This morning James Joyner has a post on the loss of connection between productivity and wages in the United States:
Real (that is, inflation-adjusted) weekly wages have been essentially stagnant since 1970 while productivity has continued its previous trend. This leads to an obvious question: What happened in 1970 to decouple wages and productivity?
He outlines several candidates for the cause of the change including technology, the end of hard metal-backed currency, globalization, the decline of the labor unions, and the rise of dual income households.
I would propose an additional candidate: the wage and price controls imposed under Richard Nixon.
On August 15, 1971, in a move intended to control inflation, President Richard Nixon announced the first of several policies of federally-mandated wage and price controls, known collectively as the Economic Stabilization Program. Although these moves were thoroughly discredited by 1974, they had dramatic, persistent, and deleterious effects.
For one thing the controls gave further impetus to something that had been under way since just after World War II (and which was also a foreseeable consequence of government policy): increasing non-wage compensation, i.e. employee benefits.
I’m not the only one to propose this idea and in this post I’ll mention several papers that suggest differing explanations for how the wage and price controls could have produced such varied and persistent effects.
This paper suggests that the permanently altered the balance of power between capital and labor:
Nixon’s wage and price controls set in motion the post-1973 decline in real wages of U.S. production workers. The government-imposed wage- and price-setting institutions in place from August 1971 to April 1974 shifted the balance of power between capital and labor. When these formal institutions were eliminated in April 1974, the government-caused shift in the balance of power between capital and labor was not reversed. Rather, this shift in the balance of power was maintained through informal institutions, and these informal institutions set in motion the decline in real wages that started after 1973.
This paper attributes the high-inflation and low growth of the 1970s to a series of supply shocks induced by the imposition and removal of wage and price controls:
Blinder (1979, 1982), Gordon (1982), and others concluded decades ago that the two OPEC shocks, the two roughly contemporaneous food price shocks, and the removal of wage-price controls in 1973-1974 played starring roles in the macroeconomic events that constituted the Great Stagflation. Money and aggregate demand were, by comparison, bit players. This supply-shock explanation, which we summarized in the ten points in the Preamble, was never intended to exclude influences from the demand side, whether monetary or fiscal. But it did take the empirical view that, compared to the powerful special factors that were at work, conventional demand-side influences were minor during the years from 1973 to 1982.
That, in turn, had the effect of presenting advantages to sectors that were not so vulnerable to such supply shocks, e.g. finance, insurance, real estate, and healthcare, over sectors that were vulnerable, particularly low margin manufacturing. In particular, it was devastating to the domestic apparel manufacturing industry which never really recovered.
This paper, dizzyingly chockful of statistical information, makes a very interesting point. The wage and price controls of the ESP conferred an advantage on companies that, strategically, maximized profits over companies that maximized sales or that pursued target rate-of-return pricing in a way that had not previously been the case. It may seem remarkable now but every large company for which I worked in the 1970s was a sales-maximizer.
Profit maximizing firms are more predisposed to maintaining low payrolls than companies that strategically maximize sales or pursue targeted rate-of-return pricing. That, in turn, confers an additional advantage on larger companies that are better able to maintain the staff necessary to pursue a profit maximization strategy.
Despite the title of this post which those of you who are old enough will understand, I’m not suggesting that the ESP was the only reason for the change in the historic relationship between wages and productivity. However, I do think it was one of the mutually reinforcing factors that contributed to the situation we’ve seen for the last 30 years.
So often it’s been shown when government intervenes, even via good intentions, a flurry of unintended consequences follows which only makes circumstances worse.
Rent control is in the same subset of the ESP, in government’s myopic attempts to create more affordable housing. However, in most cases it has either produced shortages, higher prices for adjacent housing that is not controlled, faster gentrification of areas as wealthier opportunists move into these lower priced housing zones, erosion of the housing stock, and even tenants taking on the mantle of ownership and making their own profits by sub-leasing their apartments for higher prices to others.
If you damn up a river, the water’s still gotta go somewhere.
I just don’t really have the stomach or temperament anymore to deal with what I believe you described as the merry band of commenters at OTB.
There were all sorts of answers proffered. I can’t imagine that most of them didn’t have some effect. The issue is what are the dominating factors. And I find myself in agreement with you, with a tweak.
I assume icepicks reference to the river simply means that people can get cash money, or benefits. To the employer, it’s the total cost of employment. wage and price controls, just like Roosevelt’s wage restrictions, encourage “in kind” compensation.
But it’s completely unclear to me why 1970 or 1973 are picked as the point of divergence. As a veteran of engineering and finance graph reading, I’m thinking mid to late 60s. And what else happened in the 60?s. Great society programs. Again, government doesn’t create wealth, it redistributes it. But from an employers, and an employees perspective, if we are instituting in kind compensation or transfer payments, we have less to provide in cash wages. The cash profit ability doesn’t change for a corporation just because the government gets frisky.
I wish people could understand this when they advocate government programs.
You bring up a good point, Drew, which is that it is often quite difficult to determine when a process actually begins. Effects that are initially very small can compound over time. That the effects are large enough to be noticed doesn’t necessarily mean that’s when the process began.
However, there does appear to have been an inflection point in the early 70s.
When an industrial boiler blows its not because it reached the critical point, it’s because of what proceeded and set things in motion.
Does the study take into account the rise in health care costs? If it doesn’t I’m done, no point in going further.
Look everyone Drew is an optimist! I think that more often than not government reduces income and redistributes misery.
I went to the original source, and in true horribad fashion that I’ve come to expect from the EPI, they don’t tell us what compensation is and switch effortlessly between hourly wage and compensation…in other words no way to tell if benefits are included without doing lots of work or e-mail the original author….typical bullshit that passes for informed commentary.