Saturday, May 5, 2012

Why is there a compensation-productivity divergence?

If you haven't had a chance to look at the section of our paper dealing with the great divergence between productivity growth and wage growth, it's really worth a look.

It is one of the great "mysteries" most trained economists struggle to answer. Essentially, the issue is contained in this chart, which summarizes a tendency well known to economists:

(click chart for larger version)

Value-added per worker tracks the large growth of productivity over the last 60 years. Compensation (ie wages + benefits) followed the same trend until the early 1970s. From the 70s to today, although productivity continued to grow, real compensation has stagnated.

Despite the fact that this divergence is well-known to establishment economists, it is usually explained only vaguely. In fact, many (if not most) economists assume - despite all empirical evidence to date - that it is a process which will reverse itself over time.

Here at Inequality 2012, we are skeptical. Many of the things which are ascribed to "immutable laws" and "invarient proportions" by economists, are - in the view of the political economics we advocate - the result of political forces, not economic ones. This is to say that they are the result of human activity of a conscious, self-aware type, rather than to an "emergent" order of the type ascribed to the "invisible hand."

This difference is not trivial. Establishment economists continually warn of the futility of certain types of political intervention (and their "unintended consequences"), and maintain that until dis-equilibriums are allowed to "work themselves out" no intentional intervention is useful. Prominent among these "immutable realities" of the market are the wage share and the capital share.

Of course, the great irony is that where there can be shown to be large changes in these "immutable" proportions over time - and these changes can be linked to legal and structural changes - the changes themselves are usually defended as a "necessary adjustment period". See, for instance, the persistently high unemployment rate since the economic crisis of 2008...

It is past time to dig beneath these foolish shibboleths of professional economics. Beginning to understand the dynamics of such a large aggregate change as the one described in the chart above requires first of all, understanding its component parts. Do they move in harmony, or a contradictory fashion?

To begin this needed process, we will be inviting a guest blogger from the inestimable Market Earth to examine some recent research which sheds some needed light on this little-understood dynamic. Look for his post soon.

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