Paul Krugman’s recent piece pointed out that despite growing productivity, wages aren’t rising (very much) and that despite rising corporate profits, corporate investment isn’t rising (very much).
Unfortunately, these days none of what Mr. Lazear said seems to be true. In
the Bush years high profits haven’t led to high investment, and rising
productivity hasn’t led to rising wages.
The second of those two disconnects has gotten a lot of attention… The
administration and its allies whine that they aren’t getting credit for a great
economy, but because wages have been stagnant [since 2001]… the economy feels
anything but great to most Americans.
Less attention, however, has been given to the first disconnect: the failure
of high profits to produce an investment boom.
Since President Bush took office … rising productivity and stagnant wages —
workers are producing more, but they aren’t getting paid more — has led to …
corporate profits more than doubling since 2000. Last year, profits as a share
of national income were at the highest level ever recorded.
You might have expected this gusher of profits, which surely owes something
to the Bush administration’s pro-corporate, anti-labor tilt, to produce a
corresponding gusher of business investment. But the reality has been more of a
trickle. …
OK, so I’m going out on something of a limb here, this being the product of unadorned Worstall brain power and thus only marginaly less likely to be wrong than my predictions for next year’s Super Bowl.
But could the two things, low wage rises and low investment rises actually be symptoms of the same thing, strongly rising productivity?
As far as wages are concerned almost certainly yes. If (labour) productivity is growing faster than GDP growth then when a company wishes to expand production then it can do so from the internal growth in the productivity of its own workforce. OK, this won’t apply to every company all the time but on average across the economy it will. So rising production can be achieved without using more labour…meaning that there is no need to either tempt workers from other firms or to raise wages so as to encourage the currently economically inactive back into the labour force.
Thus, the transmission mechanism from rising productivity to rising wages is broken. Temporarily, until productivity growth slows to lower than GDP growth, as in fact seems to have happened in the last quarter or two and yes, as a result, we have seen real wages rising.
Hmm. Now, can the same mechanism explain both high profits and low corporate investment rates? Well, with much of the economy actually being a service economy (agriculture is what, 2% of the US workforce, manufacturing 20% or so? Or lower?) perhaps we can.
Again, a company can see that GDP is going up, they’re raking in the money. Sales (or the demand for products, whichever) are rising strongly, so why wouldn’t they invest in further production? Well, what if they can meet that extra demand purely from the increasing productivity of their current workforce?
Something that will only stop once GDP is growing faster than productivity growth. This provides this model with a possible test: if corporate investment strengthens in the near future, as we as above are seeing a slowdown in productivity growth in comparison with GDP.
Now, as regular readers will know I’m, not an economist, simply an interested amateur, so clearly and obviously this supposition must be wrong in some manner. It’s entirely too simple to actually be overlooked by all those who are economists and pontificators on matters economic, isn’t it?
So where and why is it wrong?
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