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.
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.
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.
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.