For those of you unfamiliar with his work, Steven Roach of Morgan Stanley Dean Witter is one of the foremost economic commentators on Wall Street. His current article is titled “The Big Squeeze” and its focus is the lack of income growth in the current US recovery: “America’s income-short, consumer-led recovery is the aberration — not the norm — in this Brave New World. It is all about ever-declining personal saving rates, ever-widening current account deficits, mounting debt burdens, and increasingly wealth-dependent consumers.”
“…even in the US, growth in hourly worker pay averaged only 3.3% over the past four years. [But] With consumer inflation averaging 2.1% over the 2001-04 period, real compensation per hour in the US business sector expanded at a 1.2% rate over this four-year interval.
“…real compensation per hour in the US business sector expanded at a 1.2% rate over this four-year interval [this is the inflation adjusted figure]. But that needs to be put in the context of America’s productivity performance — average gains of 3% during 2001-04. Economics teaches us that trends in worker rewards and productivity go hand in hand over time. That most assuredly has not been the case in the United States in the early 2000s, with growth in real compensation per hour averaging only about one-third the pace of underlying productivity growth.”
Let me stop right here and decode Mr. Roach’s ecotalk. Inflation is just a fancy way of saying how much less a dollar is worth on an annual basis. For example Mr. Roach notes the US’ average inflation number of 2.1% for the last four years. So $1 in 2000 would be worth $97.9 in 2001 and so on.
Productivity is simply a measure of how much more of product X a person, company or economy can make in a specific time frame. It stands to reason that if an entity can make more of X in the same amount of time it will make more money. Suppose a company originally make 5 units per hour and improves productivity to 10 units per hour. The company has effectively doubled its profit per hour of production. As a result, the company should reward its employees with higher wages to compensate them for their performance.
This is where the rub with the current situation comes in. Although the US is more productive, it’s employees are not being compensated for their improved performance.
This helps to explain the pathetically low-savings rates and record high debt levels of the US consumer. The US worker sees more of X being made, but he is not receiving his fair share of the increase in productivity. As a result, he participates in the expansion by going into debt.
However, it is important to explain why the US worker is not receiving his share of increased productivity. As Mr. Roach explains:
“My vote for the explanation continues to go for the “global labor arbitrage” — a critical outgrowth of globalization and the concomitant integration of cross-border labor markets. The pace of cross-border integration has now reached hyper speed. Global trade surged to a record 28% of world GDP in 2004 — up dramatically from a 19% share as recently as 1991; over the 1987 to 2004 interval, our estimates reveal that the expansion of global trade accounted for fully 35% of the cumulative increase in world GDP growth — essentially double the 17% share over the 1974-86 period.”
Let me decode all this ecotalk. “Cross-border integration” simply means that geographic borders don’t mean much to business. A company can move money to a new location at the click of a button and set-up a manufacturing facility. As a result, the company does not have to increase US worker’s pay at US rates, but at the rates of other countries. In effect, the US worker is competing against all a companies employees – national an international. This puts the US worker at a competitive disadvantage when negotiating wages.
What can the US do? The answer is simple. The US needs to develop jobs and skills that cannot be outsourced to other countries. Let me explain this by way of contrast with a current example. In January, the US lowered textile quotas on Chinese textiles. Within several months, Chinese textiles flooded the US market. US textile workers were up in arms for very legitimate reasons. But they have very little real power to deal with the situation. If they work for a multi-national company, the company can simply close the US plant and move it to a country where labor costs are cheaper. If the company only has domestic operations, a pay increase is less likely because of the increased competition in the textile industry. In short (and regrettably) the textile workers will in all likelihood have to simply take it if they want to keep their jobs.
Now, suppose the workers made a product that had a unique skill set – one that could not be easily outsourced. This would give the workers a stronger negotiating position for wage increase. This situation would also imply the workers were making higher wages because of the rarer nature of their product. <
This is where the real long-term answer to the US’ low wage growth lies. Building a job base that requires skills not available in other parts of the world.
This is what the Democrats have to push as their economic platform.