Producing more but earning less around the world

We are working more and earning less. Productivity is up, but paychecks don’t keep pace. Average wages have been stagnant for four decades as the one percent has enjoyed spectacular gains in wealth.

The disproportion between increases in worker productivity and wages is perhaps most pronounced in the United States and Germany, but is common among the world’s advanced capitalist countries. This upward flow of income has long-term implications because the mass of wealth concentrated into few hands has led to an increase in destabilizing financial speculation — there are not enough opportunities for productive investment and consumer spending erodes because working people have less to spend.

In turn, reduced spending means there is little or no incentive for capitalists to invest, leading them to plow more money into speculation and to move production to newer low-wage havens because their profit margins are squeezed. Round and round the world has gone as the global economic crisis has persisted for half a decade with no end in sight.

The U.S. economy is still the world’s largest and is the model that its powerful capitalists work to export around the world; moreover, the massive U.S. trade deficit means the U.S. is to some extent propping up the world economy. Yet unemployment remains stubbornly high in the U.S. (even if lower than in the European Union). The U.S. economy simply isn’t creating jobs fast enough — that is the conclusion of a February 1 report issued by the Economic Policy Institute. The report, written by Heidi Shierholz, says:

“The U.S. labor market started 2013 with fewer jobs than it had 7 years ago in January 2006, even though the potential workforce has since grown by more than 8 million. The jobs deficit is so large that at January’s growth rate, it would take until 2021 to return to the pre-recession unemployment rate.”

Apologists for austerity as the “solution” to economic downturn often claim that the problem is a mismatch between the skills of job seekers and the skills needed by businesses. It is true that unemployment is lower among more educated people and higher among lesser educated people, but the rate of the increase in unemployment since the economic crisis began has been similar among all groups; in fact it is slightly higher among those with some college or a college degree than those with high school or less.

Among workers age 25 or older who are not high school graduates unemployment has risen 1.7 times since 2007, the Economic Policy Institute reports, while for college graduates it has risen 1.9 times. Among all workers, the rate of long-term unemployed has more than doubled during the past six years. The report says:

“The fact that we still have large numbers of long-term unemployed is unsurprising given that the ratio of unemployed workers to job openings has been 3-to-1 or greater since September 2008.”

Job growth lags behind GDP growth

The economies of the advanced capitalist countries simply aren’t growing fast enough to generate jobs. Because of competitive pressures that lead to layoffs, plant shutterings and moves to locations with much lower wages, and the increasing sophistication of computers and machinery, capitalist economies only increase employment during periods of robust growth, when demand requires more production. Unemployment ordinarily decreases only when an economy grows at least three percent annually.

Fred Magdoff and John Bellamy Foster, authors of the book What Every Environmentalist Needs to Know About Capitalism, summarized this conundrum:

“Capitalism is a system that constantly generates a reserve of unemployed workers. Full employment is a rarity that occurs only at very high rates of growth, which are correspondingly dangerous to ecological sustainability. As Christina Romer, former chair of President Obama’s Council of Economic Advisers, tells us, ‘We need 2.5 percent growth just to keep the unemployment rate where it is. … If you want to get it down quickly, you need substantially stronger growth than that.’ … [I]t is clear that if the GDP growth rate isn’t substantially greater than the increase in the working population, people lose jobs.” [pages 56-58]

As competition for jobs steadily becomes more acute, the dynamics of capitalism dictate that wages will be buffeted by strong downward pressures. Over the long term, not only the past few years, that has happened. A study published in the Spring 2012 edition of the International Productivity Monitor demonstrates the extraordinary mismatch between productivity gains and wages. The authors, Lawrence Mishel and Kar-Fai Gee, write:

“During the 1973 to 2011 period, the real median hourly wage in the United States increased 4.0 percent, yet labour productivity rose 80.4 percent. If the real median hourly wage had grown at the same rate as labour productivity, it would have been $27.87 in 2011 (2011 dollars), considerably more than the actual $16.07 (2011 dollars).” [page 31]

Almost every penny of the income generated by that extra work went into the pockets of high-level executives and financiers, not to the workers whose sweat produced it.

Around the world, workers see little of the gains

Workers in other advanced capitalist countries did not fare quite as badly, but the general pattern is there.

In Canada, for instance, labor productivity increased 37.4 percent for the period 1980 to 2005, while the median wage of full-time workers rose a total of 1.3 percent in inflation-adjusted dollars, according to a Fall 2008 report in the International Productivity Monitor. The authors of this report, Andrew Sharpe, Jean-François Arsenault and Peter Harrison, provided caveats as to the direct comparability of productivity and wage statistics, but find the mismatch to be real as labor’s share of Canadian gross domestic product has shrunk. The authors note that, in Canada, almost all income gains have gone to the top one percent. They write:

“If median real earnings had grown at the same rate as labour productivity, the median Canadian full-time full-year worker would have earned $56,826 in 2005, considerably more than the actual $41,401 (2005 dollars).” [page 16]

Wage erosion is also at work in Europe. Making a few calculations from International Labour Organization statistics on labor productivity and wages, provided for individual countries, I found that average real wages in Germany declined 0.5 percent per year for the period of 2000 to 2008 while German labor productivity increased 1.3 percent per year. (This was the only period for which I could find statistics for both categories.)

The prosperity of German manufacturers is built on the backs of German workers, who have absorbed a decade of pay cuts. Because the International Labour Organization uses average, rather than median, figures, the disparities are likely made to appear smaller than they might be because the wealthiest are increasing their share of income faster than anybody else, distorting the average. (“Average” is the halfway point between highest and lowest; an average will rise if the highest has risen while all others are stagnant. “Median” is the number representing someone at the 50th percentile, or the middle number if everybody was arranged in order, and thus is more representative.)

Using the ILO statistics, French workers’ average wages kept pace with productivity growth for the period 2000 to 2008 while Spanish workers lagged, earning 0.5 percent more in wages per year while productivity increased 0.9 percent per year. Income inequality has increased in France since the mid-1990s, an indication that growth in pay for the highest earners likely masks declines for most workers and therefore could account for the statistical stability in the French wage/productivity ratio.

By contrast, in Britain, a Resolution Foundation paper found a differential between productivity and wage gains, although smaller than that of the United States, but also that British workers did not lose as much ground as did French, German, Italian and Japanese workers. That conclusion is based on a finding that the share of gross domestic product going to wages in those countries has steeply declined since the mid-1970s.

What we have is a structural problem, not a problem confined to a particular country, caused by a government nor solvable by adopting a specific monetary policy. Nor is personal greed the underlying cause, regardless of the personal qualities of individual capitalists.

Intensified competition over private profits, and that “markets” should determine social outcomes, inexorably leads to a consolidation in which industries are dominated by a handful of giant corporations, and those corporations gain decisive power over governments and relentlessly reduce overhead (especially wages and benefits) in a scramble for survival. More inequality means less pay for employees, reducing demand and weakening economies, which leads to more unemployment and less leverage for employees in wage negotiations as corporations use any means necessary to maintain their profit margins.

That a new boom or bubble might occur in the future does not alter the overall picture; such a development would only be a temporary blip. If it is the structure that is the problem, then only a different structure can be the solution.

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5 comments on “Producing more but earning less around the world

  1. Jeff Nguyen says:

    The invisible pimp hand of the marketplace strikes again.

  2. Alcuin says:

    Two book recommendations for readers of this blog:

    Catastrophism: the Apocalyptic Politics of Collapse and Rebirth

    and

    The Pirate Organization: Lessons from the Fringes of Capitalism

    The first book, by Sasha Lilley, David McNally, Eddie Yuen, and James Davis, consists of 4 longish essays by the aforementioned authors plus an introduction by Sasha Lilley. You may know that the authors of the essays are associated with Retort, in San Francisco. I read the book twice – I was that impressed with it. It delves into the uselessness of catastrophe as a method of generating political change and it also goes into detail explaining how catastrophism plays right into the agenda of the Right. The first chapter, by Eddie Yuen, deals with environmentalists and catastrophism, the second, by Sasah Lilley, addresses catastrophism and the Left, the third chapter, by James Davis, goes into detail in how catastrophism benefits the Right instead of motivating the Left to do something and the last chapter, by David McNally, traces the relationship between late capitalism and zombie movies.

    I have just started reading the second book. It is published by, of all publishers, Harvard Business Review Press. The book was first published in France in 2010 and is by Rodolphe Durand and Jean-Phillipe Vergne. I’m fascinated with the author’s thesis, which is that pirates are the leading edge of capitalism, not what we have always been told they are. One of the points of the first book is that capitalism is infinitely malleable and adaptable and this second book delves into that idea.

    Both are short books, though they take some time to absorb. The first book is 127 pages and the second is 163 pages.

    What I found most intriguing about the first book is the contention, throughout the book, that the critiques of capitalism by Leftist intellectuals, which fall into two broad categories, determinist and voluntarist, do not serve humanity well at all. Determinists believe that capitalism will collapse because of internal contradictions – a view that is common amongst Marxists of various flavors. Voluntarists believe that worsening social conditions will lead to revolt. Lilley writes, “[w]hile there is something to the trinity of crisis-war-revolution, the historical record shows that periods of crisis, while polarizing, frequently spur people to move right, rather than left.”

    Stimulating reading – I recommend both books highly.

    • I hadn’t heard of either book — thanks as always for your recommendations. The first of the two, Catastrophism: the Apocalyptic Politics of Collapse and Rebirth, sounds like an interesting challenge. A quick look at its Amazon page describes its intended lesson that activists “focus on working on issues now instead of waiting until society has ended and needs to be rebuilt.”

      I hesitate to make any comments, not having read it, but I would not agree (if that is the argument made) that Left activists (mostly?) are “determinists” or “volunteerists,” although some are one of these. I certainly would agree that the time to get to work is now, as opposed to waiting until a collapse sometime in the future, but then just about every Left activist I know (and I know a lot of them) would agree. Caveats aside, I believe I am going to pick this one up and give it a close reading. The struggle to integrate theory and practice is always ongoing.

      • Alcuin says:

        Do let me know your thoughts when you digest the ideas in the book. I was fascinated – I go now to Ian Welsh’s blog and skim through the comments by all of the whiners moaning about the state of the world. Most, if not all, fall into one of those two camps. I’ve also been reading John Holloway – I like his recommendation that we just stop making capitalism.

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