
The Future of Work: Why Wages Aren't Keeping Up - bpolania
http://www.psmag.com/business-economics/the-future-of-work-why-wages-arent-keeping-up
======
roymurdock
Robert Solow, the author of this article, is one of the most well-respected
economists of his generation. He derived the "Solow Growth Model" which
underpins a good deal of modern macroeconomics. [1]

Here, he states that it is customary to think of the value of a firm in terms
of (1) returns to labor and (2) returns to capital. He argues that there is a
third factor, (3) position in the market, that provides a rent to the owners
and shareholders of the company. Just as a title/deed provides the owner with
a geographical rent opportunity, regulation creates an opportunity for a
company to extract an abstract sort of monopolistic rent within a market.
Estimates of this component of rent lie between 10-30% of GDP, and it changes
as a function of regulation.

He argues that the division of this rent "has been shifting against the labor
side for several decades" starting under the Reagan administration, due to (1)
the decline of unions and collective bargaining (right to work laws,
"hardening of business attitudes") and (2) the "casualization" of labor, i.e.
the increase in part-time/contract-based labor that many companies are able to
force onto a workforce that would, in many instances, favor full time
employment. These casual workers "have little or no effective claim to the
rent component of any firm's added value."

In summary, the aggregate workforce is losing bargaining power whereas the
aggregate business owners (investors) are gaining bargaining power within the
economy, allowing the investors and owners to carve out a larger share of rent
profits.

While Solow does point out that international competition and "the biased
nature of new technology" both play a role in this phenomenon, he strives to
emphasize the importance of internal social change in the division of economic
rent.

Personally, I think that he is dancing around a much more controversial
thesis: inequality is a direct result of poor government regulation and
oversight (starting with Reagan) which is due to a deterioration of the
separation of powers between the public and the private sectors as corporate
owners and investors have been able to buy influence in Congress and further
support/entrench regulation that favors their own interests.
Unions/collections of workers no longer have the power to combat corporate
interests at the political/legal level and are being dismantled/shafted which
leads to many individual laborers being shafted as well, which is the cause of
the nonexistent wage growth.

[1] [http://www.unc.edu/~jbhill/Solow-Growth-
Model.pdf](http://www.unc.edu/~jbhill/Solow-Growth-Model.pdf)

~~~
mc32
That could perhaps explain this phenomenon in the U.S. but this phenomenon is
not solely expressed in The US. It is exemplary in the U.S. but it is also
seen in more socialist countries as well. China, Brazil, as well as European
economies.

~~~
roymurdock
I think it would be hard for you to argue that workers have more rights/power
in China or Brazil.

China is socialist only in name. They are an economic powerhouse because the
ruling class has fully embraced capitalism in order to exploit its large labor
force.

Brazil has a long history of corruption and poor regulation/enforcement.
Slavery is still a very large issue in the agricultural industry there, which
makes up a large portion of the economy.

I'd love to see any data that you have that supports your thesis about the
prevalence of this phenomenon in Europe despite a fairer split of economic
rent due to fair labor laws.

------
littletimmy
Why would wages ever keep up with productivity? Wages will always be a race to
the bottom between employees who have to work to not be homeless. The
capitalists can exploit this to make wages as low as possible.

Productivity has nothing to do with it.

~~~
merpnderp
The means of production have never been more accessible. The ability to learn
new skills/trades has never been easier. If the average person can't take
advantage of them, then it probably has less to do with capitalism and more to
do with the government and corporatist conspiring to keep them out of the
game.

~~~
zajd
Learning a new skill or trade doesn't give you access to the "means of
production", capital does. And inequality is as bad as it's ever been over the
past 50 years. A few tech startup darlings doesn't change that.

~~~
jerf
Learning a new skill or trade _is_ capital. Capital is not just hard
equipment. To the extent that was an acceptable approximation in the 20th
century, it's less so today.

To forstall the next likely objection, no, of course it is not the _only_ form
of capital. And "less so" != "completely the opposite of". And further,
obviously, learning a trade isn't millions and millions of dollars worth of
capital, nor does it instantly catapault you into the leagues of the wealthy,
just because you learned how to fix plumbing or write code. And it obviously
isn't liquid.

But it _is_ a form of capital.

If you don't understand this, you can't understand unions. If labor doesn't
have this capital, then unions can't work, because if labor really are just
interchangable cogs that bring nothing but mere clock time to the equation,
then labor has _no_ bargaining position whatsoever. Unions only work because
labor has this illiquid capital to bargain with.

(There are some obvious further elaborations on this theme, such as the way
the capital gets devalued by increasing the supply by globalization, and the
continuous importation of cheap labor via illegal immigration. IMHO there's a
certain amount of contradiction in being shocked at how labor is devalued in
the market place and being pro-"open borders". It may not be the only cause
and effect, but it's certainly involved.)

~~~
zajd
I never said capital was simply hard equipment, but I'd like to hear what your
definition of capital is that "learning a new skill" falls under that? I mean,
we're talking economics here so there's a level of interpretation for
definitions, but I've never heard of someone claiming that skills are capital.

It feels like you're going with the "Everything is capital" route, which
devalues the word in the first place.

~~~
hderms
He's using the notion of "human capital" which I think is clearly different
enough from ordinary capital so as to deserve a different term. Human capital
can beget ordinary capital if someone works hard for many years, saving their
money and reinvesting it, but your average office worker is no more a
'capitalist' than a temporarily homeless man looking for work. Human capital
seems differentiated by the fact that it ultimately is traded on the market
for wages and generally doesn't translate into any kind of meaningful
ownership of the fruits of capital.

~~~
jerf
"He's using the notion of "human capital" which I think is clearly different
enough from ordinary capital so as to deserve a different term"

Sort of yes, sort of no. It's important to understand that "physical capital"
isn't some sort of magic pathway to wealth, either. If by some weird turn of
events I suddenly came into possession of a 20-ton press, it isn't going to do
me any good, and just about my only avenue to producing money from it is to
sell it to some entity that does know what to do with it.

A great deal of "capital" in the industrial world is relationships,
organization, and the ability to apply human capital. Simplifying that to
"physical goods" leads to weak thinking and bad policy.

------
mc32
With globalization and the lifting from abject poverty the greatest numbers
and percentages of people, should we continue to see wage growth in areas
where people are relatively better off? Should we not expect some
normalization, a meeting of levels?

It's a bit selfish to think that the fist world should continue to get richer
while the poor remain poor, which is what protectionism would get, alongside
stagnation.

Another sidepoint, when people get wealthier the more they spend and the more
they contribute to resource depletion. I'm of course in no position to even
guess what the optimal average wealth would be but I'm sure having everyone
with too much disposable income leads to wastefulness.

On the other hand, let the people at the bottom catch up and let them breathe.
That's what we should be pushing for.

~~~
jahnu
I agree that the rich of the world are morally obliged to help the rest catch
up. The analysis you put forth suggests the wages that otherwise would go to
the middle and working classes are going to people in developing countries but
is it not also true that whilst wages are stagnating the wealth generated by
increased productivity is largely accumulating amongst the already super rich?

~~~
mc32
Yes some of the wealth which could otherwise could go to the workers of first
world countries is going to the upper management of these companies, but I
think that is made possible because of globalization. If the domestic costs
get too high, they can move production to Mexico, or they can move development
to Russia or India. This keeps a lid on wages and at the same time allows more
for the management class. If we were to see international competition in
management workers, they too would experience stagnation and companies would
see increased profits.

Let's look at the wage growth of professionals who implement barriers to entry
from foreign trained professionals like doctors, lawyers, etc. Have their
wages stagnated?

~~~
jazzyk
As for doctors, yes, stagnated to some extent (albeit at a nice level :-)).

But the reasons are entirely different - the cause is the growing, cancerous
(and greedy) layer of bureaucracy on top of actual producers (doctors). But
that's yet another topic.

------
sideband
I'd argue that flat wages are not (entirely) a failure of the labor market and
are partly a consequence of modern life requiring less resources.

Think about it: When was the last time you spent 15 minutes on the phone
getting directions to someplace, got lost, had to find a payphone or stop
places asking for directions, and then had to ask around to find somebody once
you got there? Or paid a travel agent to plan your next vacation? Bought an
expensive widget because at the only store you could find it at and were
willing to drive to not knowing you could get it for half as much in the next
state over? Used up a few hours looking for a specialty contractor in the
newspaper classifieds or yellow pages and then had a bad experience because
you had no way to know what their previous customers thought of them? These
used to be very common experiences.

For many people in America, modern life requires far less time and money to be
comfortable than it did just a few decades ago and as a result workers are
seeing less and less incentive to push for higher wages.

~~~
minikites
Except the cost of necessities (energy, housing, etc) is still rising:
[http://www.mybudget360.com/wp-
content/uploads/2014/10/colleg...](http://www.mybudget360.com/wp-
content/uploads/2014/10/college-tuition.png)

Computers and TVs are cheap but everything else is expensive.

------
jokoon
We live in an age where technology is always progressing, and it constantly
make engineers and technicians obsolete. I think the bottleneck in our economy
is teaching higher level of scientific knowledge. The money has always been
into technology being a big lever for profit, but it has never been
accountable for the social cost.

I do think that people today can't cope with the fact that their work position
can be made obsolete and that they should be asked to learn new things again.
Obviously it's not anchored in how labor works. I think even workers should
spend some time learning new things to not become obsolete, something like
1/20 of their time.

I guess MOOCs will be one solution, but I kinda doubt it. I don't think that
most people really like to work in tech, but it's going to be a transformation
that will keep happening, and I don't think there will be a stop to it.

~~~
richmarr
> The money has always been into technology being a big lever for > profit,
> but it has never been accountable for the social cost

Totally. A good start might be large companies paying equitable taxes.

~~~
paulhauggis
Companies already pay a huge amount of taxes. When you see that ge didnt pay
taxes, its because of loss rollover.

~~~
logfromblammo
In other words, it is because the tax code allows those with a greater
investment in studying the tax code and in playing stupid accounting shell
games to pay less in taxes.

It would likely be preferable to instead tie the effective tax rate more
directly to those activities that actually address useful economic activity. I
am leaning increasingly towards the fairest tax being a function based upon
one's increase in wealth (subtracting some fixed amount for actual humans--
probably median household income) that asymptotically approaches 50% as your
positive change in wealth approaches infinity.

If you earned $10000 and spent $10000, any tax would just have to be offset by
a subsidy somewhere else. If you earned $100000 and spent $100000, you're at
least stimulating your local economy, and probably making wiser choices while
spending your own money than anyone else would in spending other people's
money. If you earn $100000 and spend $20000, that leaves $80000 that you
didn't actually _need_ to use _this year_. Everyone else would probably prefer
that you had spent it. So maybe you're allowed a tax-free increase of $50000,
and you lose $10000 of the remaining $30000 to taxes. If you earned $10M and
only spent $100k, you might pay $4.925M for the tax. The same equation would
still work for corporations, because paying dividends would count as spending
for them. You end up only taxing the winners in the economy--those who are
getting richer--and never more than they could reasonably afford to lose.

How could such a system be subverted? You would have to set up a system where
you could control property for your own benefit without legally owning it.
You'd probably see a resurgence in executive perks, such as company-provided
housing and cars. It would definitely blow more air into the education bubble.

~~~
prostoalex
> I am leaning increasingly towards the fairest tax being a function based
> upon one's increase in wealth

Tax system are lenient on the wealth (vs income) as one is expected to
accumulate wealth and exit the workforce. Taxing wealth seems like a working
idea when you're 20 and have job offers chasing you, less so when you're 70
and plan to spend the next 20-30 years in retirement.

~~~
logfromblammo
Taxing the increase in one's wealth is neither a property tax nor an income
tax. The taxable amount would be income minus consumption.

The deduction for living people was intended to account for a reasonable rate
of retirement/emergency saving. Corporations don't need to retire, so they
don't get it.

~~~
prostoalex
> The taxable amount would be income minus consumption.

Doesn't this result in all sorts of bubbles, as people scramble to manufacture
consumption, from real estate to precious metals?

Also, taxing the increase seems to benefit wealthy offsprings and trust fund
babies in general.

For most Americans a change in wealth is also tied up to non-liquid assets,
like their house. Let's say you're a retiree living in an area that's been
lucky to undergo a real estate boom this specific year. Your house wealth went
up 7-10%, yet there's no extra cash flowing in to account for this tax bill,
now what?

Moreover, with housing being the focal point of wealth accumulation, the
government would receive its tax revenue when the things are up in economic
cycle, but come the first recession/correction, and not only there are
problems with the economy, the source of government revenues has dried up as
well.

~~~
logfromblammo
If you buy gold, you have the gold as an asset. If you buy real estate, you
have the property as an asset. That's not consumption. If you buy a steak and
eat it, that's consumption. You no longer have the steak, and the butcher
doesn't owe you anything else.

To avoid stupid government accounting rules, the value of assets would have to
be fixed at what you paid for them until they are sold in an arm's-length sale
on the open market. So if you're a retiree and you never sell your home, you
would not be taxed on its increase in value. There would probably be something
made available like a less-parasitic version of a reverse mortgage, to absorb
increases in value gradually, so that it could work with the annual real
person deduction.

~~~
prostoalex
That seems reasonable, and it's how capital gains tax works at least in the
US.

------
dataker
This is a very simplistic view of capitalism and ignores larger issues.

One ignored issue is inflation itself. Although it had a profound impact in
the middle class, it has nothing to do with 'evil business owners' trying to
make more money.

Then, unions shouldn't bargain with monopolistic corporations. Why? Because
monopolistic corporations shouldn't exist 99% of the time. That's the root of
the problem, not the lack of analogous monopolistic labor unions.

~~~
clownio
You realize the person who you accuse of having a "very simplistic view of
capitalism" (the author) has been studying economics for most of his life and
won a Nobel Prize for it? Currently a professor of economics at MIT? Etc...

~~~
dataker
Ad hominem.

One could argue the same about Paul Krugman.

~~~
gjm11
I don't think I've heard "ad hominem" used to describe _positive_ assessments
like this before. In any case, this isn't one. No one is saying "Solow must be
right; he's an outstandingly eminent economist"; but it's perfectly reasonable
to say "It's monstrously implausible that Solow simply doesn't understand
capitalism; he's an outstandingly eminent economist".

And yes, one could _and should_ argue the same about Paul Krugman. Of course
it's possible that someone like Solow or Krugman is terribly wrong, but
barring traumatic brain injury or something it's absurd to suggest that either
is wrong _on account of not understanding basic economics_.

... Of course it's possible that Solow or Krugman understands something very
well but then chooses to present an oversimplified version (for honourable
reasons, like not intimidating their readers; or dishonourable ones, like
wanting to hide something that works against their arguments). If _that_ is
what you were suggesting -- not "Solow's understanding of capitalism is
simplistic" but "Solow probably has a sophisticated understanding of
capitalism but is presenting a simplistic version, and a better one would
invalidate what he says" \-- then indeed pointing out that all the evidence
suggests he's an extremely skilled economist isn't to the point. But what's
wrong with it still isn't that it's "ad hominem".

~~~
stillsut
> is terribly wrong, but barring traumatic brain injury or something it's
> absurd to suggest that either is wrong on account of not understanding basic
> economics

There are plenty of eminent CS prof's that couldn't push a HellloWorld to
Heroku, or competently perform entry level software development tasks.

Like the SE vs CS divide, "job creators" disagree with academic economists on
the axioms of "basic economics".

------
lordnacho
The negotiation angle has long been missing from economic discussions. The
classic line is that you get circa what your marginal productivity is, but
that's under some rather stringent assumptions. Also it sidesteps how exactly
you calculate marginal productivity. There's very little talk about the
dynamics of wage settings, ie how do you actually reach a number?

From what I can see, as a guy who's been in a few businesses, the salary
amount starts off with just a simple assumption: we'll pay roughly whatever
everyone else is paying for a certain job. You then go and find a bunch of
likely-sounding candidates and bring them in to interview. (OT: This is a
complete mess, because you're not as good at this as you think, even taking
into account lordnacho's law.) You will fall in love with one or two of these
people, probably not more. You'll then throw out a lowball number on the game
theoretical rationale that they'll either ask for more or be happy with it. If
there are special circumstances like the guy being a recent grad, we can say a
bunch of stuff like "you're learning a lot from us, you need us more than we
need you" (yeah, it's a shitty thing to say) and count on other bosses
thinking similarly. The candidate can then take it or leave it, or if they
have another offer, use that to get a bit more. But it's really a silly dance
around a fairly static anchor, silly because people can get pissed off over
small amounts of money. I've worked with more than one guy who thought he was
a great negotiator because he managed to talk some guy down by a few grand,
even though a $700M hedge fund makes that amount in about three hours.

Now why would wages ever change, if this is roughly what happens? I never came
across a situation where there wasn't a huge queue of people wanting whatever
jobs we put up. In fact, there was no real rationale for setting any
particular salary, other than "that's the market". My thinking is that
salaries really only go up when companies find zero suitable people for a
given job, or when they get a particularly large number of offerees coming
back to them saying they took some other job.

And what would create a situation where there were very few candidates for a
job?

1) Collective action. Apart from the London Tube, this seems to be out of
fashion. It also seems to be hard to organise something like software devs,
given they live in very different cost areas scattered around the world.

2) Growth. When things are booming, companies get desperate. They can see the
demand, customers are telling them they want product, but they can't get the
staff they need to build the product. But since they can see the demand,
offering a bit more to grab those staff is a bit easier on the executive mind.

~~~
jazzyk
Spot on. I would like to add that the name "labor market" is a misnomer. It is
not a market.

On the one hand you have rich capital providers who DO NOT HAVE to invest
money - they can live off their capital without doing anything.

On the other, you have labor providers, who HAVE to work to feed themselves.

The solution is to reach the "fuck-you-money" savings level. Not that simple,
but not impossible.

------
serve_yay
Capitalism involves a struggle between labor and capital. Or perhaps another
way to say it would be that if capital could do what it wanted without labor,
it would. And capital is winning in that struggle, for most jobs there are
more qualified people than jobs. I don't see why it's so bad to say; this
strikes me as a predictable development of a capitalist economy.

------
phreeza
Please link to the actual article, not the snippet on a blog:
[http://www.psmag.com/business-economics/the-future-of-
work-w...](http://www.psmag.com/business-economics/the-future-of-work-why-
wages-arent-keeping-up)

~~~
euroclydon
Thanks. That article was pretty short. I can't imagine how short the blog was.

Interesting that the author spends most his words explaining the _rent_
concept, then abruptly ends with speculation that the rise of temp workers,
agency workers, part-time workers, basically everyone who is not an FTE, it to
blame for labor not capturing the financial benefit of increased productivity.

The only solution to this problem is going to be through the tax system. If
you hire me to shovel dirt all day long, and one day an inventor sells you a
more productive shovel which you give to me, I don't really _deserve_ more pay
because I'm shoveling dirt better.

But commerce and tax laws are the purview of the democracy, how much money the
business owners need to pay back to society for the benefits they receive, and
also so society doesn't burn their homes and factories down and kill them, is
a matter public policy.

~~~
logfromblammo
I disagree. If I am a dirt-shoveler with a v1.0 shovel, and I can make a hole
with volume of 8 cubic yards in 8 hours, that sets the business expectation
for how much a typical dirt-shoveler can do, and how much it costs to dig an
additional cubic yard of holes. Namely, it costs one hour of dirt-shoveler
labor.

If the v2.0 shovel allows me to dig a hole with volume of 10 cubic yards in 8
hours, that reduces the marginal cost of digging an additional cubic yard of
holes. It now costs 0.8 hours of dirt-shoveler labor.

In the short term, the demand for new holes is unchanged, but the demand for
shoveler labor has shifted left, as its supply is unchanged. In the long term,
the marginal dirt-shovelers--especially those without v2.0 shovels--exit the
market. The supply curve for shoveler labor shifts left, and price goes back
up, as quantity decreases.

Deserving doesn't enter into it. If dirt-shoveler pay per hour does not go up
to reflect the increase in productivity, some shovelers will stop digging for
their living and go do something else (or remain unemployed), because they
will get paid zero for the holes that they are no longer able to dig. The ones
who survive the cull will only be able to demand more pay when someone wants a
hole dug, but can't get anyone to do it at the offered rate.

The cost of a v2.0 shovel is now a barrier to entry to the profitable region
of the dirt-shoveler business. Now extrapolate to mechanized earth-moving
equipment. If you need to excavate a basement for a new building, you hire one
guy with the $100000 v46.3 shovel, rather than 20 guys with 20 v3.1 shovels.
At this point, just owning the shovel is profitable, because that guy can just
rent it out to people who know how to dig holes, but lack the necessary
accumulated capital to be competitive in the business.

But those 20 guys you didn't hire to dig your basement are still out there,
and they're getting hungry. And they're looking at their crappy v3.1 shovels
and thinking, "If I sharpened this edge a bit, it would make a decent weapon,
and I could take that v46.3 shovel by force."

There are many possible solutions, because the problem is making multiple
economic variables (aka human motivations and desires) balance. A change in
the taxation regime is only one, and not necessarily the best one.

~~~
euroclydon
I wasn't sure if you were moving the goalposts through your first five
paragraphs, but paragraph six confirmed it: In my hypothetical, the employer
owns the shovel. In yours it's the worker.

If you own your own tools that you use for work, you're probably an
independent entity like a contractor, not an employee. You seem to confirm
this at the end of paragraph six with the example of a homeowner hiring twenty
shovel laborers -- surely this homeowner does not intend them as FTEs.

~~~
logfromblammo
The shovel doesn't care who owns it. If the employer owns it, the employee
gets paid less because the shovel rental is effectively deducted from his pay.
If the worker owns it, the end consumer can (theoretically) pay less, because
the worker does not need to pay any rent on his tools. The purchase cost of a
better shovel is a barrier to entry, not a marginal cost of production.

By the time you get up to giant mechanized excavators, the barrier is so high
that a guy with just a spade and a dream can never get that far, because
anyone either renting or owning a better tool can outcompete him at every
turn, and the rent on a better shovel may be such a large proportion of the
cost of shoveling that the laborer using it could never accumulate enough
savings to buy his own tool.

That's where you have to rely on an external force to change the status quo,
"force" being the key word. The guy who doesn't play nice gets metaphorically
whacked in the head with a shovel. Taxes are just one of many ways to do that.

~~~
euroclydon
If the little guy gets a mechanized excavator, he's not so little any more.
And wouldn't that be his goal anyhow? Why would anyone want to go through the
trouble to buy one, if there were not a high barrier to entry?

