
The rich world needs higher real wage growth - known
https://www.economist.com/finance-and-economics/2018/06/30/the-rich-world-needs-higher-real-wage-growth
======
dalbasal
This article really demonstrates how meaningless most economics reporting is,
it's nearly as bad as markets/finance reporting.

Oil is $75, about average over the last decade. It has almost nothing to do
with employment, wage growth or GDP except inasmuch as all major economic
measures affect eachother. A year ago oil prices were low, did that mean the
opposite of this article (whatever that is) was true?

This kind of writing leans very heavily on its metrics, euphemisms and
cliches. I have a feeling the journalists would not be able to unpack any of
its abstractions.

" _If slack were eliminated everywhere, pay might rise faster._ " _.._ _"
hawks think there is little room to boost real wages by running labour markets
hotter._" _.._" _structural changes in the economy, rather than weak demand
alone, have stacked the deck against workers._ "

...If asked, would the writer be able to give a specific examples or instances
for any of these? Are "labour market running hot" or "central bank tightening"
references to actual things that are happening or are these just boilerplate
sentences that get added to any article?

I really don't see how anyone is more informed of anything, even about the
authors' opinions, from reading this.

~~~
JumpCrisscross
> _Are "labour market running hot" or "central bank tightening" references to
> actual things_

Yes. Unemployment is very low. That means if you need ten people, you may have
to pay more or wait longer than you expected. That is what “labour market
running hot” refers to. “Eliminating slack” means encouraging employers to
raise wages (which can cause inflation) to fill productive jobs.

“Central bank tightening” refers to the Federal Reserve reducing its balance
sheet and raising rates. There is a Fed meeting later this year when target
rates are expected to be raised, partly in reaction to said labour market.

I agree that the financial press could afford to be less jargon heavy.

~~~
AnthonyMouse
> “Eliminating slack” means encouraging employers to raise wages (which can
> cause inflation) to fill productive jobs.

If you reallocate money without creating new currency, what you get isn't
really inflation. Prices may adjust because the demand for things lower income
people buy increases and the demand for things higher income people buy
decreases, and prices follow demand. But supply and demand isn't inflation.

And that effect is present for any method of reducing wealth inequality. If we
had less inequality, people who are currently poor would then have more money
and use it to buy things. If those things are scarce then their prices will
increase.

It's like saying we shouldn't decrease homelessness because it may increase
energy prices when the new homeowners have to heat their new homes. Even if
it's nominally true, the implication that the cost outweighs the benefit is
ridiculous.

And if you're really worried about high prices, the way to combat them isn't
to denigrate efforts to increase middle class wages, it's to address
artificial scarcity in markets like housing.

~~~
JumpCrisscross
> _If you reallocate money without creating new currency, what you get isn 't
> really inflation_

You’re forgetting about velocity. A dollar in a middle class earner’s hands
gets spent faster than a dollar in a billionaire’s. That faster spending
stokes both growth and inflation.

~~~
AnthonyMouse
> You’re forgetting about velocity. A dollar in a middle class earner’s hands
> gets spent faster than a dollar in a billionaire’s. That faster spending
> stokes both growth and inflation.

At a fixed money supply, growth causes _deflation_. People want to engage in
more transactions and they need money to do it, which increases demand for
currency.

You often see inflation during periods of growth because when there are high
returns to be had, people take out loans to expand and banks making loans
creates new money. The new money causes inflation. But if you really didn't
want that to happen, it's simple to prevent it by requiring banks to hold more
reserves (so they won't make as many loans).

But it's not clear why preventing moderate inflation should even be desirable.
If you get a 10% raise at the same time as prices increase by 4%, who's
complaining? You're up 6% annually and your mortgage, credit card debt and
share of the national debt are down 4%.

~~~
JumpCrisscross
> _At a fixed money supply, growth causes deflation_

True. This is the problem with fixed money supplies.

We moved past fixed money supplies several decades ago. My statement stands
true in any modern context. Rich households spend slower than poor households.

------
adpirz
Linked elsewhere in the comments, but this is an interesting read regarding
the increasing gap between productivity and labor:
[https://www.epi.org/publication/understanding-the-
historic-d...](https://www.epi.org/publication/understanding-the-historic-
divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-
why-its-real/).

The interesting fact is that the loss of labor's share of GDP to capital is
less than you'd imagine, and a much bigger reason for stagnant real wage
growth has to do with inequality regarding compensation. Automation is real
and is taking jobs, but it's executives that have been soaking up the
financial gains from productivity.

~~~
Nokinside
When you are really rich, consumption becomes tedious.

If someone has $100M income after taxes, they might invest $50M reducing the
ROI of the capital in economy during the economic boom when there is enough
capital and cheap credit already.

What to do with the remaining $50 million? It's hard to eat, travel or use
services to spend $50 million per year. It's possible, but it takes some real
effort. Helicopter ride every day barely registers.

You can always buy a bigger house. $50 gets you a nice one. If you put $150
million you get even better. Property prices increase.

~~~
walshemj
They are tanking about the rich middle class west (ie you and me) not euro
trash millionaires and trustafarians on made in Chelsea :-)

Also if you did suddenly get 50mil say you invest for the long term 50% the
balance gives you an income < 1,000,000 a year

And that's not assuming you don't spend 10-15 mill or so on a really nice
house or two one in London and one in the country.

~~~
jessaustin
Those houses wouldn't be your worst investments...

~~~
walshemj
If I had done that 15 /20 years ago yes :-) the post Brexit / Trump stock
market crash maybe not.

------
rdlecler1
The rich world needs cheaper housing. Fix that and the average family can
allocate more resources to other things like health and education instead of
diverting more resources to rent seekers.

~~~
Synaesthesia
Economist Michael Hudson often writes about this. The housing bubble is mostly
beneficial to banks, as they get more interest. They know that house prices
will go as high as they are willing to lend out.

~~~
paxys
And to existing homeowners, who also conveniently get to drive housing policy
in their neighborhoods.

------
GatorD42
I think there are many reasons to be skeptical of inflation and productivity
statistics because they don’t seem to capture the rate of innovation in
consumer goods such as smartphones and related areas like wireless plans. I
wrote a piece on inflation statistics showing how U.S. inflation statistics
fail to account for the quality improvement in iPhones:
[https://medium.com/@vince.pavlish/using-iphone-prices-to-
che...](https://medium.com/@vince.pavlish/using-iphone-prices-to-check-the-
accuracy-of-inflation-statistics-4140d65ac252?source=linkShare-
acc967f91527-1530458838)

~~~
tfehring
Interesting take, but I'm not sure I buy it. I certainly don't feel like I get
~2.5x more utility from my current iPhone than I did from the smartphone I
purchased in 2012, which was just as fast (on the software of the time) and
had most of the same functionality. I'd also be curious as to how you were
able to conclude that the so-called "fashion effect" is not supported by
evidence.

~~~
madengr
Things have gotten worse in some respects. Computers get more and more locked
down with corporate security bullshit, it becomes harder to get any work done.

Remember when you could quickly FTP a file, toss up a web page, email someone
a zipped file. Can’t do any of that now without jumping through hoops.

Computers have become very slow for tasks that used to be fast. Everyone
always seems to “waiting on the computer”; that’s screwed up. It should be the
other way around.

~~~
noonespecial
>Remember when you could quickly FTP a file, toss up a web page, email someone
a zipped file. Can’t do any of that now without jumping through hoops.

Oh I remember all right. I've spent _weeks_ of my life yelling into a phone _"
no PASV. You have to find where it says PASV and check it"_

Toss up a web page? On what, Geocities? (back to the ftp thing are we?)

Email a file? Great. I hope its less than 2mb or it might just vanish
somewhere along the way...

Dropbox. Wordpress. Slack. This stuff is 100x better for the average user than
a decade ago. 1000x better than 2 decades ago.

The real trouble is all of this means just about nothing when you're afraid to
go to the doctor because your deductible is more than a decent used car.

------
temp-dude-87844
I don't disagree with this article. I think they lay out some concerning
trends, and possible reasons why they might be occurring. The New York Times
published a similar analysis in February [1], and I've played armchair
economist with these points for a while.

But it's remarkable how different two pieces of reporting can be around the
same basic metrics. For most of the past year, the story as read on mainstream
outlets has been that unemployment in the US (the U-3 metric) is historically
low, and outlets contextualized this as "the economy is strong", which people
are left to interpret to their own devices. And the complicated
interdependence of factors, like how tight labor markets drive wage growth,
how we're simultaneously showing signs of a tight and slack labor market, and
how wage growth drives price-inflation or the other way around, makes the
impact of a "strong economy" difficult for the average person to
conceptualize.

The reductionist view is that for large segments of the society in the US and
Europe, rising cost of living are interacting adversely with their low gains
in real wages. There's broad overlap between the people whose budgets are most
crunched, and the people whose anxieties caused them to bring into power anti-
globalization, domestically-focused administrations. It's ironic, then, when
metrics whose correspondence to real workers' observed conditions are being
touted as measures of success.

[1]
[https://www.nytimes.com/interactive/2018/02/01/business/econ...](https://www.nytimes.com/interactive/2018/02/01/business/economy/wages-
salaries-job-market.html)

------
lumberjack
Wage growth is not everything. Low financial risk is another important
consideration. The average Joe is some countries is ridiculously exposed,
despite the supposed wealth of the nation.

------
Animats
The emphasis on oil may reflect a European perspective. Only 19% of US oil is
imported now, and the US generates very little electricity from oil. The US is
a natural gas exporter. If the US wants energy independence, it's within
reach.

At the other extreme, Japan imports essentially all its oil, as does the UK.
Both import most of their natural gas.

~~~
oriol16
US burns 20mbd and produces less than 10mbd. Are you sure imports are only
19%?

~~~
TheCoelacanth
Where are you getting the 10 and 20 million barrels per day numbers? Those are
roughly the crude oil production and total petroleum product consumption
numbers given here[1], but those aren't measuring comparable things because
there are products other than crude oil that go into the consumption number.
The same source gives 14.2 million barrels per day as the total petroleum
product production.

[1]
[https://www.eia.gov/tools/faqs/faq.php?id=268&t=6](https://www.eia.gov/tools/faqs/faq.php?id=268&t=6)

------
TangoTrotFox
Here are a couple of interesting and crucially related graphs:

\- Nonfarm Business Sector: Real Compensation Per Hour [1]

\- Nonfarm Business Sector: Real Output Per Hour of All Persons [2]

\- Real Median Personal Income [3]

Nonfarm business sector is defined as _" a subset of the domestic economy and
excludes the economic activities of the following: general government, private
households, nonprofit organizations serving individuals, and farms. The
nonfarm business sector accounted for about 77 percent of the value of gross
domestic product (GDP) in 2000."_

I think many of these articles were influenced by an earlier Pew study which
showed a sharp disconnect between income and productivity. But their study
excluded supervisor positions and only counted wages - not overall
compensation. The data I'm presenting here seem to show relatively strong wage
growth over time. Interestingly enough median personal income, by contrast,
has not grown nearly as rapidly. I present these data as a question more than
an answer.

But we do live at a time when developers, engineers, and many other 'normal'
white collar jobs are going into 6 figures early in their career. And on the
other end I know there are also plenty of people making healthy 6 figure
salaries doing things like working on offshore rigs _(not to mention getting
schedules like 2 weeks on, 2 weeks off)_. And for general low skill work you
have fast food/coffee managers making $40-$50k. It could be that all of these
sharp increases in wages are somehow being offset by other jobs having seen
substantial decline in wages, or it could be that somehow the market dynamics
have changed in ways that certain measurements might not accurately reflect.
I'm not really sure, though I'm increasingly leaning towards the latter.

[1] -
[https://fred.stlouisfed.org/series/COMPRNFB](https://fred.stlouisfed.org/series/COMPRNFB)

[2] -
[https://fred.stlouisfed.org/series/OPHNFB](https://fred.stlouisfed.org/series/OPHNFB)

[3] -
[https://alfred.stlouisfed.org/series?seid=MEPAINUSA672N](https://alfred.stlouisfed.org/series?seid=MEPAINUSA672N)

~~~
jaggederest
These are more interesting graphs.

[https://fred.stlouisfed.org/graph/fredgraph.png?g=ki8y](https://fred.stlouisfed.org/graph/fredgraph.png?g=ki8y)

[https://fred.stlouisfed.org/graph/fredgraph.png?g=ki8A](https://fred.stlouisfed.org/graph/fredgraph.png?g=ki8A)

[https://fred.stlouisfed.org/graph/fredgraph.png?g=kipg](https://fred.stlouisfed.org/graph/fredgraph.png?g=kipg)

Healthcare, education, and housing have all doubled since the turn of the
century compared to median incomes. There are a few sectors of the economy
that are absolutely crushing people who make a median wage.

~~~
IkmoIkmo
On housing there are some caveats:

\- it's a consumer-driven market, higher prices made a lot of ordinary
citizens rich. It's not money that disappeared into a few rich shareholders'
pockets like say in the medical industry.

\- [0] mortgage rates have gone down from a peak of 18% to below 3%. That's
the money that you'll never see again. Suppose you bought a home 3x your
income, you used to be paying 54% of your income on interest alone, now it's
9%. Prices went up, but there was also downward pressure on your actual
monthly expenses due to interest rates plummeting.

\- 'houses' aren't fungible over time. Home sizes are way bigger and household
sizes slightly smaller. On average each individual has roughly twice as much
home space as before. [1] We choose to live bigger and sharing our space with
fewer people. That's at least a sign of shifting preferences, and at best a
sign of wealth, not poverty.

Caveats can be made about healthcare, too. We've added 8 years of life to each
individual since the 1970s. That's insane.

I'm less excited about education. I see signs of credentialism. Education
still has positive returns for individuals, but the story isn't as strong as
for societal returns (i.e., at some point the abundance of degrees become a
positional good or in other words a zero-sum game).

[0] [https://i.stack.imgur.com/eKqLH.gif](https://i.stack.imgur.com/eKqLH.gif)
[1] [https://azgolfhomes.com/wp-
content/uploads/2016/07/American-...](https://azgolfhomes.com/wp-
content/uploads/2016/07/American-Enterprise-Institute-Housing-Data.jpg)

------
tfehring
One thing to keep in mind: It's easy to think of stagnant wage levels as
implying that everyone is working the same jobs and getting 2% nominal raises
per year. Another possibility is that a subset of the population is seeing
real wage growth while a different subset is being pushed into lower-wage jobs
by automation and/or outsourcing.

The hivemind of Trump supporters would have you believe the latter, and while
I'm decidedly not one of them, that explanation definitely strikes me as more
plausible. Though I'd contend that there are probably 3 buckets, not 2:

\- Those who work in highly-paid fields that aren't vulnerable to automation
or outsourcing, including those who are driving the automation and outsourcing
of other fields. These people see real wage growth.

\- Those who work in relatively low-wage jobs (e.g., in the service sector)
that are prone to automation and/or outsourcing, but for whom automation has
been gradual because their low wages mitigate the benefits of automation and
outsourcing. For these people, I suspect that real wages are more or less
stagnant - they have no leverage since their jobs could be at least partially
automated if it were worthwhile to do so, but it hasn't been worthwhile yet.

\- Those who work in highly-paid fields that are susceptible to automation
and/or outsourcing. Many of these jobs have been automated and/or outsourced
due to the significant cost savings from doing so, pushing these people into
lower-wage jobs. These are the coal miners and skilled tradespeople who form
the core of Trump's voting base.

Of course, there are jobs that don't fall cleanly into any of these buckets -
lawyers are a good example - but my impression is that this is still a good
model for understanding wage levels for many jobs. Obviously I'm speculating
quite a bit here (though BLS projections seem to support my argument [0]), so
please let me know if you know of any evidence that contradicts this.

[0] [https://www.bls.gov/emp/tables/industries-large-grow-
decline...](https://www.bls.gov/emp/tables/industries-large-grow-decline-
employment.htm)

~~~
marcoperaza
The numbers are pretty clear. The top 20%, which roughly correlates to the
college-educated professionally-employed class, has seen their real income and
social welfare steadily go up for the last half century. The bottom 80% has
seen stagnation and decline, as well as increased social ills like drug
addiction, broken homes, and so forth. Notably, this pattern exists even if
you look at just white people, so a racial explanation won’t do.

~~~
refurb
Declines wages for the poorest are only true if you ignore non-monetary
compensation (e.g. benefits) and government transfers (EITC).

Not really fair to compare it that way.

~~~
IkmoIkmo
Yup. Real median personal income in the US is up. [0] Although there have been
few gains in the past decade. It's a pretty decent measure of the average
American.

It's also a bit better than wages as a measure of average citizen's purchasing
power. After all, wages are linked to having a job. The 20th century saw
substantial emancipation and the end of high degrees of exclusion of
minorities, particularly women. As they entered the workforce, real wages may
have decreased slightly on average, i.e. men were earning slightly less per
job, and women were earning significantly more, which is why you can see
average wages decline while average personal income increases.

[0]
[https://fred.stlouisfed.org/series/MEPAINUSA672N](https://fred.stlouisfed.org/series/MEPAINUSA672N)

------
pknopf
What exactly (as if anyone can know) caused the wage growth and productivity
to split in the 1970s?

Was Nixon's complete split from the gold standard a factor at all?

~~~
platz
The investor class saw inflation marginalizing their endeavors, and they got
us to target price stability as the goal instead of full employment.

The controls, liquidity of global capital, and action of the central banks
that maintain price stability, end up suppressing wage growth.

So we have a world in which rather than the debtor’s paradise we had in the
70s, we have a creditor’s paradise now.

[https://youtu.be/X5JI0_i_Xik?t=21m44s](https://youtu.be/X5JI0_i_Xik?t=21m44s)

~~~
lifty
I am not sure I follow your reasoning. Taking into account the low interest
environment that we have gone through in the last 10 years how can it be a
creditor’s paradise?

~~~
platz
They don't need super-high interest rates to lock in their returns.

They need investment predictability, and can make up the difference with scale
and global arbitrage.

From the other perspective, if your wages don’t rise, and your debts are there
and your debts — particularly the student debts — are guaranteed by God
himself that you can never default on them — you’re a debt peon.

------
patientplatypus
I think the root cause of most of these problems, is that most people don't
add economic value. That isn't to say they are bad people (of course not!),
but that we have reached a stage in technology driven capitalism where only a
small percentage of people can gain large pieces of the pie (software
engineers and CEOs), while middle income jobs are too inefficient to survive
(lawyers displaced by discovery software, accountants with TurboTax, truck
drivers etc.). The jobs that are left available are all low skill and pay
accordingly (it is hard to automate burger flippers, but people are trying).

All of this is being greatly exacerbated by climate change. As people consume
more things and the worlds' resources are reduced there is a greater incentive
to automate as once previous costs in production become too much. As fewer
people are hired because of automation, there is less money to buy quality
long lasting goods, so manufacturers aim to make cheap disposable products at
scale to sell to the poor, thus exacerbating climate change.

All of this I think is pretty obvious. What I've just shown is only one of any
number of negative feedback loops that are growing worse and will probably
cause huge social conflicts and war. The interaction between poverty, populist
governments, tariffs which increase in trade wars and more poverty is another
good example.

Most people in the first world (>50%) by my estimation, will be net economic
drains on society within 20-30 years because of technological advancement and
globalization. We will also start to see mass starvation in the third world as
climate change makes potable water rare and changes to regional climates
disrupts food supply chains. We could very well see mass migration and
conflict that will appear similar to what happened around the time of the
Mongol invasion of Rome (again, migrants searching for food are obviously not
bad people).

The issue is that in order to solve these problems we need to address root
causes that are impossible to stop. Knowing the solution does not make
enacting that solution any easier. The only steps that I can see that would
solve these problems would be the following:

\- People voluntarily stop having (as many or any) children worldwide.

\- People stop eating meat. It is the number one greenhouse contributor, and
it shameful that people eat meat (which requires farm animals to consume food
in order to be made), while _any_ other people go hungry.

\- There is a basic needs allowance. We have enough resources to feed, cloth,
and shelter everyone in the world and the lack of these resources is what
causes the poor to take up arms. Show me a conflict and I'll find the people
going hungry.

\- The benefits of capital and technological automation have to be widely
distributed. That means the profits as well.

But these are hard problems to solve, because it means convincing people to
share. I don't think most people ever really learn how. The alternative to
doing the hard work of sharing is to keep going down the path we're on now.
Eventually there will be enough reports that all the increases to productivity
only go to the rich for people to stop believing that hard work matters.

I don't know man. When I was younger I thought knowing the solution was
enough, but as I get older I'm more and more convinced the world is a bad
place because some people just suck.

~~~
beokop
Sorry but the idea that most people will become “economic drains” in the next
20-30 years is ludicrous. Are you saying that there’ll be nothing worth doing,
at all, that people can meaningfully contribute to after 2050?

~~~
lolsal
I think the parent means that something like "flipping burgers" or "mopping
the floor" will still need to be done - but it will not pay enough to sustain
a person, or that it will cost more than the value received for the service.

------
patientplatypus
The rent is too damn high.

------
notananthem
Real wage growth is stagnant because of shit like brexit and trump's trade
wars. Companies can afford to provide real wage growth but are being
conservative because idiots who don't understand simple macroeconomics keep
shooting their economies in the foot.

Brexit particularly is a good example of keeping a monty python esque giant
foot down on real wage growth.

------
mozumder
Or better yet, reduce prices all around. Think of all your expenses and look
at ways to systematically reduce them for everyone. Start with food, get a
meal down to less than a dollar.

Rent is high because everyone wants to move to certain dense areas, while
moving away from more spacious/rural areas. This is unsustainable. Offer
incentives for people to move elsewhere, including jobs programs and
subsidizing mass transit to less dense/rural areas. Offer mass transit
everywhere to reduce transport costs.

~~~
closeparen
Everyone in dense areas is the _only_ sustainable settlement pattern. The
energy alone needed to maintain existing levels of sprawl cannot go on much
longer.

~~~
rootusrootus
I hear this a lot. But the fact remains that it is significantly more
expensive to live in a dense urban area. Until the claimed efficiency
improvement can be translated to an actual day-to-day cost improvement, people
will continue to live where their dollars go farther.

~~~
nhaehnle
I think there are different concepts of "cost" and "expensive" at play in this
discussion which can lead to this kind of misunderstanding.

Having the population located in dense urban areas is more efficient and
therefore cheaper in terms of the real resources that are required:
infrastructure is cheaper to build, distances are smaller so that less time is
wasted commuting and transport is cheaper (not to mention that highly
efficient public transport becomes viable).

So in real resource terms, urban sprawl is more expensive.

But since land is still a limitation and zero-sum, competition can drive up
housing costs in attractive dense urban areas to the point where it more than
cancels out the efficiency gains of the urban density, and the cost of living
in the urban area to the individual becomes higher than the sprawl.

This is why some sort of collective planning is required to make sure that as
much as possible of the efficiency gains of urbanization are actually
realized. This means having proper infrastructure mostly in terms of public
transport.

(Of course, the other part of it is that you need to be careful not to look at
just housing costs in the first place. For example, I don't even have to pay
for a car, and I benefit from city infrastructure in many other ways.)

