@Economike: real wage growth vs productivity

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anonymous_coward
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@Economike: real wage growth vs productivity

Economike, I'm curious for your take on this post:
http://jaredbernsteinblog.com/julys-jobs-report-solid-jobs-but-little-wa...

Specifically, the chart at the bottom with the huge divergence between productivity increase and wage growth.

The author attributes it to weakened labor unions and globalization but doesn't really give any kind of proof, he just sort of hand-waves it like a college professor.

The divergence does correspond with the rise of Japan, which was then followed by Korea, China, and India, so there's that. Would be interesting to see this graph but with global data, not just U.S. data.

Economike
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Divergence between

Divergence between productivity and compensation growth is a mystery to people a whole lot smarter than I. I can only speculate.

My first reaction is skepticism. How realistic are measurements of productivity, especially over time?

My second reaction is to focus on what one might call labor market frictions. For instance, "compensation" is wages and benefits. Over time, benefits have become an increasing share of compensation. Any employer's costs of non-wage benefits are necessarily greater than their value to employees. Thus, increasingly over time, rising compensation costs have failed to deliver real income to employees, skewing the compensation data we're using to track productivity.

Essentially, the greatest cost of benefits is for health insurance. Employees pay for heavily-regulated, one-size-fits-all policies through which they cross-subsidize the few workers who derive benefit from such compensation. Further, the system of employer-paid insurance imposes an additional rigidity by creating an additional cost of changing jobs.

Jared Bernstein wonders if stronger labor unions would increase compensation. But what do labor unions demand? Benefits! Vicious cycle.

So, productivity growth has slowed (mystery) and compensation hasn't kept up with productivity (mystery).

Economike
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Speaking of productivity, I

Speaking of productivity, I've recommended this book before, and it's worth a repeat. The author is William W. Lewis.

The Power of Productivity - Wealth, Poverty, and the Threat to Global Stability

https://www.press.uchicago.edu/ucp/books/book/chicago/P/bo3623392.html

anonymous_coward
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All great points.

All great points.

I remember hearing an interview with one of Bush 43's economic advisers, who was lamenting the fact that real wages had grown over the administration's terms but the entire growth was eaten up by rising health care costs.

mainemom
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Arnold Kling says the old

Arnold Kling says the old models don't work anymore, not in our post-industrial economy.

National Affairs

There's a lot here so an excerpt doesn't do it justice; he says, stop looking at models and look at the world instead.

All of this implies that economists' "neoclassical" approach to explaining the distribution of rewards is in peril. For employees, we can no longer treat productivity and earnings potential as individual characteristics, because the context in which one works matters a great deal. For firms, we can no longer expect to find a close connection between the revenues from investment and the amount of capital invested, because outcomes depend so much on strategic interaction.

Economike
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Thanks, mainemom.

Thanks, mainemom.

Arnold Kling is a geat recommendation, and a pertinent reminder that the map isn't the territory.

Kling frequently blogs on www.arnoldkling.com/blog

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