The bad economic news for the middle class keeps on coming, and they may need more financial counseling as a result:
The work force was more efficient last year with productivity rising at the fastest pace in eight years. Labor costs fell for a second straight year, something that hasn’t happened in nearly five decades.
Productivity, the amount of output per hour of work, rose a strong 3.6 percent in 2010 after a 3.5 percent gain in 2009, the Labor Department reported Thursday. Both years represented the best showing since 2002. Labor costs dropped 1.5 percent last year after a 1.6 percent decline in 2009.
In a nutshell: Since the mid-1970s, workers have increasingly been contributing more and more to their companies while receiving little additional benefit (at least as far as wages) in return.
Pundits and economists have always wondered why it is necessary now for a household to have two incomes to make ends meet. There are many possible answers.
Standard responses (mainly on the right end of the political spectrum) have been that the influx of women into the workforce placed downward pressure on salaries by increasing the supply of labor (see “Women, Employment, and Economic Scarcity”) and that increasing levels of taxes have reduced corporate profits as well as employee take-home pay. The former is both controversial and worthy of further study; the latter is flat-out wrong.
Tax Tricks breaks down U.S. income-tax rates over the past several decades:
Angry Bear presents a chart showing corporate-tax data from the U.S. Bureau of Labor Statistics (see the line in blue):
Both income-taxes in all brackets and corporate taxes have been at historically-low levels since the late 1980s, but the productivity-wage gap has still continued to increase. Despite what pundits who fail to understand the Laffer Curve believe, neither individuals nor companies are overly taxed by historical standards. Businesses are hoarding cash rather than investing in capital or labor, causing the higher middle-class to become the shrinking middle-class.
So, the answer must lie elsewhere.
First, it is important to analyze the trends in both increasing productivity and the stagnation in the growth in real wages (income after adjusting for inflation) separately. The growth in productivity is more obvious and can largely be attributed to the benefits of free trade and globalization as well as technology, which allows companies to hire fewer people in general (at least in America) and individuals to work more efficiently. (Just imagine, for example, how much less work you could accomplish today if you did not have a computer.)
However, the lack of an increase in real wages is more complicated. According to 2007 report from the Economic Policy Institute:
Changes in real compensation result from a broad set of factors, including:
• workers’ bargaining power, which is closely related to the tightness of the job market and the strength of unions and other labor market institutions, including the minimum wage;
• changes in the rate of inflation;
• the cost of fringe benefits, including health care; and
• productivity growth
If EPI is correct, then the poor trend in real wages since the mid-1970s is a result of issues including unions having less power, little increases in the minimum wage, and increasing costs of benefits like health insurance. The latter issue is important. As I wrote in a prior post explaining the Generation Y work-ethic:
The decline in real wages was offset by an overall increase in other forms of compensation (see above) including “health care benefits, employers’ share of social security contributions,” and so on over the last several decades.
In other words, companies began paying less cash and more benefits to their workers. (I am reminded of a certain newspaper for whom I worked that compensated for the abysmal wages by giving reporters free theater tickets that were likely donated by advertisers.) In fact, the expensive cost of benefits to firms is one of the economic reasons for national health-care.
However, this trend likely did not help workers at the lowest end of the ladder who received little or no benefits. In addition, the benefits have largely disappeared in the recent economic downturn — so that many, if not most, workers now receive both less cash and fewer, if any, benefits. (See a related post on “Understanding Gen Y.”)
In such an environment in which workers are overworked and underpaid (with justifiable outrage), the result is macroeconomic chaos. As Ravi Batra, professor of economics at Southern Methodist University, notes:
Without this balance [of supply and demand], there is either high unemployment or high inflation. The main source of supply is labor productivity, whereas the main source of demand is the real wage, or people’s purchasing power in Sarkar’s nomenclature. When productivity rises, production or supply goes up and when the real wage increases, consumer spending, and hence investment spending, go up. Because of this investment and new technology, productivity grows over time, which means supply rises over the years. Therefore, demand must also grow proportionately to maintain the economic balance, implying that the real wage must rise in proportion to productivity…If the real wage fails to grow as fast as productivity, then over time, a wage-productivity gap develops and [supply becomes greater than demand]…
There is another way through which demand can be raised—new debt. It is an artificial way, and cannot be used forever, but it can postpone the problem for a long time, while the potential economic imbalance builds and cumulates. From 1981 on, U.S. budget deficits, with Greenspan and company advising President Reagan, grew apace. Economists called it fiscal policy, but in reality it was a debt-creating policy. This is how the supply-demand balance was maintained in the presence of the rising wage gap.
In other words, consumer made up for the lack of growth in real wages by borrowing money (often for needs, but sometimes for wants). The result was a credit market whose level of debt — when described as a percentage of GDP — vastly surpassed that of the Great Depression:
And we all know how that turned out (although there were other factors as well). The United States may indeed be facing a return of the Great Depression over the long-term. (For more information, see “Debt Bubble: Will the Market Crash because of College Costs?” and how a student-loan deferment and student-loan repayment plan will be needed to help to fix the economy.)
Still, there is an obvious point: If companies can become more productive and efficient by squeezing as much work out of each employee as possible, that is good for businesses, right? After all, the entire point of a firm’s existence is to maximize profit by increasing revenue and limiting expenses as much as possible.
Well, sort of. As I wrote in a post on My SEO Software on how to work for yourself with top blogs and famous blogs, too many companies today have been focusing on short-term success at the cost of long-term value. As much as theories of efficiency can help managers, the fact remains that employees are not machines — they are people, who not always conform to rational metrics. (The same holds true in the stock market — as much as technical analyses and P/E ratios can help investors, the fact remains that irrational emotions like fear and greed play important roles as well.)
Squeezing as much efficiency as possible works to a point, but after that point it can become inefficient — and even destructive. As Evan Robinson, writing at International Game Developers Association’s website, notes:
More than a century of studies show that long-term useful worker output is maximized near a five-day, 40-hour workweek. Productivity drops immediately upon starting overtime and continues to drop until, at approximately eight 60-hour weeks, the total work done is the same as what would have been done in eight 40-hour weeks.
In the short term, working over 21 hours continuously is equivalent to being legally drunk. Longer periods of continuous work drastically reduce cognitive function and increase the chance of catastrophic error. In both the short– and long-term, reducing sleep hours as little as one hour nightly can result in a severe decrease in cognitive ability, sometimes without workers perceiving the decrease.
Robinson presents an interesting chart:
He notes:
Depicting P, the “long-period variations (with the length of the working day) of the marginal value of a fixed quantity of labour” OX is increasing hours worked in a day and OY is increasing value. If On hours are worked, the total value produced is the area Onda… Observe that the height of the curve P represents worker productivity (output per unit time at a given number of hours worked per day).
Astute readers will note that there is a point, b , where working more hours doesn’t create more value. In fact, after b , each additional hour worked produces negative value.
In layman’s terms: As time progresses, worker efficiency (or value or revenue generated) reaches a plateau and then declines. If workers continue to work past a certain point, they actually hurt the company.
Sadly, I doubt that many business owners and managers will ease the workloads that they assign when shareholders prefer large increases in profits each quarter over long-term value. And we have seen what too much greed can do to companies specifically and economies generally.
I wish I had advice to offer except to make a small point. If you cannot work for yourself, try to find a job at one of the best companies in terms of work-life balance. It’s hard for many people out there, so I wish you luck.
