I found a lot to like in Annie Lowrey’s piece at Atlantic on the seeming contradiction in our present situation, low unemployment and slow wage growth:
The central paradox of the Trump economy is that widespread concerns about labor shortages coexist with widespread complaints about low wages. But economists do not see it as much of a paradox—instead seeing it as a sign of dimming business dynamism and diminished worker power.
However, there are several important factors she skips over and I want to concentrate on those.
First, why is there “diminished worker power”? She points to market concentration, non-compete clauses, decline in union membership, and the possibility that the headline unemployment rate doesn’t really represent the true number of people who are unemployed. Left unstated is that importing workers, legal or illegal, increases the labor pool resulting in a more slack labor market than would otherwise be the case and the sad reality is that we don’t really know whether there are ten million or forty million people present illegally in the United States, working fraudulently or illegally.
There’s something else she misses, something I attribute to having an English major and, in particular, an English major for whom I can find no evidence of ever having taken an economics course, writing your economic analysis. Labor productivity doesn’t spring up spontaneously. It is primarily the consequence of investment by government, businesses, and individuals.
Most consumer spending is consumption (hence the name) but some is investment. If you take a class that will lead to your being qualified for a better job or more pay, that’s investment. Education that does not lead more or less directly to a better job or more pay isn’t investment. It’s consumption. That 18th century Belgian art class may help you lead a fuller, better life but it’s not technically investment. Having that mole removed probably isn’t investment, either.
Most education and most health care is consumption. Whether it’s being paid for by the federal government or by you, it’s probably not investment.
And as I’ve said here repeatedly, IMO our most pressing economic problem is that business investment is inadequate to increase productivity. In preemptive rebuttal, businesses used to invest more at much lower levels of earnings than they do now. For a whole host of reasons, many of which I’ve discussed here over the years, managers have become accustomed to being able to derive more revenue without spending more and changing old habits comes slowly.
Corporate performance and price are judged mainly on quarterly earnings reports, thus, low investment and fierce resistance to pay increases. This may change, as Trump is pushing to change to semi-annual earnings reports, as has been in the news.
Gray
Capex is capitalized, not expensed. Not a big factor in near term quarterlies. As it’s depreciated and taken into earnings over time the real calculation on the minds of management and boards is expected return. And that’s the real issue at hand, is it not?
Did not know that. How about the “Walmart effect”, producers being squeezed by their customers to reduce prices? Whatever the reason wages don’t rise, it has something to do with more aggressive competition than in the past, IMHO.
More competition should drive real wages up as profits fall toward zero, butt that isn’t happening. Instead some producers are being squeezed by their suppliers because they have nowhere else to go. That’s happening particularly in areas like aerospace.
Gray
You have put your finger on two separate issues. Wages is the topic of the day. It’s impossible to believe that immigration is not a factor. Slack labor? Ugh. That’s so well worn here.
Competition driving wages up? Ben, that can only be described as bizarre. That’s not like you.
Guarneri : Shot down my ideas, what are yours?
I’ve actually spent the morning reading about why your waistline gets bigger when you retire, ugh!
Gray
As I said, it is impossible to imagine that immigration does not act to throttle wage pressures in certain job classifications. As far as a reserve of unreported labor. My opinion is that clearly that is probably still the case, a holdover from prior years. However my point of departure with people is that simply increasing wages will draw in people. The jobs Americans won’t do is a real issue. Further, customers don’t care about the prevailing wages of the firms they purchase from. They care about prices. There is only so much a firm can pass through wage increases and expect customers to pay. It’s not much.
Productivity is key. But I really wish I could see splits of capacity vs productivity related capex. I think it has distorted spending measures. I doubt one could do it. The two are closely intertwined. Lastly, I don’t think businessmen have lost their mojo. They simply haven’t seen the returns necessary. I suspect we will see an uptrend if the economy remains strong. But it’s a daunting issue given the current length of the expansion. But the 50% increase in GDP growth recently simply has to give some comfort.
PS. The idea isn’t to shoot ideas down. They were just clarifying remarks.
Drew, if what you say is correct, that immigration throttles wages and also that wages can’t increase much because of prices, then that seems to be a no-win situation. The latter, by necessity, drives the former.
Something’s got to give.
Corporate profits have been pretty strong. They recovered in about 2 years with the recession. Not sure what kind of returns people need to see to invest. We are also seeing less of corporate earnings going to labor, so the money is going somewhere, just not to investing.
On immigration, it looks to me like businesses are using the lower wages they need to pay immigrants to help maintain profit levels. Do they go back to investing more if they cannot have immigrants? eats me.
Steve
Not only are personal consumption expenditures the highest they’ve been in history, they constitute the highest percentage of GDP they have in history. The notion that people just aren’t buying enough to warrant more investment, dammit, simply doesn’t hold water.
The simplest explanation is what I have maintained: managers have become accustomed to getting high returns with a lower level of investment. It’s thought of as the norm. But when business investment is at the lowest level it’s been for the last 40 years other than at the trough of a recession:
it’s not much of a stretch to think that they’re mistaken.
Then again their behavior also supports something I’ve pointed out from time to time: if people are behaving as though we’re in a recession we probably are.
Andy
Let’s take Daves favorite – IT workers. I have no direct experience, but have no basis to disagree with his assertion that hiring H1B visa types will hold down wages for Americans. Is there any reason to believe it will not also pertain to other sectors? However, as I’ve pointed out, in lower skill jobs the notion that Americans just don’t want to go into trades or ag work etc is simply an empirical fact. I seriously doubt you will attract workers by paying higher wages, especially wages that that if reflected in prices will be acceptable to consumers. What will have to give is either corporate profitability (not likely), or sales volume (likely) or offshoring (a current reality).
I should note it will be very situational. Comparing software programmers to tomato packers to home roofers is a dangerous game.
Steve
margin pressure is everywhere. Don’t confuse dollar profits and margins.
Dave
I think you are working with some bad assumptions. $100 in sales of cars, appliances and mining product require a quite different capex profile than $100 in haircuts, clothing, or dining out. Further, I think you really need to consider the capacity vs productivity capex conundrum.
. . . if people are behaving as though we’re in a recession we probably are.
Would explain why we don’t see one on the horizon as we’re in the middle of it.
Guarneri:
Let’s recap.
1. Real business investment is quite low relative to what it has been in other recoveries over the period of the last 40 years.
2. Real personal consumption is high relative to what it has been in other recoveries over the period of the last 40 years.
3. There have been technological developments that have resulted in reduced requirements for investment, e.g. JIT inventories.
4. Increases in productivity are proportional to investment.
5. Wages rise with productivity.
6. Wages aren’t rising relative to earnings.
Those are all facts or axiomatic. Go ahead and connect those dots in a way other than I have—that managers have decided they don’t need to invest as much as they used to get results as good or better than they used to.
One thing you might consider. Your conclusions are based on your experience and your experience is with small to medium-sized concerns and I have no reason to doubt it. However, economy-wide consolidation means that big business comprises more of the economy than they have at any time of the post-war period.
Dave, Ben
I think you need to share with us your personal definitions of recession if you are going to put forth those assertions. I’ve been involved in business as a process engineer, manager and investor my entire career. I’ve seen good times and bad. We are not in recession IMHO. By any measure.
To be sure, we are in an era of rapid change and intense competition. We have a wage issue, and a wage disparity issue. We have the ever present issue of employees adapting to changing fortunes. We have immigration and trade issues that affect the fortunes of employees and businesses. We have a financing issue wrt pensions and health care with an aging baby boom bulge passing into a critical lifecycle stage. We have a broken education industry scheme. We have an issue with the drag placed on an economy by government intervention, cronyism and regulatory capture, and dead weight loss. We probably have a consumption vs business investment imbalance. However, we have reasonable growth, we have relatively low unemployment – in multiple demos – and we have signs of upward wage pressures. We are not in recession.
“First, why is there ‘diminished worker power’? ”
Lowry, and the commentators here, miss nearly all of the causes, all of which are Econ 101. In no particular order: (1) women entering the work force in massive numbers; (2) free trade; (3) off-shoring of manufacturing; (4) legal immigration, particularly H-1B visas; (5) illegal immigration (50 million?, equal to the whole population of Britain? likely); (6) automation; (7) deindustrialization and the service economy.
The first six constitute either increased labor supply or decreased labor demand, so labor prices must decline. And they have. Workers earn less today than they did 40 years ago, and middle class incomes have stagnated. All the growth of the last 40 years, plus a portion of working class wages, have been seized by the Ruling Class.
The last is a conversion of the whole economy from high profit, high wage manufacturing to low profit, low wage service jobs. The service economy simply cannot generate enough corporate income to pay high wages and benefits.
As a side “benefit,” the service economy also cannot generate enough taxes to pay for the welfare state and our military and infrastructure. The result is huge and rising deficits. In a very few years, the annual debt payment on the accumulated federal debt will be the largest item in the annual budget. Something will have to go, and it will be the military and all non-welfare spending, like infrastructure and science.
On the bright side, the collapse of our military would go far to stop the neocon adventurism that has brought us to the brink of nuclear war.
Dave,
You could probably add anemic entrepreneurship and new business formation to your list.
I think that both of those are a consequence of consolidation and to a lesser degree a change of attitude.
Dave
I continue to find your dismissal (my words) of capacity vs productivity capex measurement, and the trend to a less capital intensive economy odd. It seems to me it skews the 1-6 point recitation with the advance of time. But let’s move on.
I am fairly sympathetic to your observation of my small vs large corporate experience, although I’ve been in both. I would say I don’t think adding zeros to the numbers changes the investment calculus as much as you might. However, as you know, I hold no brief for large corporate decision making.
In any event, my general sense is that a number of policies currently advocated by the Trump Administration should result in greater investment over time: immigration restriction, because it will force equipment as opposed to cheap labor solutions, and managed trade with its attendant offshoring immediately come to mind. Throw in vitalizing regulatory relief and tax incentives and you have a decidedly different policy mix than the period over which business investment has declined, no matter the economy’s declining capital intensity. I realize for some Trump is the devil himself, but on this I think he is headed in the right direction. I think Dems, progressives whatever are and were flat out bone headed in their’s.
You may be right.
I certainly hope that the changes in policy result in greater investment since I’ve been banging this drum now for fifteen years. Way back in the early days of the George W. Bush administration I complained about his cutting the personal income tax because it didn’t address the problem we actually had which was a decrease in business investment.
Just a reaction to Andy’s entrepreneurship comment. My daughter is a business major. She was accepted to a top 5- 10 rated business undergrad program, IU, but decided to go elsewhere. I was disappointed because, other than the usual parental coaching, I had advised her that entrepreneurship and leadership offerings in addition to the standard business curriculum are needed in the US. She ended up at another great school in the VA/NC area, which has that leadership studies aspect. (And I do think it’s not all natural). So far it is working out wonderfully.
I recite this just to be clear that I don’t just discount the change agent issues. In my business I’ve met plenty of doers………and plenty of slugs.