Thursday, February 28, 2008

Pay, Productivity and Power

The basic, Econ 101 story of wages is that the value of the last chunk of work you do will be your basic compensation in an economically efficient industry. The slightly more complicated story is that since in most jobs, production value is fairly constant over relevant time horizons and the cost of identifying the marginal value is fairly high (how do you want to assign the value of the database conversion meeting I went to yesterday afternoon, or the training demonstration I'm doing this morning), compensation is roughly in line with average output over the long run.

Productivity is basically the ability of people to do stuff per unit of input. Business productivity is the ability to create value per staff hour along with the changes in procedures, technology and materials. The basic Econ 101 story on productivity is that as productivity increases, wages should move roughly in lock-step with productivity. Sometimes wages and total compensation will get ahead of productivity, sometimes it will lag, but both should self-correct over the intermediate term.

Dani Rodrik is pulling a very interesting graph from Frank Levy at MIT that indicates this is not the actual case. In it over the past generation, prime working age men are seeing a significant increase in productivity, but none of the educational groupings are seeing their compensation increase at the same or faster slope than the general business productivity increase trend.

Remember, this graph is talking about total compensation which includes employer contributions towards health insurance. We all know health insurance is increasing at rapid rates for all workers, and since this is for males age 35-44, the top of this cohort is starting to get expensive to insure. People are working harder, producing more, and even for graduate degreed individuals, staying even or falling behind in real cash wages.

The basic Econ 101 or 102 story is falling apart on the evidence here. There are a couple of basic explanations that could make some sense. The first is that the productivity statistics are overstated, so groups are on average making their marginal value and this compensation tracks well with changes in lowered productivity. The second explanation is a power imbalance as we know corporate profits as a proportion of the economy has increased to multi-generational highs in the past couple of years, and that unions have become ever weaker (there is good news on the slight 2007 increase in union density, but it is not a trend yet.)

The New York Times is looking at recent compensation trends and the combination of high inflation and a slowing economy is decimating real wages right now for the general population.

People in the prime of their working life are getting screwed and they know it. They are getting screwed in the short term and they are getting screwed in the long term.

No comments: