This has always been the consequence of globalization and free trade. While in an egalitarian sense, its only fair the same work brings the same pay. But the real shock is to the American worker who is still paid on average much better, even relative to cost of living.
It is becoming apparent that this transition best absorbed over the long run, is instead hitting full force during what is already a bad time for workers. This can only mean more of the same for the forseeable future. Unemployment is going to stay high for the forseeable future. Wages are likely to continue to stagnate or even retreat in the face of global competition.
Meanwhile, the US tax base, heavily shifted to the middle class with Bush's policies continues to slip relative to the national debt and promised Social Security payments. The Republicans appear to have gotten their wish for "starving the beast" of government. The middle class will be uninterested in raising taxes with raises falling behind cost of living. That means very little money left for government after paying on the National Debt and even more pressure on Medicare. Even rolling back the tax cuts for the rich won't make up for the short fall.
It's hard to imagine a worse scenario for the American worker.
Morgan Stanley
The stagnation of earned labor income reflects a breakdown of the relationship between worker pay and productivity.
[...]
This shortfall of organic labor income generation is all the more unusual in a period of rapid productivity growth.
[...]
...the divergence between productivity and pay was most glaring outside of manufacturing --- construction, mining, and services.
[...]
While there are many factors that may be accounting for this squeeze on worker compensation, I continue to believe that globalization is playing the most important role. I don’t think it’s a coincidence that America is currently in the midst of the weakest recovery of both employment and worker compensation on record. Nor do I believe that it is a coincidence that the disconnect between worker pay and productivity has been concentrated in the services sector. And I certainly don’t think it is a coincidence that the new squeeze on services is occurring at a time when e-based connectivity is taking off -- disseminating the knowledge-based output of information workers around the world at hyper speed. Long shielded from global competition, services now are exposed to global forces as never before.
[...]
Needless to say, the implications of this development are profound. Three big conclusions jump off the page: One, American consumers are, indeed, as income-constrained as I had previously thought. Broadening the focus to compensation only underscores the key point that labor earnings are behaving very differently than might be expected of a high-productivity growth economy. Two, US policymakers -- especially the Fed -- have responded by providing stimulus to asset markets in order to provide a substitute for lagging organic income generation. Increasingly wealth-dependent consumers then drive their income-based saving rates lower -- leading to an ever-wider current-account deficit and ever-mounting global imbalances. Meanwhile, asset markets go to excess and bubbles become the rule, not the exception. Three, as the angst of economic insecurity has spread from concerns over jobs to wages, and as the US trade deficit mounts, the risks of politically inspired protectionism rise. Washington’s focus on China bashing is in fashion these days for precisely these reasons.
Complete Article
Global: Back to the Drawing Board
Stephen Roach (New York)
The stagnation of earned labor income reflects a breakdown of the relationship between worker pay and productivity.
A few times every year, I get the opportunity to present my view to the academic community. The challenge is very different with this group. Unlike investors, where accountability takes place on a mark-to-market basis, in the academic world, it is the rigor of the analytical framework that is tested. Recently, I sung for my supper in front of a group of superstars at Stanford University. Predictably, they went right for the jugular -- challenging one of the major building blocks of my macro framework. Nobel laureate Kenneth Arrow politely suggested that I might want to consider reworking a key assumption. That stopped me dead in my tracks. For a moment, I felt like I was in graduate school again. It was back to the drawing board.
The debate was over my core premise of the income-short American consumer. For some time, I have argued that consumers were being squeezed by an unprecedented stagnation in real wages and an equally profound shortfall in the wage earnings component of personal income. I have stressed that this development is all the more extraordinary in the context of America’s high-productivity-growth economy. After all, one of the time-honored axioms of a free-market capitalist system is that workers are paid in accordance with their marginal productivity contribution. The Stanford crowd hardly quibbled with this basic point. They suggested, however, that I was wrong to test this hypothesis by scrutinizing trends in real wages and wage and salary income. The theoretically correct construct, they argued, was the linkage between productivity and the broader measure of real compensation -- wages plus benefits. They were right, of course. And so I have redone the analysis from the standpoint of compensation. Interestingly enough, my earlier conclusions hold: The extraordinary stagnation of earned labor income in the past four years reflects a fundamental breakdown of the relationship between worker pay and productivity. The saga of the income-short American consumer remains very much intact.
Here’s what the recalculations show: The story still starts with the combination of the weakest hiring recovery on record and an extraordinary outbreak of real wage stagnation. Not only has private sector job growth fallen nearly 10 percentage points short of the typical recovery path, but fully 42 months into this recovery, the inflation-adjusted hourly wage rate is fractionally below the level prevailing at the trough of the last recession in November 2001. Adding in the benefits piece of worker compensation does not change the bottom line of an unprecedented shortfall in labor income generation. According to our new calculations, the private sector compensation component of personal income -- direct wage payments plus benefits -- is up only 11% in real terms so far in this recovery; this is well below the 17% average increase recorded over comparable 42-month intervals of the preceding five business cycles. (Note: Including rapidly growing benefit outlays narrows the wage and salary gap that we originally stressed by only about 12%). This shortfall of organic labor income generation is all the more unusual in a period of rapid productivity growth. In the first 13 quarters of this recovery, total hourly compensation in the nonfarm business sector increased only 7.5% in real terms -- far short of the 13.0% cumulative gain in productivity over this same interval. American workers, long accustomed to receiving their “just reward†as defined by their marginal productivity contribution, are facing the most profound disappointment of the modern era.
The plot thickens with a decomposition of this divergence between productivity growth and real hourly compensation. Surprisingly, the problem is not concentrated in the manufacturing sector -- the tradable goods portion of the US economy that has long borne the brunt of increasingly intense competitive pressures. Over the first 13 quarters of this recovery -- from 4Q01 to 1Q05 -- hourly compensation in manufacturing increased by 16.6%; that’s more than double the increase for the private nonfarm business sector as a whole and a relatively minor shortfall from the 19.7% cumulative increase in factory sector productivity over the same time period. Conversely, over the same 13-quarter interval, the 5.5 percentage point gap between real compensation and productivity growth in the nonfarm business sector was nearly double the 3.1 percentage point shortfall in manufacturing. By inference, that means the divergence between productivity and pay was most glaring outside of manufacturing --- construction, mining, and services. With workers employed in private services industries accounting for fully 92% of the private sector “nonmanufacturing†workforce, there can be little doubt that the bulk of America’s recent real-wage disconnect has been concentrated in the vast services sector.
The US database does not allow us to make timely estimates of services sector productivity, which would undoubtedly shed further light on this problem. However, courtesy of the Labor Department’s Employment Cost Index, we can glean additional insight into the recent compensation shortfall in services. Over the 24 months ending in March 2005, nominal compensation growth in private service producing industries averaged just 3.4% at an annual rate, or 0.9% in real terms. That compares with a 4.25% pace of nominal compensation growth in manufacturing over the same period, or 1.75% in real terms -- double the anemic pace of real compensation growth in services. Within the broad services aggregate, average compensation gains over the past two years have been especially sluggish in banking (2.2% in nominal terms), wholesale and retail trade (2.9%), and business services (3.3%). Interestingly enough, these are also the segments of the broad services sector where anecdotal reports point to significant recent improvements in productivity growth.
The data reveal one other interesting piece to this puzzle: The bulk of the shortfall in services sector compensation growth shows up in the benefits piece rather than in wages. Over the 24 months ending in march 2005, benefits -- paid leave, supplemental pay, insurance, and retirement and savings plans -- rose at a 5.5% average annual rate (nominal terms) in services versus an 8.1% increase in manufacturing. By contrast, there has not been much of a differential in wage inflation between the two sectors -- with nominal wage increases in both manufacturing and services averaging around 2.25% to 2.5% over the past two years. In inflation-adjusted terms, that means workers in both services and manufacturing are feeling comparable pressures of real wage stagnation in a high-productivity growth era.
While there are many factors that may be accounting for this squeeze on worker compensation, I continue to believe that globalization is playing the most important role. I don’t think it’s a coincidence that America is currently in the midst of the weakest recovery of both employment and worker compensation on record. Nor do I believe that it is a coincidence that the disconnect between worker pay and productivity has been concentrated in the services sector. And I certainly don’t think it is a coincidence that the new squeeze on services is occurring at a time when e-based connectivity is taking off -- disseminating the knowledge-based output of information workers around the world at hyper speed. Long shielded from global competition, services now are exposed to global forces as never before. With nontradables becoming increasingly tradable, worker rewards in a host of services industries are now being shaped increasingly by offshore wage-setters in far-flung places such as India, China, Mexico, and Eastern and Central Europe. As a result, the global labor arbitrage, as I have called it, is showing up in both headcount and pay decisions in an increasingly wide array of industries of the high-wage developed world -- manufacturing and services, alike (see my 7 March 2005 essay, From Jobless to Wageless).
Needless to say, the implications of this development are profound. Three big conclusions jump off the page: One, American consumers are, indeed, as income-constrained as I had previously thought. Broadening the focus to compensation only underscores the key point that labor earnings are behaving very differently than might be expected of a high-productivity growth economy. Two, US policymakers -- especially the Fed -- have responded by providing stimulus to asset markets in order to provide a substitute for lagging organic income generation. Increasingly wealth-dependent consumers then drive their income-based saving rates lower -- leading to an ever-wider current-account deficit and ever-mounting global imbalances. Meanwhile, asset markets go to excess and bubbles become the rule, not the exception. Three, as the angst of economic insecurity has spread from concerns over jobs to wages, and as the US trade deficit mounts, the risks of politically inspired protectionism rise. Washington’s focus on China bashing is in fashion these days for precisely these reasons.
There’s nothing like the test of academia to prompt a careful rethinking of any macro argument. If you don’t expose yourself to the pros, the risk is that your conclusions will become tired and stale. The Stanford crowd forced me to re-examine one of my core premises. They made me sweat. My framework is hopefully more robust for the effort.
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