Monday, August 28, 2006

Wages, Productivity, and Immigration

A story in today’s New York Times highlights the latest data on wage and productivity growth. See Greenhouse and Leonhardt, Real Wages Fail to Match a Rise in Productivity, New York Times, August 28, 2006 (online at

The story indicates that there has been a 2 percent drop in the median hourly wage for American workers since 2003, after taking into account inflation. At the same time, productivity gains continued, outpacing the rate of wage growth. During the period 2000-2005, productivity increased by 16.6 percent, while the median wage increased only 7.2 percent. At the same time, corporate profits are up, thus suggesting that employers benefited from these productivity gains at a greater level than workers did.

Consistent with the editorial slant of the New York Times, the writers seemed to go out of their way to make this into a news item boding ill for the Republicans in elections this fall. The article makes much of the growing disparity between the high-end workers (i.e., CEOs) and the rank and file, and the possibility of voter discontent running toward incumbents. In fairness, it also notes that wage disparity has been growing over time, and that was not the fault of the current administration.

Wage stagnation is a matter of concern to working Americans. Though it is popular in some circles to lambaste globalization as the cause of downward competitive pressure on wages, as a practical matter little can be done about the trend toward global trade without great economic harm. Goods and services are going to be crossing borders with increased regularity, affecting the competition for those goods and services here and dampening wage growth. According to the article, even those earning over $80K/year are struggling with wage growth (though apparently not the top 1% earners, such as CEOs.)

This disparate result is not a vast conspiracy against the common man. CEOs can benefit from leveraging profits from global cost-cutting and trading opportunities to the extent that their compensation is measured by the output of the enterprise. The average workers, not so much – but they can benefit by consuming cheaper products and services than might otherwise be available. That plasma TV made in China would not be available for the big game without global trade. Unfortunately, one of the products we import a lot of – oil – has taken an increasing share of the earnings of workers these days. To the extent that something can be done about that – like expanding supplies domestically through offshore drilling or exploration in Alaska – the political parties have not been effective at advancing this obvious (albeit partial) solution. However, hand-wringing and blaming continues – which results in even more global warming if you believe political hot air contributes to this phenomenon.

Wage growth can also be affected by immigration policies, which is another area where political wills appear to be lacking for both parties. The supply of lower-skilled workers has been increasing dramatically in domestic markets through unregulated immigration, seriously dampening wage growth. Though many say native Americans won’t do the work that immigrants do, that is not so: they simply won’t do it at these prices. Instead of requiring higher wages from employers, the influx of immigrant labor means that lower wages can continue. Thus, immigration is likely to have a significant impact on the trends identified, but particularly in dampening wage growth.

If the public begins to understand the effects of immigration on domestic wage growth, this issue will resonate with many voters in middle-class America. However, two powerful interests are likely to dampen the enthusiasm of political candidates to address this issue in close contests – and both parties are affected.

On one hand, we have business interests. Whether large or small business is involved, no one wants to take a policy position that will increase their costs and decrease their competitive advantages. Why stop trends that dampen wage growth? This understanding undoubtedly affects what is often a Republican base that candidates cannot afford to alienate.

On the other hand, the substantial size of the immigrant population is something that Democratic candidates cannot ignore, either. They perceive a potential electoral power base coming from the immigrant population, as well as from others in lower economic strata. Common support bases among those who believe in enhancing state support for health care and other public welfare services provide a natural ally for Democratic candidates, which they will not want to alienate. A lack of economic progress actually helps this power base – if its members turn out to vote.

Though labor unions have long been a source of Democratic support, their numbers are generally declining. Sadly, the labor unions may find they have no one speaking their language on this issue, as their candidates will likely make an electoral calculus and follow the votes. For many, this means choosing liberal immigration policies despite the fact that they drive down wages, particularly for those with lower skill levels. Though rhetoric on globalization may seduce some union folks into believing their candidates care about their plight, they must realize that this is just like talking about the weather: everyone talks, but no one does anything about it. The sooner this group recognizes this truth, the sooner they will be asking some tough questions and focusing on this political problem.

It will be interesting to see how this quandary is resolved in this fall’s campaign season. I think we’ll see lots of dancing around the issue, but not much straight talk. And this is not a healthy sign for the future.


1 comment:

Shawn Deluhery said...

I wonder if the reporter is slanted, or are you reading it with your conservative bias?

At any rate, the statistics in the report shows the economy is either growing to slow to benefit the worker or corporate officers are too greedy to hand over some of the gains to the worker. In reality it is both, especially demand I'm afraid.

In reference to the New York Times slant, I thought it was common knowledge that conservatives are in fact Robin Hood in reverse. Reagan at least admitted to stealing from the poor to give to the rich in the praise of productivity. Clinton, not a liberal or a conservative, did slow the wage gap growth even with a republican senate.

Don't worry though. The republicans will still get votes from these people because they strangely vote out of social interests which are not at all important to this current conservative movement as shown by how much time, effort, and money the conservatives have spent on gays and abortion. In fact, I fear, the poor and misfourtuned will continue to vote against their economic interests until they are literally homeless.

Wage stagnation is naturally a concern for not only the working class, but more importantly to the macro economy. If we stop and think for a moment, the U.S. is powerful because of two circumstances. First and most important, the U.S. has yet to be invaded by a more powerful military. Thank heavens for the two large bodies of water we call the Pacific and the Atlantic oceans! Second, the U.S. consumer LOVES to spend. Ah, demand! The U.S. consumer relentlessly demands more and better products and services. If wages decrease or stagnate for a long period of time, unrest will casually increase. Unrest normally leads to violence and murder, hurting the macro economy.

Globalization is a cause of wage stagnation. Why would I give a worker a raise when I can hire someone in Mexico for less? Why hire the Mexican when I can hire someone in China for even less?

I agree with your conclusion on globalization. It is happening, and thus, cannot be stopped. History has a rhyme and reason, and cannot be altered.

The CEOs are getting away from not paying their workers more money. This is the way business works. If continued, this will naturally hurt our economy as we will continue to be taking dollars out of the U.S. workers' hands into foreigners' hands. This is what is taking place. In turn, the U.S. worker has less money to play with, causing demand to decrease. It doesn't matter if Wal*Mart continues to cut prices. If I don't have a job, I am not buying the products. In economic terms, this is unacceptable.

So, U.S. businesses MUST address globalization responsibly or else the government will step in to help those who are left behind. This is the government's job.

Now about oil. Off-shore drilling won't work because there isn't enough oil there to matter. The cost is way more than the benefit. Why don't we increase our refinery facilities? Why didn't the oil companies increase the refinery facilities to meet demand? There is enough supply, heck, its all in the ground! It hasn't all of a sudden moved has it? At any rate, I heard only one oil executive, an Italian oil refiner, who described the oil situation best. The oil supply is controlled by those who live on top of it since it is in the ground. As a result, they get to set the price. Political parties are ineffective because they probably know this immovable fact.

Now about immigration. I don't know if I'd call it deregulated immigration. More accurately, I'd call it a failure to impose the standards as they are written. One question, why are businesses not punished for hiring illegal aliens? The illegal immigrants are dampening wage growth because it is illegal, not because it is a shrewd business move. Companies can hire them for less since dollar is worth so much in Mexico and you don't have to pay them any benefits. By the way, it seems the Native American analogy is false. The reason why Americans will not do the work immigrants due is because they simply do not want to do it. If illegal immigrants were forced out, fast-food chains around the U.S. would close! At any rate, I do agree with the premise that illegal immigrants do keep wages down. The verdict is not out yet on if this is a good thing for our economy or not.

I showed above why stopping wage growth is a bad idea. Liberals want to get as close as possible to full employment because they simply want others to have a better life. Dampening wage growth hinders a better life. I don't know about you, but I sure could use a raise.

Yes, I'd like someone to come to the table and speak the truth. Can you say Barack Obama? Stay tuned!