Most economists view productivity growth as being the key to rising living standards through time. The basic story of productivity in the post-war era is that growth was rapid in the years from 1947-1973, but then slowed sharply over the years from 1973-1995. Productivity growth then ticked up again in 1995 and has been relatively rapid since 1995.
1995, huh. That was quite a year according to this article by Aaron Krowne. Aaron argues that in 1995, an obscure loosening of US bank reserve requirments, and an abandonment by the Greenspan Fed of a "virtual gold standard", gave rise to an era of unprecedented growth in broad money. In my own mind, 1995 corresponds to about the beginning of the "asset economy", when wealth accumulation from capital gains rather than wage or business income became an unusually important driver of the US economy. Hmmm.
I have an monetarist intuition about wages during this period. Suppose that under certain circumstances fast money supply expansion results in asset inflation rather than goods inflation. Goods prices remain stable, the economy seems to grow at a moderate clip, but asset prices grow far faster than GDP. Sellers of productive capital (tractors, factory equipment, etc.) as well as workers then have to compete with the financial sector for investable funds. As expectations of asset appreciation increase, more investors choose to purchase stocks, homes, hedge funds, oil, or gold than to build factories, open businesses, and hire workers. Of course stocks have to be backed by firms, and homes have to be built, but on the margin, investment dollars are diverted from direct deployment as productive capital to purchasing paper assets via financial intermediaries. The net effect is a reduction of the "velocity of money" in the real investment sector, reducing input prices while at the same time diminishing future capacity. Input prices include wages.
In an environment where capital is drawn to appreciating financial assets, workers and vendors of productive capital have to make price concessions relative to productivity in order to attract funding. Rocketing asset prices should be expected to reduce the bargaining power of workers, and to exert downward pressure on their wages.
UPDATE: Shamed by Greg Mankiw and some awful grammar, I've performed major surgery on this post, prettying things up and dropping a long digression from the main point. (I'll insert the original version into the comments for posterity). 2006-10-08 03:11 am EET
By the way, Dean Baker's piece offers a very different, but quite interesting explanation for the divergence between wages and productivity. He adjusts productivity growth by subtracting out growth in depreciation costs (which cannot go towards wages) and taking into account the diversion between consumer inflation (by which real wage grwoth is reckoned) and the GDP deflator (by which real productivity is measured). Since consumer inflation has been higher than broad GDP inflation, even wage earners who do see their wages of growing in proportion with GDP would see their "real" wage lagging, because they disproportionately buy goods that have gotten more expensive. Read the whole thing.
|Steve Randy Waldman — Saturday October 7, 2006 at 3:48pm||permalink|