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  • Wages, Employment, and Productivity

    Posted by David Foster on February 21st, 2020 (All posts by )

    I think President Trump is quite sincere about his oft-stated desire to drive up the wages of low-income workers…especially young and non-college workers…and he does seem to be having some success at this quest.  It has struck me for a while that while this is a very good thing from the standpoint of the overall society, it is also likely to pressure business profit margins, with possible consequences for the stock market as well as for Fed policy.

    Yesterday the WSJ noted that “wages for 20- to 24-year olds are increasing twice as fast as for other workers…Overall job satisfaction in 2018 was the highest since 1994.”  At the same time, “90% of blue-collar businesses report operating with unfilled positions, and 29% say this has made them reduce output or turn down business.  Rising wages together with sluggish productivity growth are crimping corporate profits.  Between the fourth quarter of 2014 and the second quarter of 2019, profits for nonfinancial corporations  declined 17% and 46% for manufacturers.   The article quotes the Conference Board:  “The US will not be able to maintain its current standard of living unless the US government acts to significantly increase immigration, improve labor force participation, and, together with employees, raise labor productivity growth.”  To which the WSJ writer adds:  “Maybe the only short-term fix is to increase legal immigration–unless Americans want to see their living standards decline and more jobs exported.”

    Higher wages do of course drive productivity improvement…the US has been a pioneer in the mechanization of work in large part because it has been a high-wage country, and that mechanization has helped to enable further wage increases.  This doesn’t always require any new inventions:  there are always productivity tools available that will make sense to a business that is paying $25/hour for labor but would not make sense to one paying $15/hour.  The process isn’t instantaneous, though.

    Concerning immigration as a solution to labor shortages: commentators sometimes lose sight of the fact that GDP per capita matters for broad-based prosperity, not just absolute GDP.  And the only way to increase GDP per capita is through productivity improvements and higher labor force participation rates.  Increasing the raw number of workers doesn’t do this.

    The Conference Board statement appears to put a lot of emphasis on things that the government should do, and the WSJ emphasizes more (legal) immigration.  Some increases in legal immigration may well be a good idea…as would increases in American fertility rates…but the main issues, I think, are productivity and the labor force participation rate.  The actual productivity numbers don’t reflect all the talk about (and even the realities of) robotics and AI.  Maybe this is largely just a matter of implementation lags, maybe it reflects increasing bureaucratization and ‘compliance’ costs throughout our economy.

    My concern is that margin pressure may lead (in conjunction with other factors, like already-high valuations) to a sharp stock-market decline, which could have electoral implications.  Such decline might also lead to many deferrals of productivity-improving investments.  Alternatively, Fed concerns about rising wage rates as a possible signal of incipient inflation could lead the central bank to increase interest rates excessively as a preventative.

    And any electoral result which substantially increases Democratic party power could lead to massive upsurges in legal and illegal immigration, with consequent wage pressures, demoralizing many workers who are now on an positive track and deferring the need for productivity investments.  Any attempt to deal with such wage pressures by establishing high Federal-level minimum wages would add much rigidity to the systems, creating problems of many kinds.

    Discuss, if you feel so inclined.

     

    21 Responses to “Wages, Employment, and Productivity”

    1. Gavin Longmuir Says:

      “The US will not be able to maintain its current standard of living unless the US government acts to significantly increase immigration, improve labor force participation, and, together with employees, raise labor productivity growth.”

      That sounds like the WSJ writer must have attended an Ivy League university, at which she was credentialed instead of educated.

      If we increase the supply of labor, that is magically going to drive up the standard of living? Talk about bass-ackwards. If instead we increase the number of productive jobs, that will pull in the discouraged workers who are now not counted in the unemployment statistics and are not contributing to the economy. It may even pull overhead people out of sand-in-the-gears government work and get them back into the productive economy. That will raise the average standard of living.

      How do we increase jobs? Eliminate excessive regulations. Simplify the tax code. Renegotiate trade deals so that they cease being one-sided give-aways by the US. Put lawyers on a very short leash. And we cut, cut, cut government workers — to push them back into the productive economy.

    2. Kirk Says:

      One would do well to pay attention to the lessons of history, and recall one of the side-effects of the Black Death.

      You lose a chunk of your labor force, the survivors are gonna make a lot more money, and be in the driver’s seat as things ramp back up.

      China is probably going to be unrecognizable after all this is over. The CCP has been used to a state of affairs where they had untold riches, in terms of human resources. Now? Not so much… They are about to find out what it’s like to live in a China where the Party can’t expend people like bullets, and I imagine that many of the elite are going to have problems coming to terms with that, or making the leap.

      Of course, it all depends on how many people succumb to this pandemic we seem to be in the early stages of.

    3. MCS Says:

      There are a lot of ways to increase productivity besides mechanization. Wal-Mart seems to be using contractors to restock their stores. A whole crew descends on the store, breaks down the pallets that have been delivered and puts the merchandise on the shelves in a few hours, then, presumably, moves on. It’s terrifically inconvenient if you happen to be trying to shop at the same time but I assume it’s more efficient than having the regular complement of the store do it. No technology needed and we’re a pretty long way from a robot that can do it.

      Mechanization requires first of all capital with payback periods that generally range to years. A lot of businesses aren’t either able or willing to do it. Adding employees that can be let go when things slow down is seen as a lesser risk.

      Mechanization requires a well ordered work flow and consistent materials. This is often unrecognized. People, even in menial jobs, are capable of extensive adaptability and improvisation. Having to deal with inconsistent materials will greatly increase complexity and cost. There are still a lot of things that are easy for a person to do that are nearly impossible for a machine. The converse is also true, but most of that has already been mechanized. It’s still easier to increase production incrementally by hiring a couple more guys.

      Mechanization requires time, first for planning and design, then for procurement and construction and finally for commissioning and training. All of the experts, equipment and labor may be, probably are, in limited supply. Even then, the time most lacking in a lot of businesses, especially small a one, is management. They not only have to keep the present business running, they have to plan and figure out how to run a different one.

      Mechanization will require at least partially, a new work force. One that can operate the new machines. This will have to come from the present one by training. The supply is already very thin. You’re not going to be able simply hire enough trained people off the street, not when everyone else is trying to do the same thing.

      In the short term, there is no escaping the law of supply and demand. Wages will rise, some jobs will go away and some services will become more expensive. It may no longer be economic to hire someone to stand beside the road, twirling a sign.

    4. David Foster Says:

      Kirk…”One would do well to pay attention to the lessons of history, and recall one of the side-effects of the Black Death. You lose a chunk of your labor force, the survivors are gonna make a lot more money, and be in the driver’s seat as things ramp back up.”

      That would not occur, though (the ‘make more money’ part), if the only source in demand was the same group of people whose numbers declined…because their demand be driven by fewer people….and the production would be getting done by the same % of the original people. I’d think there would need to be either a non-population constraint on production (probably land), or some other source of demand, such as the nobility.

    5. Anonymous Says:

      “That would not occur, though (the ‘make more money’ part), if the only source in demand was the same group of people whose numbers declined…because their demand be driven by fewer people….and the production would be getting done by the same % of the original people.”

      All of that is going to depend entirely on the distribution of the deaths. If, as we might surmise, it eliminates a lot of dead weight in terms of the non-working population (elderly, non-productive homeless, etc.), then the only people losing out are going to be the caregivers who survive. Close a bunch of homeless outreach operations, and you’ve suddenly got unemployed caseworkers and others. The rest of us go on as before, with cleaner city streets. Net gains to productivity? Well, you’re suddenly saving a bunch on public sanitation.

      On the other hand… Say you instead lose a bunch of mid-level skilled employees that make things–That opens up a lot of room for advancement for the lower-skilled, and creates a bunch of costs you didn’t have before because those skilled employees saved you money, and the new ones are still on the “expensive” side of the learning curve. Opportunities become good for the less-skilled, and they make more money because of it.

      The market may tighten because we lose a bunch of customers, but on the other hand, you still have to have people around to do things. It’s all going to depend on who winds up dead, disturbingly enough. Some good might actually come out of it all, but at what cost?

      Whole thing is going to be very dislocating, and that’s going to cost money, but… As with anything, there will be opportunities. Hell, I’d love to have shares in a company that makes face masks, right now. Or, any other health-care product, for that matter.

    6. David Foster Says:

      Some data: BLS analysis in the ‘persons not in the labor force’ category and their reasons for being in this category.

      https://www.bls.gov/web/empsit/cpseea38.htm

    7. David Foster Says:

      Here’s something said Wednesday by acting White House chief of staff Mick Mulvaney:

      “We are desperate — desperate — for more people,” Mulvaney said at the gathering in England. “We are running out of people to fuel the economic growth that we’ve had in our nation over the last four years. We need more immigrants.”

      I don’t think these comments were intended for public release.

    8. d Says:

      “We are desperate — desperate — for more people,” Mulvaney said at the gathering in England. “We are running out of people to fuel the economic growth that we’ve had in our nation over the last four years. We need more immigrants.”

      Get rid of the 10 -40 million illegals and get 49 million out of the labor force employed, then we can talk about more legal immigrants.

    9. Tom Holsinger Says:

      This discussion will likely be blown away by the coronavirus epidemic. Let’s wait a year or two to see how that comes out.

    10. d Says:

      >Immigration is a losing issue everywhere, except in the United States. But soon, it will be here too. Because the immigration = economic growth = societal wealth argument is now as observably and objectively false as the free trade = economic growth = societal prosperity argument.<

      http://voxday.blogspot.com/2020/02/the-importance-of-rhetoric.html

    11. Assistant Village Idiot Says:

      The hidden assumption is that any new immigrant coming in is going to be instantly at the American average for workers. When stated openly, anyone can see that it’s false. But advocates and policymakers just running along heedlessly treat them as interchangeable units. We have x open jobs, we should bring in x people, so they think.

      Bringing in Englishmen would be fine, generally. I don’t think that’s who we will end up inviting, however. Considering the long run and world stability, we might want to encourage the best and brightest of every country to fix their own places rather than come here. I can understand why they don’t want to do that, though.

    12. Mr Black Says:

      Name the year in which white Americans are projected to be a minority in our own country. From that data point, we’ll discuss immigration policy.

    13. Anonymous Says:

      “Wal-Mart seems to be using contractors to restock their stores.”

      When I first read this I figured that this would explain why my local Walmart is invariably out of several items I’d like to buy, but actually I think you were watching a reset crew change the store layout.

      From personal experience long ago, it’s really helpful to know exactly where on the shelf the cans of early medium June peas are vis a vis the mixed peas with carrots, simply to avoid the completely unproductive time spent standing and searching the shelves in bewilderment.

      Eventually, you’ll find where it goes- but if you need to stop and search for the locations of 200-300 different items in an 8-hour shift, you’ll leave a lot of boxes on the floor.

      Not from personal experience you’ll get fired, too.

      In other words, I don’t think it likely that Walmart thinks a set of contractors will know where to put things on the shelf more efficiently that the local store employees who are at that store every day.

    14. Mike K Says:

      Bringing in Englishmen would be fine, generally. I don’t think that’s who we will end up inviting, however.

      First, repeal and replace the 1965 immigration law that Ted Kennedy wrote to stop immigration from “white Europe.”

      I know a German master plumber who spent years on the waiting list for an immigration visa until he and his nurse midwife wife won a lottery and got to come to Tucson where he was almost immediately successful. It helped that they had 60,000 Euros in savings.

      Our immigration laws are designed to discourage immigration for skilled people who look and act like Americans. Not all are white. I interviewed a Nigerian guy who was applying to the Army Reserve in Phoenix. He has a BS in Mechanical Engineering and an MS in Industrial Engineering, both in Nigeria. He told me that he had two choices for college majors, Engineering and Optometry. It sounds like Nigeria has its incentives aligned, unlike the US which provides student loans for Dance and Gender Studies.

      I asked him if he was an Ibo tribe member and he was pleased that I knew about them. Of course he is.

    15. David Foster Says:

      I’m dubious about the idea of limiting immigration to those who are ‘high-skilled’ or who have substantial assets. Do we really want to be effectively selling American citizenship? Are we confident in the ability of the Government to pick the truly valuable skills?

      Historically, one could immigrate to America and could–and were expected to–make your own way. The equation is more complex now, of course, given the social ‘safety net’ and the much better communications with country of origin.

      Just anecdotally, I’ve seen quite a few immigrants from Mexico and further south who are indeed very hard-working and have in many cases started businesses. Some intend to stay here permanently, some want to accumulate money for several years and eventually return to their home countries where living costs are a lot lower.

    16. MCS Says:

      Anonymous,
      They were stocking. I’ve watched them on numerous days since I usually shop on Wednesday. I’ve overheard talk between the foreman and the crew. I was in the business for 6 years and know the difference. The store was reset about 3-4 months ago to free up space for online orders.

      Wal-Marts, above all else, are rigidly planned. I’m sure that they have no trouble putting the Planogram on a smart phone. Hell, I could probably do it from memory.

      What this does is allow them to reduce store personnel even more. It’s very rare to see anyone in the blue vest for workers or the yellow vest for managers more than 5 feet from the checkout lines. That it even further aggravates the customer experience doesn’t seem to matter. It’s not worth even going to a store from Sunday to Tuesday because they will be out of half of what you want. Aldi has become the same. The ultimate labor saving will be when they eliminate customers, they’ll be able to just lock the doors and walk away.

      The jobs in the stores have become very specialized. From the problems getting a checker, you’d think it required a post-doc at least. The days when someone would go from stacking to bagging to checking to sweeping the floor in an hour are gone. So is having a checkout lane open as the line extends past the produce section. Having a dedicated crew is probably more efficient and probably reduces mistakes compared to a frequently interrupted generalist. It’s not particularly new, it just used to take place after hours.

      Organizing, specializing and closely supervising greatly reduces the necessary quality of labor. It started long before Ford started building Model-T’s and probably went furthest during WWII. The RAF couldn’t have survived if Rolls Royce had continued to take 4 years to train every worker. There’s still lots of jobs that are at risk of this, probably far more than at risk of robots.

      I’m sourly amused when I saw an article about how someone had taken the kind of machinery that have been producing frozen pizzas for decades and put them in store front. Bringing frozen pizza quality at restaurant prices to the masses. I’m sure this is the future of pizza delivery if you were planning a career; I wouldn’t.

    17. David Foster Says:

      More data: The Economic Report of the President

      https://www.whitehouse.gov/wp-content/uploads/2020/02/2020-Economic-Report-of-the-President-WHCEA.pdf

      The productivity discussion starts on page 37.

    18. Jonathan Says:

      I’m dubious about the idea of limiting immigration to those who are ‘high-skilled’ or who have substantial assets.

      Yes. We want the best people to stay here, but because there is so much variability between individuals screening immigrants for qualities other than performance tends to lead to excessive focus on national origin, race etc. To attract high-quality immigrants, it might be more effective for us to reduce our welfare state payouts than to expect more from our dysfunctional immigration bureaucracy. As Jim Bennett said: Multiculturalism, open borders, a welfare state – pick any two.

    19. Mike K Says:

      , I’ve seen quite a few immigrants from Mexico and further south who are indeed very hard-working and have in many cases started businesses.

      I agree but almost all are from 20 years ago and more. My closest friend in medical school was the son of immigrant parents from Mexico. They had ten children, nine of which had graduate degrees. Ed had gone to college and medical school on scholarships funded by Francisco Bravo, who had founded the Bravo Clinic is east LA.

      Francisco Bravo, a son of migrant farm workers who eventually came to own thousands of acres of his own farmland, has died in a Montebello hospital, it was learned this week.

      His daughter, Francine Pumphrey, said her father–a seminal force in the financial development and self-determination of Latino East Los Angeles–died May 3. He had turned 80 the previous day and lived in Whittier.

      Bravo, a former Los Angeles police commissioner and member of the state Agriculture Board, was, sequentially, a pharmacist, surgeon, clinic founder, banker and then rancher and landowner.

      Born to poverty in Ventura County, he worked his way through the USC School of Pharmacy and then as a pharmacist through Stanford University School of Medicine.

      His scholarships did not have to be repaid if the student practiced in a community with 25 % Spanish surnames. Ed settled in Chula Vista, south of San Diego,. His daughter joined him in practice of Surgery in later years. His mother never learned English and made her own tortillas. His father had a wrought iron business in east LA.

      Those immigrants are from an earlier era. The more recent ones are mostly Indian and from villages that don’t speak Spanish, let alone English

    20. Mike-SMO Says:

      Seems like we have allowed the dim employees of the “Swamp” to skim from one side or the other until there was no there there. Used to be, or so I remember my parents sayin’, “All or none”. Either wages, profits, creativity, and productivity “all” increase or we all fail. The corruptocrats played one against the other until there was nothing left. The Orange Man and AOC both see that. AOC worked to block Amazon prosperity and to maintain her dependent party base. Kind of Lenin with buck teeth. That Neu Yawker, Donald of Orange, seems to see or sense that game; “All or none”. The latest cycle of the Corona plague may help him/us if the Asian Skimmers don’t fail into a convenient war in an attempt to survive. Them idiots killed tens of millions last time to keep their plush offices.

      The guys with the shovels (“ped noir”?) made the Titanic go. The man with the brass on his hat doesn’t make the ship go, but he can keep it from hitting the big, bad stuff. When the guys “upstairs” were only inspecting their nethers, or those of the entertainment, they all drowned.

      The “pointless” air shows in Syria and Iraq were subtle, brutal messages that were understood (forunately) by those who were not reading by the narrow glimmer of ideology, fantasy, or greed. Big League stuff.

      I don’t particularly “like” “Captain Orange” but he is smart enough to be looking out the front window while trying to avoid the nasty stuff.

      Hey! Who took my shovel?

    21. Mike K Says:

      To attract high-quality immigrants, it might be more effective for us to reduce our welfare state payouts than to expect more from our dysfunctional immigration bureaucracy.

      Trump is trying to enforce the “Public Charge” law on immigrants and is meeting furious resistance.