&l;p&g;&l;img class=&q;dam-image shutterstock size-large wp-image-1113158591&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1113158591/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock
The main question economists in the US seem to love debating these days is why wage growth is so slow &a;mdash; barely above inflation, which means, in real purchasing power, next to nothing.
Working people would like to know, too. The &l;a href=&q;https://news.gallup.com/poll/237389/immigration-surges-top-important-problem-list.aspx&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;latest Gallup survey&l;/a&g; on what people think is the most important problem facing the company should be the &q;situation with Russia,&q; if you gauge by media coverage. That topic doesn&s;t even get a 1% share of attention.
Instead, the main issues are dissatisfaction with government and poor leadership (25%), immigration (8%), race relations (7%), and healthcare (6%).
Economic problems are mentioned by 20% of the population, and I suspect that healthcare and leadership both tie back, at least in part, to money issues. The &l;a href=&q;https://www.forbes.com/sites/eriksherman/2018/07/06/parsing-the-crazy-unemployment-numbers-college-class-and-color/&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q;&g;unemployment numbers&l;/a&g;, while they look good, ignore the bifurcation of society. Those with skills that are in both shortage and high demand are doing well. People less skilled are the ones helping to keep that median wage from rising too quickly.
That still leaves the question of why so many fail to benefit from a supposedly improving economy. &l;a href=&q;https://blogs.imf.org/2018/07/10/chart-of-the-week-an-answer-to-the-u-s-wage-puzzle/&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;International Monetary Fund economist Yasser Abdih this week said he had an answer&l;/a&g;, and one summed up in a single graphic and paragraph:
&l;/p&g;&l;blockquote&g;The Chart of the Week, based on our new study, offers a plausible answer: slower growth in labor productivity&a;mdash;the amount of goods or services produced in an hour of work&a;mdash;and a decline in the share of income that goes to workers. Both have held wages down, overcoming the positive impact of a declining unemployment rate.&l;/blockquote&g;
University of Massachusetts at Amherst Professor of Economics Gerald Friedman saw a tweet about the IMF blog post and thought it a tad &a;hellip; circular:
&l;blockquote class=&q;twitter-tweet&q;&g; &l;p dir=&q;ltr&q; lang=&q;en&q;&g;Seriously? The IMF explains slower wage growth by citing the decline in the labor share? A little circular! Chart of the Week: An Answer to the U.S. Wage Puzzle &l;a href=&q;https://t.co/J8FW2aPGzn&q; target=&q;_blank&q;&g;https://t.co/J8FW2aPGzn&l;/a&g;&l;/p&g; &a;mdash; Gerald Friedman (@gfriedma) &l;a href=&q;https://twitter.com/gfriedma/status/1019542572887404544?ref_src=twsrc%5Etfw&q; target=&q;_blank&q;&g;July 18, 2018&l;/a&g;&l;/blockquote&g;
He&s;s certainly right as a fast take. If labor gets a declining share of corporate income, it means pay isn&s;t going up as quickly. This is like saying if people don&s;t get enough sleep at night, they will be tired in the morning.
There was also a second important part: the slowing of productivity. Although companies do get more out of workers, it isn&s;t growing at the rates it once did. And yet, profit growth continues to roll along, as this graph from the Federal Reserve Bank of St. Louis shows. (The data includes adjustments to account for changes in inventory value and the need to repair, update, or replace capital investments for a more accurate picture of what is actually profit.)
&l;img class=&q;size-full wp-image-2205&q; src=&q;http://blogs-images.forbes.com/eriksherman/files/2018/07/corporate-profits-after-capital-consumption-and-inventory-valuation-adjustment.jpg?width=960&q; alt=&q;&q; data-height=&q;470&q; data-width=&q;1168&q;&g; Corporate profits after capital consumption and inventory valuation adjustment
Productivity increases are a long-standing source of profit growth. Companies do more with what they have. If you can&s;t get the productivity growth in a world of investors who expect ever expanding value, the company will have to look elsewhere. As Abdih wrote:
&l;blockquote&g;How productive workers are is a key factor for employers when making compensation decisions. If workers aren&a;rsquo;t producing as much, employers need to restrain pay growth to sustain profitability.&l;/blockquote&g;
However, this sounds backward. Management typically controls productivity by providing tools to make workers more productive. It&s;s not as though the entire labor force collectively strolled off to the water cooler.
The production process is the combination of labor, on one hand, and capital devoted to production on the other. The result is output value.
If you want to increase the output value, you can hire more people or invest more capital &a;mdash; resources of various types &a;mdash; to let those workers get more done per hour. You &l;em&g;invest&l;/em&g; and improve productivity. The economic concept is &l;a href=&q;https://www.thoughtco.com/capital-deepening-economics-definition-1146048&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;capital deepening&l;/a&g;, the increased capital investment per worker to improve the business.
To do so, you have to redirect money to investment and away from immediately enriching shareholders, directors, and top management.
&l;a href=&q;https://www.stlouisfed.org/on-the-economy/2018/april/capital-deepening-affects-labor-productivity&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;According to the St. Louis Fed&l;/a&g;, if you express capital deepening in terms of capital per hour and look at the year-over-year growth, the typical pattern is that capital per hour spikes during a recession because labor hours drop, then it rapidly falls. During a recovery phase, capital deepening again increases as business investment picks up.
After the Great Recession, it didn&s;t.
Maybe part of a drop in productivity owes to baby boomers retiring, with less-experienced younger people taking their place. But it&s;s not as though we&s;ve never seen generational shifts before. Companies aren&s;t investing. That was supposed to be the whole point of the big tax cut passed at the end of last year.
Instead of all the extra profits going into capital investment and hiring &a;mdash; the sorts of things that might help increase productivity &a;mdash; there&s;s a &l;a href=&q;https://money.cnn.com/2018/06/05/investing/stock-buybacks/index.html&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;boom in stock buybacks&l;/a&g;, which is money directed to enrich shareholders.
If capital deepening is a major factor in increased productivity and if companies decide to plow money into buybacks and holding all costs down, including labor to historically unusual levels, to boost profits, then, yes, wages won&s;t rise all that quickly and labor&s;s share of income will drop.
Now it&s;s back to the question of why employees put up with this. Combine years of being frozen out and loosing practice in getting more with a systematic attack on union labor that helped improve the lot of working people, add in the shift of money away from workers, and you have a formula for many people getting stuck in a pay rut. Companies look at recent pay histories to set their compensation, and it becomes a self-perpetuating mechanism to prevent workers from getting too much.