval will save money at a run rate of $1.4 billion per year.  Although more than a layoff is involved, the savings amounts to $117,000 per worker lost.

Intel workers may feel a measure of grief, but they should have an easier time than most finding a suitable new job because their skillsets will be in demand.  For “those ages 25 and older… with a four-year college degree, the [unemployment] rate is 2.5 percent… that means that employers seeking college-educated, experienced workers are really struggling right now to find candidates to fill openings.”  The list of IT jobs at glassdoor.com and Glassdoor’s recent study reveal many firms with median pay exceeding $150,000 per year, putting those employees solidly in the top income quintile.  These are not middle income employees suffering from wage stagnation.

Unfortunately, policy talk on the Presidential campaign trail does not focus on detailed plans to encourage sustainable well-paying jobs that can improve middle income wages.  Most of the chatter centers on extoling a victimhood culture, scapegoating the usual suspects, and loading benefit costs onto the gig economy’s self-employed.

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