Home > Uncategorized > Wages, surplus, and inequality

Wages, surplus, and inequality

from David Ruccio

productivity-wages

Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili:

Firms cannot afford a misalignment of their workers’ pay and productivity increases—the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the folks at the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

So, no, there is no necessary or automatic link between productivity and wages within the U.S. economy. There may have been such a relationship after World War II, during the so-called Golden Age of American capitalism, but not in recent decades.*

A natural question that arises is just where did the excess productivity—the extra surplus U.S. employers appropriated from their workers—go? A significant proportion, as I showed last year, went to higher corporate profits. Another large portion went to those at the very top of the wage distribution.

appendix

As is clear in the chart above, the top 1 percent of earners saw cumulative gains in annual wages of 157.3 percent between 1979 and 2017—far in excess of economy-wide productivity growth and nearly four times faster than average wage growth (40.1 percent). Over the same period, top 0.1 percent earnings grew 343.2 percent, with the latest spike reflecting the sharp increase in executive compensation.

In other words, corporate executives—on both Main Street and Wall Street—have been able to share in the extra booty captured from American workers, who were forced to have the freedom to sell their ability to work for wages that have barely increased in recent decades.

That combination of stagnant wages for most workers and the ability of those at the top to capture a large portion of the extra surplus is therefore at the root of increasing inequality in the United States.

*Even then, as I explained back in 2017:

The fact is, the supposed Golden Age of American capitalism was based on a set of institutions that allowed the boards of directors of large corporations to appropriate a growing surplus and to distribute it as they wished. At first, during the immediate postwar period, that meant growing incomes for those in the bottom 90 percent. But, even then, the mechanisms for distributing income remained in the hands of a very small group at the top. And they had both the interest and the means to stop the growth of wages, get even more surplus (from U.S. workers and, increasingly, workers around the globe), and distribute a greater share of that surplus to a tiny group at the very top of the distribution of income.

  1. February 26, 2019 at 2:02 am

    Too many facts. You’ll frighten the horses.

  2. Econoclast
    February 27, 2019 at 5:16 pm

    In fact-free United States one fact is too many.
    Yet to ignore Ruccio’s good work here is to put us in ignorant peril.
    Here is some further context: A hundred years ago Henry Ford decided to pay his employees 60¢ per hour so they could afford to buy the cars they made. That translates into $15 per hour in 2019 (using the CPI Inflation Calculator), exactly the minimum wage proposed by “progressives” and proposed by my neighbor, Seattle WA (there currently $12). In 1992 a study was done by a local (Pacific Northwest) political body that showed a wage level to keep a one-wage-earner family of four above all forms of public assistance to be $20 per hour (in today’s dollars that is $36).
    So Ruccio’s facts and charts are an excellent way of documenting not only this huge disparity but the fraud perpetrated by market fundamentalists such as Boudreax and Palagashvili.

    • Rob Reno
      February 27, 2019 at 10:05 pm

      Hi neighbor! Econoclast, I couldn’t agree more.

      • Econoclast
        February 28, 2019 at 3:18 am

        How neighborly? I live in Hood River.

      • Rob Reno
        February 28, 2019 at 3:47 am

        We have a home in Renton (20 minutes from Seattle). Wife and I are in Japan (just moved here) as she has recruited by Toyota. Our daughter and her husband are now living in house while we are in Japan. I will be traveling back and forth in business.

  3. Ken Zimmerman
    March 12, 2019 at 7:32 am

    So, how do all the pieces fit together? First, according to Mitch McConnell wage stagnation didn’t begin till 10 years ago. It’s Obama’s fault. Second, per some “neo-con” economists wage stagnation is the result of three factors, (1) workers cannot produce many things valued by others; (2) workers can produce things valued by others but they are prevented from doing so; or (3) workers volunteer for lower wages. Third, wages are stagnating because CEOs and Boards of Directors (BOD) have decided to reduce the distribution of company income to workers and increase the distribution to CEOs and other higher-level employees and to share owners. BODs have had this power under American law since the late 19th century. With the decline of unions and the active hostility of many legislators over the last 40 years workers have been robbed of any bargaining leverage they had to stop the redirection of company income. If the laws remain the same, legislators remain hostile, and unions continue to decline the situation will only get worse. I’m certain Trump will simply tell workers they’re earning more. It’s the old Richard Pryor joke, who are you going to trust, me or your lying eyes?

    • March 12, 2019 at 9:01 am

      So yes Ken, it’s a political challenge. You could try Dean Baker’s book Rigged for a look at the many ways things are rigged to pump wealth to the wealthy. I’ve also listed some in my book Sack the Economists. With that understanding you can begin to undo things, given the political power.

      Sanders, AOC et al. are pushing a Green New Deal in your country, and that would be an excellent start. So get behind them?

      An early item in my list would be to increase the minimum wage substantially. If the workers have nothing to spend the economy will stagnate. That’s a simple fact that Henry Ford apparently understood but few others at the big end of town ever have. Pay more and the economy will pick up.

      • Ken Zimmerman
        March 18, 2019 at 12:09 pm

        Good comment, Geoff. In a consumer economy, the welfare of everyone depends on consumers. If consumers stop consuming that leads to reductions in the production of goods, which leads to societal stagnation. If the “big end of town,” as you say wants to maintain the “big end,” there really are no other options.

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