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Mystery (Sort of) Solved: Why are Wages so Low?

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Two big trends have hit the economy over the last four decades. 

One, worker wages as a percentage of GDP have plunged. It looks like this: 

Two, corporate profits as a percentage of GDP have surged. Here's that: 

What's going on here? 

For years the explanation was that corporate owners were collecting more of the economic pie for themselves at the expense of workers. Unions declined, shareholders benefited, and so on. And that's almost certainly the case. 

But a new paper published by the Brookings Institute shows that explanation might be overstated. The paper covers a lot of ground in the wages vs. profits debate, but this part stuck out:

[Around] one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure.

In other words, part of what we may have been counting as profits are what most people would call wages. Millions of workers are employed on a contract basis, often working full time for an employer but invoicing for their work, rather than receiving a salary. Most of these workers would consider themselves employees. But if their income is counted as a business profit, measurements become skewed. 

What explains the other two-thirds of labor's decline? A lot of it is the decline of labor-heavy industries like manufacturing. Here's economist Justin Wolfers on the report: 

My favorite example of former high-labor industries pushing out labor's share of the economy is the steel market. In 1950, a U.S. Steel plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers, according to The New York Times. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.

Anyway, this is another example of how we need to be careful drawing strict conclusions from data.

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  • Report this Comment On October 01, 2013, at 4:17 PM, AltReality11 wrote:

    <i>Anyway, this is another example of how we need to be careful drawing strict conclusions from data.</i>

    Yes, and I was in that Gary mill in the 80's and 90's and my company provided process control improvement technology. Our customers ranged from NASA to steel mills to petrochemical plants and even cement manufacturing. As a consequence of our work in the steel industry, it wasn't simply the workers who were reduced. Energy consumption was also substantially reduced.

    One of the ancillary consequences of the application of sophisticated process controls was also a reduction in worker injuries, or what we call "lost time accidents." Even if we consider a 25% reduction in hourly employees, the consequences of the application of automation technologies was astounding.

    It's common sense. Move human beings out of harms way, and injuries and fatalities will decrease.

    Government agencies like OSHA and MSHA like to take the credit and that's how they justify their existence. But I know, from real experience, that removing workers from dangerous environments has had a real impact on reducing worker fatalities and injuries. After all, that's what automation in industrial settings is really about. Our goal was to turn workers into managers while moving them from the front lines to a safe place where they could make great decisions.

    Politicians love to take the credit, but it was engineers in concert with corporate managers who got us to where we are today.

  • Report this Comment On October 01, 2013, at 7:00 PM, kyleleeh wrote:

    A lot of contract work overseas never gets counted in our economic measurements also. I wonder what apples productivity per employee would be if they counted the 600k contracted employees in Asia that make apple products and the components that go into them.

  • Report this Comment On October 02, 2013, at 10:10 AM, sevenheart wrote:

    Any correlation between declining wages and the increase of government during this period?

    Nice overview AltReality11. It's the same on oil rigs, majoity of injuries and fatalities came when handling drill pipe. With some incredible engineering innovations people have been moved out of harms way so that now most oil rig workers are injured or killed driving to and from the rig, or from having strokes and heart attacks.

    Get out of the engineers way and watch the progress!

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