Good For What Ails Us

On the other hand I tend to agree with the editors of the Economist:

From mid-2009 to the end of 2017, wages and salaries grew by only 2% a year on average. That outpaced inflation, but mainly because petrol prices slumped in 2014. Today, however, paycheques are fattening faster. In the year to the first quarter of 2018, wages and salaries grew by 2.9%—equal to the average growth, though hardly the quickest, seen during the 2000s.

Plenty of outside opportunities give workers negotiating power even without labour unions, which have been in near-terminal decline. In May 2.4% of workers quit their jobs, the highest figure since 2001—good news in an economy that has been plagued by falling dynamism. Job-switchers are banking median pay rises of nearly 4%, according to the Atlanta Fed. In the jobs boom of the late-1990s, overall wage and salary growth reached 4.3%.

At that time, fast productivity growth enabled wages to boom without provoking inflation. Yet the second benefit of economy-wide labour shortages is that they may precipitate faster productivity growth, which has been disappointing in America—and in other rich countries—since the financial crisis. If less profitable firms have to fold because they cannot pay enough to attract workers, their labour and capital can be put to better use. A similar process can take place within firms. Plagued by resignations, Dunkin’ Donuts, a purveyor of starch, sugar and caffeine, recently asked its ex-employees which tasks they disliked most, and then automated the dullest, such as writing labels and checking the quality of coffee grounds. Less prosaically, worker shortages might encourage firms to adopt path-breaking technologies such as artificial intelligence.

A labour shortage is also likely to reduce inequality. As wages stagnated, corporate profits—and stockmarkets—touched record highs. That has contributed to a feeling that the economy has tilted towards capital and away from labour. From 2000 to 2014 labour’s share of national income fell from just over 57% to below 54%. If rising wages reduce profits, labour’s share could yet rebound. Moreover, the biggest wage gains in a tight labour market tend to accrue to the poorest workers. Full-time employees at the 10th percentile of the income distribution are earning almost 4% more than a year ago.

Firms are also reaching into untapped pools of labour. For years policy wonks have worried about rising disability rolls. Today nearly 10% of disabled workers who were outside the labour force a year ago are employed, a figure that has been steadily rising. There have been scattered reports of firms hiring more ex-convicts. Even a 30-year-old jobless man who recently gained notoriety after his parents went to court to evict him was offered work by a pizza chain as a publicity stunt.

Those are the reasons I’ve advocated the policies I have. They are intended to tighten the labor market. In addition we either need to relax the caps on certain jobs or else tie pay raises in those jobs to increases in productivity.

There will be a difficult transition while whole sectors in which we don’t have either competitive or comparative advantages are de-emphasized while areas in which we can be competitive or have a comparative advantage receive more. The end product will be more efficient, wealthier, and more equal. The alternative is remaining on the road we’ve been on which leads to a small aristocracy, a large impoverished peasantry, and a struggling middle class.

10 comments… add one
  • Guarneri Link

    I held my, um, keystrokes because I thought this post would get quite a response. I find myself largely in agreement, and the disagreements are of a technical nature (eg the late 90s Jobs boom is a poor benchmark as it was a bubble)

    The disability rolls observation is one I’ve made for quite some time. Government set the disability benefit too high. I have no idea what relaxing caps or tying wages to productivity means. But it sounds like Central management, perhaps to be housed next to the Ministry of Silly Walks. Otherwise, change is hard. It’s messy. People hate it. But it is necessary. As you observe, we will come out the other side better off. I’ve made a living off of it.

  • There are two ways of looking at SSDI. You’ve presented one of them. Here’s another.

    SSDI may be the unemployment insurance of last resort. When jobs vanish in the millions as they did during the Great Recession and people can’t find new ones when unemployment runs out they’ll go on disability. What the high disability rolls may be telling us is that a lot of people work hurt.

    They may both be true simultaneously.

  • Ben Wolf Link

    If public benefits disincentivized work, logically, total elimination would be the most effective solution.

    The British attempted this exact policy in 1832 with the New Poor Law. All assistance was ended unless the individual joined the labor force in the form of the workhouses, as good a commodification of labor as anyone is ever going to get. The result was a collapse in wages, increased poverty and a social backlash that created the British welfare state.

    If the extreme didn’t work, fiddling at the margins certainly won’t. So the far better alternative is to make a deal with those on SSDI in the same way Italy makes a deal with those on unemployment benefits: if you find a group of ten like-minded people, you will receive your benefits as a lump sum which you as a group can use to start your own business. This not only empowers people to control their own work, it further tightens the labor market by denying employers those ten employees.

  • Andy Link

    According to the charts here, ~75% of those on SSDI are over the age of 50.

    And in the state-by-state chart just above that, there is a huge range in the percentage of beneficiaries by state with Utah, Alaska and Hawaii at the lowest with under 3% population. Alabama, Arkansas and West Virginia are the highest with well over 8% of the population on SSDI.

    The two most common disability conditions for workers are “mood disorders” (13%) or “Musculoskeletal system and connective tissue” (29%) disorders.

    To me it all makes some intuitive sense for a variety of reasons, but it’s hard to see the complete picture.

  • Andy Link

    Also the total number of people receiving SSDI has doubled since 1996, while the population has grown by only about 23%. The average age of workers receiving SSDI has also grown from 50 years old to 54. I wonder if a lot of this increase is just demographics.

  • If public benefits disincentivized work, logically, total elimination would be the most effective solution.

    As with most things, a balance is necessary. There is rarely a grand master stroke.

  • steve Link

    The problem here is clearly Tennessee. Note that 4 of the 6 states with the highest disability rates touch Tennessee, and West Virginia almost touches. It looks like the state is the carrier of the disability germ. Maybe it is the Jack Daniel’s? Maybe we can explain Maine if we look at its liquor consumption.

    Steve

  • Some of what’s at issue is economic, some is cultural.

  • PD Shaw Link

    This includes a county level map of where disability claims increased:

    https://www.bloomberg.com/news/features/2016-12-16/mapping-the-growth-of-disability-claims-in-america

    Also states: “In a 2013 paper, David Autor, an economist at MIT, and his co-authors wrote that Social Security disability insurance was the single biggest source of federal transfers into areas that had been directly affected by trade with China and Mexico.”

  • If I’m not mistaken those much-affected areas in Missouri and Arkansas are chronically impoverish counties where iron and bauxite (aluminum) mining were a significant activity.

    That certainly corroborates my point about disability being the unemployment insurance of last resort.

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