Yet, on the other hand, it seems to make the key question -- are workers being compensated for rising productivity? -- intractable.
Why? Because it's hard to assess the productivity of individual workers. The whole debate over CEO pay, for example, has foundered on this issue. You can see that in Josh Bivens and Larry Mishel's recent paper on CEO pay, in which they concede that the evidence that CEO pay is untethered to productivity must be suggestive and circumstantial.
What then is the basis for claim that workers are paid what they are worth based on their marginal productivity?
Evan Soltas
Inequality and Productivity
35 comments:
"Because it's hard to assess the productivity of individual workers."
Right. Many essential workers don't actually produce anything -- maintenance, security, receptionist, purchasing agent, safety officer, etc.. -- yet you can't run your business without them. And then there are the vendors and contractors that the business can't live without.
One reason for the outsourcing craze is that outsourcing makes the productivity of the remaining employees appear higher. If your annual bonus is tied to output per employee, then you get a bigger bonus if you outsource most of the work to contractors and vendors. That was the basic operating principle at a Monsanto plant where I once worked as a contractor. I did the work, the Monsanto employees got the bonus. :-(
On the other hand, if middle management and administration becomes bloated, as it tends to do, that makes the company's productivity seem low. All in all I struggle to see how you can accurately measure productivity even in manufacturing where there is a tangible product, never mind the service sector or the financial sector or the health care sector where there is no tangible product.
I'm not sure what to make of Evan's graph because it is too abstract to be intuitive. Does it include the contractors and vendors and temps?
Manufacturing jobs mostly pay well, but a lot of service and retail jobs don't. We've lost manufacturing jobs and gained service jobs. Maybe that's our root problem?
Absentee landlords, shareholders and holders of intellectual property have virtually zero and decreasing productivity. Yet somehow they find ways to increase their share of the economic pie. At least they are putting their leisure time to good use, lobbying for new regulations and international trade agreements in their favour.
What about foreign oil monopolists extracting their monopoly rents too in USDs?
They do nothing (domestically) while obtaining a high price for their imported product in USDs... domestic producers piggy back on these monopoly prices by doing the same work only for more USDs ..... same domestic work for more USDs means productivity increases...
I'm assuming economists measure product output in USDs not barrels or tonnes.... ie they measure output in financial terms instead of real terms...
Thats how AUDs exports can be seen to decrease in the face of rising exports as measured in tonnes...
@Dan
Actually in parts of health care I think one can get a real sense of productivity. Take two surgeons , its easy to measure if one guy takes 8 hours to do three gall bladders and another guy takes 3 hours, and the patients have the same outcome, one can conclude that the first guy was more productive. There are factors other than the guys skill which can influence this but if you are running a surgery center and you want to get the most patients through in the shortest period of time with the least complications (complications are expensive), surgeon A is your man. Surgeon B might counter that his team was worse, the scrub was slow and inexperienced or anesthesia was slow to wake them up and these can be factors but they can also be measured and accounted for.
Additionally there are patient centered problems like scar tissue in abdomen or an active inflammation making the surgery more tedious or obese patients (a much more common issue today)
Its harder to do this analysis with Internists or GPs since most of their time is spent talking to patients and outcomes arent determined on the day of the visit usually. But I do think healthcare lends itself to a type of productivity analysis that is useful and can say something about relative skills of practitioners.
That being said, I cant stand the way productivity is discussed by most economists. Its the dark matter of economics. Once everything else that can be measured is measured whats left must be productivity. Its seems to me the target gets moved all the time as well. They talk often as if they care about real production (units of product or service per person per day) but then simply look at price of inputs to price of outputs.
And its funny how the answer is ALWAYS..... pay those other guys less!!
Pay your workers less and make them work harder. That's what your competitors are doing, so you'd better get with it.
"How and what economists measure to determine productivity gets to the core, the very essence of their ideology."
Ryan consider their ideology is NOT driving their technocracy... they ARE ideologues and are not qualified for technocracy...
I used this analogy before but here:
You and 2 other people are standing up on a hillside looking down on a newly constructed bridge... some unqualified people designed and constructed the bridge and there is a big gap in the middle... so you 3 are standing there looking on as the bridge is opened for traffic and all these vehicles and occupants are innocently driving over the bridge and falling thru the gap plunging into the chasm below cars exploding, etc.....
You 3 are horrified. Then... you hear the one person say to the other "whose idea was it to build this bridge in the first place?!" and then the other person says back "yeah good point! and what were their motivations?!?!"
What is going on is that economists are like those other 2 people there with you... they are ideologues masquerading as technocrats ie they are unqualified to be working in the area they are working...
This is like how some are always complaining that the problem is "capitalism" like "we have to get rid of "capitalism" and then things will be better!" or some nonsense... meanwhile unqualified ideologues in charge of economic systems are running all around screaming "we're out of money!!!!"
I got news for you.... if you get rid of capitalism and replace it with socialism or whatever, if the new unqualified ideologue morons in charge are all still running around screaming "we're out of money!!!" then nothing is going to change...
Owners have no legal obligation to compensate workers for their productivity, as shown in the graphs in this article:
https://www.wsws.org/en/articles/2015/09/04/wage-s04.html
Well Said, Matt.
I deleted my comment because it was as much of a rant against the orthodox methods as anything. TFP models measure what orthodoxy wants them to measure in the way orthodoxy thinks they should be measured. It is all framing by the left-academic-neoliberal elite to promote their ideology of a world entirely ruled by a social hierarchy of academic achievement rather than technology, innovation, investment, and work.
Progressive economists if they believe in reducing inequality, need to advocate measurements, models and policies that make the obvious solution boosting the productivity of workers at all levels including the bottom. The current models make the obvious solution getting another university degree for workers to remove them from the bottom while abandoning all economic activity and endeavors that don't involve getting another university degree as they are 'lost' and 'never coming back.' (TINA) The problem is that we always are going to need people to do jobs at the bottom, we should increase their productivity, get them decent wages and training and provide institutional support and regulation that enhances innovation, technology and increases the abilities of workers to command more remuneration to do the most mundance, non-university degree required tasks with the same vigor that we subsidize academic pursuits. The reason that an attorney can demand $500/hr isn't market forces. Market forces don't get surgeons $15,000/hr. Public investment and regulation of their training gets them high wages. There are alternatives, those jobs can "come back" and can be made to lift the prospects of the poor and middle class to higher levels of productivity. Hair cutters, house cleaners, auto mechanics, and lawn clippers are not doomed to poverty. It is time they are no longer used as the examples of workers that can not improve their productivity. We should use surgeons that have to perform appendectomies as a profession that can not improve productivity. The average appendectomy is what $35,000 now? And they are upper class. Productivity as measured, has nothing to do with wages or amounts that people command. Market forces my foot.
As Warren put it: "all prices are necessarily a function of what the govt pays for things and what they let govt fiscal agents lend against things...."
@Matt when I first read Warren's claim that government has the power to be a price setter I was skeptical but after considerable thought I have come to agree with Warren.
Certainly it is true in my field (engineering) where about half the engineers are employed by the government or by government contractors. If a government contractor pays engineers $X that sets the bar for all engineers.
Certainly it is true for educators who mostly work for a government and whose salary relies in part on Federal funding.
Certainly it is true for health care where Medicaid and Medicare price standards function as a "minimum fee" for medical procedures. If the government is willing to pay $35,000 for an appendectomy then why would any hospital do it for less?
Certainly it is true for low wage workers where the government sets the minimum wage and that ripples up to other hourly employees.
Certainly it is true for construction workers where Davis-Bacon wage guidelines for public works has a ripple effect on the entire construction sector.
And so forth. The real invisible hand controlling prices is the government's hand.
" The real invisible hand controlling prices is the government's hand."
Yes, and this information, like the observers of the faulty bridge in Matts excellent example above is used to different means by different observers. There are those who see this as evidence that we shouldt have the govt buying things and affecting prices because they are distorting the "free" market. The "just get rid of govt" people are like the guy whos asking "who decided to build that bridge?".
Govt aint getting out of the business of buying things, so we need to put people in govt who will ask the right questions of what to buy and why AND they need to use their power to set prices in a way that advances public purpose.
We live in an environment where the majority, considered 'non-productive' are funnelling wealth to the elite urban class, based on a model of cheap oil, the 'productive' class. For the 'productive' to keep their status, the non-productive CANNOT under any circumstance share the so called 'growth of productivity', they cannot access to the produce. This goes back to the late 70's and the oil shocks. It goes back to resource constraints and the depth fear the Malthusians in the top (the 'productive' class) has about sharing the produce. The parasite only needs to let feed the host enough so it can keep producing the produce but not more so it can cure itself, as if that were to happen, the host could end up killing the parasite. That's why they are rising rates as soon as they hear of 'wages picking up'. We cannot afford oil @ 100 USD, because then the parasites cannot keep feeding from the host, and something has to give.
The non-sharing of the produce has one single effect: it opens space for inflation for the 'productive' class. AKA the urban class, the upper-middle class, and the economic elites. But above all for the cohorts and echelons that sustain the current structure (this includes plenty of management, govt officers, highly skilled professionals, some mid/big business owners, etc.).And this is way NOTHING will be fixed, is not even about the rich or the elites, is about the system perpetuating itself, the status quo, and for this it has to follow the current path of decay. Because there is not enough wealth for everybody to live in McMansions, and this cohort knows it. That's why they so vehemently will attack someone like Corbyn, because it may pose a problem for the share of inflation creation they want to absorb. As MMT would or could say: IT'S ALL ABOUT INFLATION, STUPID (and that's why any discussion, eventually comes back to this).
We have been inventing bullshit jobs for decades, mostly through govt lobbying and action (read the post by Tom below, as it's related), with very little REAL value added, an in many cases, with negative value added (like a big chunk of the financial industry in the last 40 years of casino-nomics; or the economics profession). Not to say, that with all the externalities and living off natural capital not being accounted for, the productivity is much higher than otherwise would be.cAnd this all has been to the advantage of a cohort (the economic elites at their enablers and supporting structure).
The 'productive' class probably are afraid (and that's because they are closet fascists that will use the police to brutalize the 'non-productive' so they keep working and shut up with their complaints) the day the non-productive are fed up and stop working FOR THEM, as then they will have to give up part of their privileged status. And that cannot happen, can it?
"Certainly it is true for health care where Medicaid and Medicare price standards function as a "minimum fee" for medical procedures. If the government is willing to pay $35,000 for an appendectomy then why would any hospital do it for less?"
What is happening now, in some cases, is that hospitals do bid with private insurers to lower their package fee for a particular procedure like Appy, Cholecystectomy or Heart Bypass (They wont offer the same thing to the govt usually, they are always trying to get MORE form them). And of course the beneficiaries of these deals are the management. They find ways to do these with less people or with the same people for less pay.
Im of two minds about all this. Being in health care (in the OR, a very high revenue part of hospitals) I definitely think we need to be better and do less unnecessary things. We definitely need to spend as few resources as are necessary to care for patients but our problems are NOT that we pay too much for unnecessary things but that we dont do enough necessary things until the patient becomes critical and then needs an expensive intervention. We are great at disaster care. We wont take care of these people until they need life saving surgery. However, if we start doing better at keeping these folks out of the operating room we wont need as many anesthesia providers.
Greg imo alot of that is like the old "$500 hammer" that DoD allegedly paid for... its all just the way you do the cost accounting...
(and btw the people who become indignant at the so-called "$500 hammer" are F_ING MORONS... literally they are as dumb as tree stumps imo.... they cant even understand the most simple cost accounting principles.... )
So the direct costs of the procedure are no way $35K but when you put in all the indirect costs (over head, facilities, snow removal, grass cutting, HVAC, etc..) , it ends up "costing" $35k...
I'm here near Johns Hopkins the place is positively fabulous it is a huge asset to the community.... but if you look at the whole place, it needs a lot of revenues to run it ($100Ms probably) ... so take that nut and divide by number of procedures and you get $35K or whatever... WHO CARES? (the f-ing morons who think "we're out of money!" thats who...)
Same with education... you take the total nut of the U and divide by number of students and you get the tuition... and then the morons say "hey! the cost of education is going up!!" (no shit!?)
FD: Its getting harder for me to maintain respect for people who dont understand these things...
One simple explanation for why capital share seems be be increasing over labor share is that technology "increases productivity" by making workers redundant. Since non-financial capital is almost synonymous with technology, capital assumes it is just taking its fair share of the contribution to increased productivity.
It is erroneously assumed that workers are "working harder" when productivity increases when they are working "more efficiently" in that less human input is needed owing to "substitution" of capital (technology) for workers, the thinking of economists being that capital and labor are substitutable. When it is economically more efficient to substitute technology for workers, firms do, reducing labor costs. The difference between labor cost and capital cost then is added to capitalists' profit.
Makes sense on the micro level but assume that workers can be employed in other capacities without decreasing overall efficiency. That is, of course, often a gratuitous assumption that doesn't work out.
The same principles should be applied to minimum labor costs. It costs what it costs to live, get over it. Squeezing the poor isn't the way to boost profits for 401K and pensioners and governments looking for that half percent extra to pad their retirement funds.
Totally agree Matt
As I said during much of the healthcare debate in 08, we have the most expensive healthcare system cuz we want it! There are a lot of well trained people who should be well compensated. They arent the peoblem, its the guys in the insurance industry who are doing NOTHING to improve the health of our citizens, yet because they are in an indusrty where it is verbotten to suggest they need to settle for less, they get to spend all day looking at their pile of money (which comes form workers and their checks or govt) and invent reasons not to pay it out for benefits. They make millions.... for saying no.
The finance part of education is bankrupting the product as well.
if you get rid of capitalism and replace it with socialism or whatever, if the new unqualified ideologue morons in charge are all still running around screaming "we're out of money!!!" then nothing is going to change...
That's true, and yet prioritizing money and machines over people and the environment is no small bias either. Given that bias it is impossible for capitalism (economic liberalism) to work as the institutional basis for a sustainable community socially, politically and economically, for the many reasons previously discussed here. But fundamentally it is not an integrated system so it is riven with social, political and economic dysfunction owing to built-in asymmetry. It not only doesn't work as advertised, it cannot work to produce the promised outcomes.
For example, government is neither a firm nor a household. Approaching governmental administration on either of models leads to disaster. So the conclusion of economic liberalism is to eliminate government from the economy and restrict it to personal security, including criminal law and national defense, and enforcing commercial law that is determined on the basis of the principle that those who own a country should govern it.
This is not just a matter of ideology versus technocracy. It is a matter of competing ideologies. As long as economic liberalism prevais as the dominant ideology, an integrated approach to institutional arrangements and governance is precluded.
The starting point is to put people and the environment ahead of money and machines and that is antithetical to capitalism, whose name indicates that capital is privileged over other factors because "scarcity."
@Tom said "Since non-financial capital is almost synonymous with technology, capital assumes it is just taking its fair share of the contribution to increased productivity .... Makes sense on the micro level but...."
Right. And if capitalists hog the income, who will be able to buy their products?
"The starting point is to put people and the environment ahead of money and machines and that is antithetical to capitalism, whose name indicates that capital is privileged over other factors because "scarcity."
Yes, there has to be a moral basis behind economics otherwise it's just sophistry to justify self-interest.
Dan they dont "hog the income..."
the S&Ps only retain about $150B of their $1T of profits, the rest is paid out as dividends (500B) and expended on capex (350B)... they are only "hogging" 15% of PROFITS... I wouldnt call that "hogging"...
The FED is probably removing more than that right now via the portfolio income they return to Treasury... for "deficit reduction"....
rsp,
@Matt, financial assets are owned by the 1% so when the 1% pay dividends they're paying themselves. Most of the 1%'s wealth is in business equity & financial assets and most of their income is capital gains.
When the rich hog income that's a demand leakage since the rich save a substantial amount of their income. Unless government makes up the difference it's bad macro, though it may be great for the individual firm.
Dan what about all of this:
http://www.treasury.gov/ticdata/Publish/mfh.txt
Over $4T of FOREIGN OFFICIAL reserves for crying out loud ie G-O-V-E-R-N-M-E-N-T-S...
The ECB morons are going broke at negative rates over there and are probably buying USTs because those bonds have a + yield... "so they have money!"....
This is not "hogging"?????
You cant even BEGIN to blame this on ideology...
The technology is driving the ideology... not the ideology driving the technology...
rsp,
The technology is driving the ideology... not the ideology driving the technology...
I would say that because of their ideology these people by and large don't understand how the technology works, and if those that use it for their own benefit and that of their cohort and its minions regardless of the consequences to others.
This is a reason that they regularly reverse the direction of causality, for instance.
The don't understand even when it is explained to them clearly because their ideological blinders prevent them. They are not stupid but blind-sided by cognitive bias grounded in self-interest. They don't want to know because then they would have to admit being wrong and do the opposite. Never happen.
They are used as collateral. Anyway, there is also the 1%'s of other countries (most of that dollar holdings are not in public institutions really) are "hogging" dollars. Happens with euros too... Anyway, on this topic, quoting Neil @ Bill place:
A floating rate currency is an effective control on capital flows. You can’t sell currency you can’t obtain and you have to settle your contracts within two days in a market with no market maker of last resort.
That means in any stress situation the liquidity dries up and those short end up having to pay through the nose to close their contracts. That limits the range of movement and causes an auto-reverse.
It only stops working if you have an idiot central bank that thinks its job is to provide ‘liquidity’ into the FX market. It isn’t. That is the job of the other central banks in the world who want to export to you. The local central bank and its regulated banks should *never* create money to allow FX transactions to complete. No lending for financial speculation.
Once that lesson is learned then this silly ‘open’ vs ‘closed’ argument – which has no basis in reality – can be put to bed as the FUD that it is.
It always amuses me that classical theory assumes infinite liquidity in the FX market and limited liquidity in the bond market, when the truth is exactly the opposite.
...
The argument is whether the holders of bonds are the correct entities that should receive a government income. The majority of current bond holders are not the correct entities to receive a government income. They should get out there in the private sector and do something useful, or have their money rot in a bank account.
However there is an argument as to whether an individual should be able to buy a safe indexed linked annuity straight from the government to provide a graduated pension for retirement.
...
The degenerate case is of course foreign ownership of savings. The foreigners never spend the interest because they wish to control the exchange rate to maintain their export policy to your nation.
Therefore any interest paid on the foreign held savings is simply saved and never spent (it ends up buying more bonds – if there are any on sale).
Blame the FED, the US Treasury, and the government for issuing debt at all. Is madness, but is an other form of welfare for a very small part of the population which is at the top echelon of the economic chain, to funnel money to them.
@Matt
I dont completely understand your objection to Dans point about the 1% hogging the income. Yes, Fed policy is probably robbing them of billions with low interest rates but their take of business' cash flows has risen to levels which are strangling the average worker, especially as the cost of many basic things like housing has gotten out of reach for many. Especially as a renter. The share to the real workers/producers has not kept up with costs over the last 30 years and any efforts to raise incomes via min wage legislation or anything else (begging, cajoling) does not seem to resonate with any of the upper class. They insist, and their bought and paid for economists parrot them, that in fact American workers are way better off than they were 30 years ago, so nothing needs to change...... except their tax rate.
Its certainly true that macro policy in this country is completely devoid of coherence and commonly understood economic models are making it so but I think Dan is not being bombastic when he says hogging.
Also, there needs to be a consideration of economic rent and rent-seeking, which what a lot of capitalism is about and always has been. Marginalism masks that and in my view MMT doesn't shine enough light on it. Even though Michael Hudson is a member of the UMKC faculty, I won't consider him to be an MMT economist, but he is tackling the issue of rent head on. So maybe that gets associated with MMT owing to the connection.
@Greg thanks for understanding what I was trying to say.
@Tom the "rent seeking" concept seems to assume that some high income is "earned" while other high income is not "earned." I'm not so sure that any high income is "earned." :-)
Marinner Eccles on the 1% hogging money: There is plenty of money today to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry and making it appear that there is a great shortage of money .... During the period of the depression the creditor sections have acted on our system like a great suction pump, drawing a large portion of the available income and deposits....
We saved too much in this regard, that we added too much to our capital equipment. Creating overproduction in one case and underconsumption in the other because of an uneconomic distribution of wealth production.
"@Tom the "rent seeking" concept seems to assume that some high income is "earned" while other high income is not "earned." I'm not so sure that any high income is "earned." :-)"
High progressive tax rates assume that the higher the gain and greater the wealth, the less is actually earned. Therefore a progressive income tax schedule, capital gains tax, and inheritance tax.
This is not to fund government but rather to address rent-seeking.
@Tom AGREE !!! :-)
"... the S&Ps only retain about $150B of their $1T of profits, the rest is paid out as dividends (500B) and expended on capex (350B)... they are only "hogging" 15% of PROFITS... I wouldnt call that "hogging"..."
That's hogging the income. The stockholders are the owners of the company. Every dollar paid out to owners is a dollar not paid to workers.
Dan L's argument isnt even stock/flow consistent...
He says "hogging the income" (flow)
Then he counters with "the 1%" (stock)
"Income" in the technical sense is earned. Revenue includes earnings and gains that are unearned, which comprises interest, dividends, capital gains, and inheritance, for example. It also includes other forms of economic rent including land rent, monopoly rent and financial rent, as well as gains from illegal and unethical means.
I don't get that criticism Matt. Im not sure you can use stock/flow inconsistency the way you did.
Its entirely valid to look at all income flows and rank them from top to bottom (most flow to least flow). Then you take the top 1% of the list (if only 1000 flows you look at the top ten) and calculate the total flows. What percentage of the overall flows does that 1% comprise is a legitimate question.
I remember when I went to the Tennessee Aquarium for the first time , there was a display on rivers of the world. One of the factoids on display (which blew my mind) was that the Amazon and the Congo have over 2/3 of all the fresh water flowing through rivers flowing through those two rivers! It certainly would be inappropriate to accuse those rivers of hogging all the water, but our economy is making choices to direct income flows to where they are.
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