« Mental Accounting for Dummies | Main | All monies are commodity monies »
Wage compression
I wrote this paragraph two days ago:
Employers also may give workers raises at a slower rate; this is called “wage compression.” If it is hard to cut wages, wait and make sure the worker really deserves a pay increase. Wages will lag productivity, but the net result is fewer situations where a direct wage cut is necessary.
The implication of course is that low unemployment, and a stable macroeconomy, will mean that wages lag behind productivity. Here is my earlier post on wage compression.
Posted by Tyler Cowen on July 13, 2007 at 07:43 AM in Economics | Permalink
Comments
Tyler,
The major reason to increase the wage of an existing worker is to prevent him from leaving for a new employer. As the employee traces his trajectory over a learning curve, his productivity increases and a higher wage can be both justified and necessary. However, part of the learning curve driven productivity enhancement is general and part is specific to the given employer. Since only the general part is useful to a potential competing employer, the wage need only track the general part of productivity increase.
Regards, Don
Posted by: Don Lloyd at Jul 13, 2007 9:06:54 AM
We had low inflation and a stable economy in the 1950s, 1960s, 1980s and 1990s and wages did not lag productivity. So if you are right, why did it change in recent years?
Posted by: spencer at Jul 13, 2007 9:27:20 AM
hat makes you say wages didn't lag, spencer?
Posted by: josh at Jul 13, 2007 9:41:00 AM
If it is hard to cut wages and future is not clear, an employer may choose to give bonuses instead of raises.
By the way, is there anything like "general theory of bonuses"?
Posted by: Pretinieks at Jul 13, 2007 9:46:15 AM
This is just another example of Open Borders (goods and people) ravaging the lives of mainstream Americans and TC trying to rationalize it.
Since Bush took office, we have had the first "recovery" with rising poverty, declining health insurance, declining labor force participation, declining median incomes, etc.
Of course, corporate profits have reached record levels (by several measures) and the top 1%, 0.1%, and 0.01% are doing rather well.
As long as the Goldman Sachs bonus pool is $16+ billion, can anything really be wrong?
Posted by: Peter Schaeffer at Jul 13, 2007 12:17:08 PM
This is slightly OT, but may be another way to help put the Dow's recent gains into perspective:
http://www.financialsense.com/fsu/editorials/2007/0416.html
Posted by: fustercluck at Jul 13, 2007 12:38:02 PM
Folks,
The reality is that the labor market is slack. The "low" unemployment rates masks relatively poor job prospects for most workers. Rather than rising unemployment, we have declining or flat (not normal in an upturn) labor force participation. See “Fed May Be Questioning Labor-Market Tightness” (http://blogs.wsj.com/economics/2007/07/06/fed-may-be-questioning-labor-market-tightness/) for some details.
If employers really were holding down wages in a strong job market we would expect to see rising turnover. A quick check shows that is not the case. See “Economic Activity: Labor Turnover” (http://www.clevelandfed.org/research/trends/2007/0107/03ecoact_122906.cfm) for some data.
Open Borders don’t come free. Indeed, they are very expensive…
Posted by: Peter Schaeffer at Jul 13, 2007 12:53:03 PM
Josh -- the data makes me say that wage did not lag.
Peter-- we are not getting job turn over this cycle as in other cycles. But that appears to be because job creation has been extremely weak this cycle. If you look at the business dynamics data from the BLS what you find is that this cycle we have seen the normal decline in job destruction -- this is confirmed by the initial unemployment claims. However, the data shows that job creation never rebounded this cycle and has remained at extremely low levels -- this is partially confirmed by the very low levels of help wanted ads even though the internet partially offsets this. The long run history is for the US economy to be a system of massive job churning as jobs are both created and destroyed. But this cycle this data shows that jobs are not been created..
So Tyler, I will answer my own question. Maybe the reason that wages have lagged productivity this cycle and not in previous cycle is that the great American job creation machine does not appear to be working as it normally does this cycle. This also ties in with Peter's comments that corporations give wage increases to keep employees from leaving, not to reward them for good work. If new jobs are not being created, employees are less likely to jump ship.
Of course, this leads to the next question. Why doesn't the great American job creation machine appear to be working as well this cycle as it has in other cycles?
Posted by: spencer at Jul 13, 2007 2:04:22 PM
"Open Borders don’t come free. Indeed, they are very expensive…"
May be to you. To TC and myself, fat and happy goverment bureaucrats
we are, it is all gravy.
Posted by: mik at Jul 14, 2007 2:08:48 PM
Just to speak to the soundness of the unemployment numbers, Barry Rotholtz's Big Picture blog has been looking at the BLS birth/death adjustment number - it has become gigantic in the last few years.
http://bigpicture.typepad.com/comments/2007/07/the-accelerat-1.html
This is an estimated number that the BLS adds to the number of jobs they actually count being created. This B/D number is now responsible for about 55% of the jobs created for our unemployment numbers. A quote from Barry:
"Prior to 2001, the B/D adds were less than 20k per month. Now, they dominate the Non Farm Payroll report."
Check out the excellent chart at the link - job creation sucks over the last few years. A slack labor market is an understatement and a more accurate term would be horrible. It is the worst expansion for job recovery in 60 years, really the worst since they have been collecting accurate data.
I would say the chart is from Bloomberg on Barrys blog, I will recreate it and expand the data set so it covers more time.
I think this explains the wage compression that Tyler talks about pretty well. Productivity doesn't translate into higher wages. The only thing that makes wages go up is the threat of moving to a new employer, and as new jobs aren't being created, that threat is hollow.
However, we should also address the quality of the productivity numbers. We have a proposed relationship between productivity and wages that we want to explore. We think that one of the numbers in that might help us in understanding that relationship has been manipulated so that it no longer represents reality. Since 2001. Hmmm. Forgive me if I suspect that the productivity numbers might have some "bias" to them as well. I suspect if I look into the productivity numbers, we're going to find something like "starting in 2001, the productivity number has been made artificially high by..." fill in the rest with some obscure functional process that changed in the calculation methodology. Calling me cynical would be an, well "understatement".
In conclusion, wages have been static because actual job creation sucks. That drives millions of people out of the job market, driving down the employment to population ratio - as those fellows at the irreplaceable EPI document so well. http://www.epi.org/content.cfm/webfeatures_snapshots_20060504
Posted by: mickslam at Jul 15, 2007 10:14:26 AM
癌症 肺癌 胃癌 肝癌 肾癌 食道癌 子宫颈癌 乳腺癌 卵巢癌 直肠癌 结肠癌 皮肤癌 甲状腺癌 胰腺癌 前列腺癌 膀胱癌 骨癌 鼻咽癌 脑瘤
Posted by: aizhengw at Jul 16, 2007 5:12:28 AM
Posted by: 鑽石 at Apr 2, 2008 9:12:27 PM
