“The economy’s biggest mystery”

How to Fix Stagnant Wages:  Dump the World’s Dumbest Idea

Today’s New York Times tells us that wages should be rising, since we live in a world in which stock markets are soaring, the global economy is growing and unemployment levels are at record lows. But wages aren’t rising. For most workers around the world, wages continue to stagnate, after decades of minimal growth or decline. The implications are dire for global political stability: resentment among middle- and lower-class workers has already given rise to populist leaders in both the U.S. and parts of Europe. Unless the problem is solved, more trouble lies ahead.

Yet the world’s leading economists aren’t much help in understanding, let alone solving, the problem of stagnant wages:

It’s “the economy’s biggest mystery,” writes CNBC’s Jeff Cox.

“This is one of the big economic questions of our time,” said Ángel Talavera, lead eurozone economist at Oxford Economics in London.

“The lack of wage growth at the aggregate level despite the declines in the unemployment rate and strong job gains remains a mystery,” Joseph Song, U.S. economist at Bank of America Merrill Lynch, wrote in a note to clients.

“Economists are stumped,” writes Noah Smith in Bloomberg.

The author, retired World Bank executive Steve Denning, thinks he’s found the answer:

Previously, firms had sought to balance the needs of all the stakeholders—customers, employees, shareholders and the community. Workers were valued both as contributors to the gains that had already been made and as the creators of future growth. But once shareholder value thinking took over, workers came to be seen as expendable commodities, whose training for the future and career development were simply not their problem. No responsibility was felt to those employees who had helped create the wealth of the company. Instead, corporate raiders, who had played no role in creating that wealth, extracted much of the gains, which they then used to conduct more raids.

“Fifty years ago,” writer Lynn Stout, the late distinguished professor of corporate and business law at Cornell Law School, in her book, The Shareholder Value Myth, wrote, “if you had asked the directors or CEO of a large public company what the company’s purpose was, you might have been told the corporation had many purposes: to provide equity investors with solid returns, but also to build great products, to provide decent livelihoods for employees, and to contribute to the community and nation. The concept was to focus on long-term performance, not maximizing short-term profits.”

“All this changed in the 1980s. Economists began arguing, confidently, if incorrectly, that shareholders ‘own’ corporations and that stock price always captures a firm’s true economic value. Thus shareholders should have more power over corporate boards, and executive pay should be tied to shareholder returns. These academic arguments were embraced by activist investors seeking to buy shares, pump up price, and sell for a quick profit. They also appealed to CEOs hoping to enrich themselves by boosting share price by any means possible (including, at Enron, outright fraud). The result is today’s world, where ‘shareholder value’ is king.”

I’m not an employee of a publicly traded corporation but I do work for publicly traded corporations, and I’ve done it for the past 27 years. I have many colleagues who’ve done it longer than me. My father worked for publicly traded corporations, as did his father before him. My grandfather’s father worked for the railroad, and I’ve heard some of those stories too. So what I’m about to tell you is based on a store of human knowledge and experiences spanning more than a century:

Corporations have always been shortsighted and greedy.

Corporations have always skimmed the fat for their shareholders, scrimped on the workers, built shoddy products, maimed and poisoned people, bribed legislators, creatively accounted, and evaded taxes. Contra Mr. Denning, I think the answer to this economic mystery is more drearily, micro-economically simple: the supply of labor has increased exponentially since around 1980.

When I was a child–about 4 billion people ago–sophisticated products and services were provided by the US, Europe and Japan. Africa was where the famines happened. The Soviet Union and Red China (remember them?) were lumbering, socialist autarchies. Southern and Southeast Asia were where all these insanely violent wars broke out. That world is as gone and vanished as the O’Hara family’s cotton plantation. First World workers now compete in a global labor market at all levels of sophistication, and there are 7.6 billion of us.

world-population-by-world-regions-post-1820

From the perspective of the global marketplace, most of us do embarrassingly fungible work. The demand relationship is the world’s simplest economic graph: labor prices will not rise. Not ever.

law-of-demand

So that’s my hypothesis, even though Forbes magazine doesn’t quote me. There are many more of us than ever before, and we actually need less workers per good. Think about the mining industry, and imagine how many miners you’d need swinging pick axes all day to keep up with this behemoth.

This is actually a great thing. Mechanical excavators don’t get horrible diseases, and don’t leave weeping family members behind when disasters happen.

black lung

massey disaster

But what do you do if you’re a coal miner? Bucket wheel excavators don’t require a twentieth of operators and mechanics as the miners they replace, and there’s no reason the operation and maintenance won’t be automated at some point as well. Unquestionably, the cognitive threshold for remunerative work is rising. Billions of people exist on the left-side distribution of the intelligence curve. They are looking at an idle future.

5 thoughts on ““The economy’s biggest mystery”

  1. When I was a kid, I heard about population growth all the time, usually in alarmed tones. Strange that it’s not at the forefront of conversations anymore, at least not very much. In all of human history, no matter how you measure that, by the year of my birth the world’s human population grew to 3 1/2 billion, and in just the 50 years since it’s grown 4 billion (we must be about the same age).
    I hate to be a black-piller, but come on, how do we recover from that? How is it possible to adjust in that short of a time span? I don’t see adjustment in our future.

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    1. “we must be about the same age”

      We are, apparently. It’s surprising to me how many of us are in our 50s.

      Regarding birth control, I have been told that there is no Orthodox dogma because the husband and wife are rulers of their kingdom and the Church does not intrude on familial jurisdiction, while of course maintaining that abortion is a grave sin. Fasting half the year is your automatic birth control. I recall reading something attributed to +John Chrysostom that husbands and wives were not under a charge to have large families as the Earth was fully populated–if he could see us now. He didn’t know about K- versus r-selection either.

      Economically, socially, ecclesiastically, we are all in undiscovered country.

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  2. Genghis & Hers

    I’m curious what the RCC expects to happen. No birth control and no abortion, so clearly the church is aiming for an expanding Global South to keep the pews full. The unstated endgame
    seems to be: lol crackers, you’re going to need to get a lot browner and a lot poorer real soon. Just like Galilee! Unless of course the Vatican is operating on the same principles that the rest of the liberal intelligentsia seems to be, i.e., the shrinking number of whites will be able to pay off and fend off the unpleasant hordes forever, or absorb them at no real cost.

    Church aside…I can’t see how we get out of this. Meteor strike aside, mirabile dictu

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    1. I keep thinking about the Spanish Flu, which I just recently found out about. It killed 50 million people worldwide, but mostly in Europe, effectively ended the first World War, and the virus primarily targeted adults in their 20’s and 30’s instead of the very young and very old. Horrible, yes, but a real oddity.

      The Bubonic Plague of the 12th century killed anywhere from 75 to 200 million, about a third of the world’s population. In fact, if you look at world population by year at this site, http://www.worldometers.info/world-population/world-population-by-year/, the only time you see the world population decrease is between 1200 and 1400.

      Another oddity, both plagues primarily affected Europe. Anyway, aside from the usual suspects, a deadly plague is a time-tested method for decreasing a population, but it’s not as sexy as a meteor strike. If we gotta be morbid, I vote for something spectacular that we can plausibly claim is not our fault.

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  3. Andre

    “Contra Mr. Denning, I think the answer to this economic mystery is more drearily, micro-economically simple: the supply of labor has increased exponentially since around 1980.”

    Wrong. The reason is plain as day: feminism. Female workers produce nearly zero value, often negative value, yet get paid roughly the same. Hiring them is for all intents and purposes, mandatory. They then get promoted first. Male workers therefore must carry them productively, while sharing the wages and taking a backseat in the promotions ladder. Most jobs these days are fake, plain and simple.

    Like

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