What is the Matter With the Labor Market?

Labor's share of the economy has rarely been lower- what is going on?

We will start with a graph of share of income, to labor, vs capital. Note that labor here includes all the highly paid executives- all those fat salaries. The share has been going down for decades, while the profit and capital share has been going up. The seventies were the high-water mark, when unions reached their apogee, and after which the Reagan revolution put business and management back in the driver's seat. 

Labor's share of national income is at an all-time low.

The neoclassical theory of labor is that businesses will hire as many employees out of a perfectly liquid labor market until the last hire is exactly as productive as her labor cost. Every worker would be hired into their most productive possible job, with the commensurate pay. Over the economy as whole, this mechanism would mean that everyone who can be productive will be employed, and that every company produces as much as it can sell. And also that wages grossly equal the productive capacity of the workers, as judged by what buyers are willing to part with. 

In a very rough sense, there is logic to this model, which at least has the virtue of generally equating what is being spent by buyers with what companies are making as revenue and paying out for their inputs, including labor. But there are a lot of problems when you get into the details, making the whole topic of labor market operation and wage-setting far more complicated, and far less fair, than capitalists and their favorite economists envision. It is a bit like the market for medical care, which has grievous flaws. One wouldn't want to go to a Stalinist system of state job assignment and wage-setting, but that doesn't mean the market mechanisms are operating fairly and efficiently.

One would have thought that the internet, enabling rapid and nation-wide job posting and hunting, would have fundamentally changed the job market, in favor of workers. But the graph above disagrees- things have gotten worse instead of better. One thing that internet job boards do not mention is pay. That remains a closely held secret, never discussed with workers or with prospects, until the moment when they have already been reeled in and gone through numerous interviews, and the low-ball is offered. There are many other structural asymmetries and power dynamics. Productivity is extremely hard to gauge, and ends up being whatever one's manager gets into her or his head. The whole job-finding process is extremely averse, full of humiliation, uncertainty, and pain, enforcing inertia in current employees, and thus power for employers. 

For example, a paper from a few years back shows that, when women enter a profession and change its composition, the pay across that profession goes down. The scholarly language is restrained, but the lesson is obvious. Pay is set by intuition and power relations, not by an analysis of productivity, or the magical workings of a fair labor market. The 80's started the greed-is-good movement in American business, as executives were empowered to take pieces of the business for themselves. Before, managers were employees, often well paid. Now, their pay became increasingly an expression of power rather than productivity- how much they could extract from the business as rent. Naturally, the more money from the business (whether via salary, stock, or other benefits) went into executive's pockets, the less was left over for workers. Similarly, the whole theory of business underwent a change as well, from an organization with multiple stakeholders and purposes, including civic ones, to a singular focus on profit and rewarding investors. Labor ceased to be involved as a stakeholder, but was demoted to an input, to be paid as little as possible. 

One additional influence is the of sufficient wage. Most people are most keenly interested in having income sufficient to live on, in some style considered in their social sphere to be decent. When wages across society fall below this level, revolutions occur. But do wages ever rise above it? Employers are sensitive to these dynamics, and as part of their wage setting know what workers will put up with, regardless of productivity, fairness, revenue, etc. This is particularly relevant with the addition of women to the workforce. What used to be regarded as a decent wage, in that it supported a family, now only has to support half a family, since most families have two earners. The perverse effect of women entering the workforce is thus, on this admittedly vague social theory, not only to subject them to outright socially based discrimination, but to lower the general level of wages, insofar as employers can get away with that without generating an insurrection. 

The value of the federal minimum wage over time.

Now we are at a dramatic point, where a soaring stock market rides on ever-higher profits taken by US businesses, while a vibe-cession and plunging consumer sentiment show that most Americans are struggling, unhappy, and underpaid. Billionaires are sprouting like mushrooms, each of whose dollars is taken from the hands of labor. So what is fair, and what do workers deserve? We need to take a whole-society view here, rather than confining ourselves to what pure capitalism sees as an ideal. Much of income inequality comes from a minimum wage that simply has not kept up, not even with inflation, let alone with worker productivity. A recent book outlines much of the evidence, but it is well known that raising minimum wages is hugely positive, increasing economic activity and helping low-power workers get a fairer deal out of the system, at very little cost to job creation or profits. The authors suggest (very modestly, one must say) generally keeping minimum wages at sixty percent of the median wage, which is currently 64,000 per year, thus would work out to about $18.50 per hour. Lower pay than that generally reflects power dynamics of oppression, and feeds into bad working conditions and the maintenance of low-value industries.

At the upper end, a new social contract needs to be drawn up to re-orient the corporation to a more socially positive role. Competition, which is the most important discipline on businesses, needs to be fostered. Taxation needs to be raised and made fairer, removing escape hatches, offshore shelters, conduits, etc. Capital needs to be taxed at least equivalently with labor, not less, as is shamefully done now. The chances of any of this taking place in the corrupt environment of the current administration and congress is nil, obviously, but if they won't do it, then the workers they are so blatantly betraying have the votes to forge a new path.

• More on the debt.
• How can this staggering loss be sold?
• When labor gets out of hand.
• When companies become tax cheats. We all should have a Carribean subsidiary!