Saturday, January 10, 2015

Where have all the wages gone?

Thus, after a week of reflecting on the life as it evolved on the way to and from India, and when in India, I return to my regular programming--how much I missed it! ;)

I went to fill gas (petrol, for you readers outside the US! haha) in the car and thought I had traveled back in time when I saw that a gallon was $2.27.  (and 9/10 after the 27, of course)

So, low gas prices are good, right?  Ahem, "it could prove a headache for Federal Reserve Board Chairwoman Janet Yellen."
The Fed is thus facing a bizarre economic dilemma: It has runaway growth and collapsing prices at the same time. The weapons available to Yellen to fight deflation are flimsy. Normally, the Fed would want to lower interest rates. But they are already at zero—there is nowhere left to go. And, of course, house-on-fire economic growth usually calls for higher interest rates, which would only exacerbate the deflation side of the problem.
Economists do not like inflation, yes.  But, deflation is way more worrisome--panic provoking--than inflation is.  And the Fed will not tinker with interest rates for a while:
This would imply that labor-market indicators would become critical to the FOMC’s analysis of when to raise rates—and in particular wage growth. As Yellen put it in August last year, “since wage movements have historically been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate.”
That is, rate hikes may be put on hold until people start seeing the benefits of growth in their take-home pay.
Growth in the take-home pay?  Oh, yeah, haven't I been blogging for a long time that middle-class jobs are incomes might never come back?  What does Paul Krugman have to say?
wages are still going nowhere, up only 1.7 percent over the past year.
That's it?  Maybe he will have more on this over the next few days.

This blogger is convinced that the wage stagnation is here for the long haul.  And is even more convinced when he reads pieces like this:
A declining labor share of income also makes it possible for labor productivity to rise without average wages rising in turn. That is, it means that workers can get more productive without seeing the fruits of their labor. That's a big deal, both for workers and for economics as a discipline. For decades, most economists have treated the existence of a stable labor share of income as something like a law of nature. It was one of six "stylized facts" the famous economist Nicholas Kaldor proposed in 1957. Those facts serve as foundations for a staggering number of influential macroeconomic models, including the ones that the Federal Reserve and federal budget officials rely upon. If the labor share is falling, things that most economists would have treated as impossible ten years ago start to look very troubling.
For those of us who have jobs with a decent enough pay, well, this ain't a bad time, with low interest rates, low inflation, low gas prices.  But, if you are like me who believes that it is the responsibility of middle-aged folks to watch out for the long-term welfare of the young, then you, too, will be worried.  Even if you live in India and not in the US--especially because many of the economic dynamics are similar!

Of course, you can forget all these, and utter your own version of "let them eat cake" and watch the "college" football national championship game, then "the superb owl," and then the "March Madness," and go international with sports all over the world.  The youth be damned!


Ramesh said...

You haven't done justice to the headline.

Wages are falling only if

- your post exclusively deals with the US (Wages are not falling, and will not fall, in China and India for some time to come)

- you are a low skills worker. If you are a very skilled plumber or carpenter in the US, your earnings are actually going up

- you are inflexible and immobile ( you are not prepared to be self employed, you are not prepared for flexi hours and you are not prepared to move where the jobs are)

The problem is compounded by the fact that

- your wages in the US are actually way too high to be really competitive globally.

- you will not save even $5 a day, when the times are good. Savings rate in the US is , to put it finely, too low.

It's hard to feel great sympathy for the US worker, although I know that is a very inhuman thing to say. OK - I'll feel just a little sympathy.

Anne in Salem said...

From the business perspective, increasing wages can be an impossibility in light of government demands of employers. Obamacare is replacing increases and bonuses for many businesses which simply cannot afford both. In addition, for every dollar wage increase, it costs the employer an additional $0.20 in taxes, social security, Medicare and workers' comp insurance. 10 employees receiving a $0.50 raise will cost the employer approximately $2000. Where is he supposed to get that money, especially with Obamacare costing him $1000 or more a month?

How many employers are withholding raises, awaiting the wave of $15.00 minimum wage to sweep the states? For businesses that can survive that increase, they need to save now for that possibility. I hope legislators talk to business owners, not just unions, before taking this step. Clearly they did not before passing the ACA.

Ramesh, saving one's income and preparing for the future are anathema in the US, where far too many people expect the government to take care of them when they hit hard times. They expect the government to forgive their student loans, save them from foreclosure, and pay for their retirement and medical care in perpetuity. We have lost our sense of personal responsibility and have become leeches on society because independence has lost its honor and dependence has lost its stigma.

Sriram Khé said...

I continue with some of the related issues in the next post too ...

1. Even in China and India, digital technologies will increasingly trigger wage stagnation. In India, the fabled IT jobs will not only slow down in their growth rates, the compensation for those jobs will fall and fall rapidly. There will be a few at the very high end of pay and there will be a vast number down at the other end toiling away.
2. The awesome technological progress means that even the demand for skilled labor decreases, and decreases rapidly. Plumbers are the best examples--because the water/sewer technologies work so well now compared to the past, rarely, rarely ever do households ever hire plumbing help anymore.
3. Yes, on the pathetic savings rate. If only we would understand how awful a strategy it is to spend money on all the fancy gadgets without saving for that rainy day and month and year!

Sriram Khé said...

Anne and I are in different political-economic camps, even more than Ramesh and me being different camps ;)
But, despite the differences, it is cool that we are able to exchange comments and exchange them freely.

As I mention in the latest post, I would note regarding Anne's points that they require extensive responsible discussions in the political scene. But, that is asking too much from most of our elected officials who only deal with irresponsible and unprincipled rhetoric.

I disagree with Anne's "leech" metaphor ... primarily because people don't expect those as much as those are a part of the social contract. The social contract about retirement, Medicare, homeownership, ...
Now, are these the golden rules and unchangeable like the speed of light? Of course not. But, rewriting the social contract will require extensive responsible discussions in the political scene ....