The U.S. Economy’s Strange Decade
given the painful memories of the 2008-2009 recession. Wage demands may be restrained by fears of losing jobs to China, Mexico, or machines. Yet a rising “quits rate,” which is now back to levels seen prior to the financial crisis, suggests that workers are perhaps less excessively cautious than they once were.
increase to ensure adequate provision of goods and services. This is why US job creation remains robust, despite pedestrian GDP growth. In addition, firms cannot raise wages by more than the increase in the marginal product of labor. Low productivity growth therefore explains sluggish wage increases. It also makes firms less willing to invest. The resulting capital discipline contributes to high returns on capital, which underpin soaring profits and yawning income inequality. US policymakers must try to ensure that the benefits of growth are more equally distributed. Populist proposals from both ends of the political spectrum, such as calls for protectionism or a universal basic income, are unlikely to do the trick. Such measures would simply result in Americans fighting over shares of a shrinking pie. Rather, the key is to raise average levels of productivity. For a variety of reasons, including the current political and social backlash against capitalism, the US cannot address its productivity challenge solely with 1980s-style deregulation, lower taxes, and less government. Economic efficiency will have to be augmented by improvements to energy and transport infrastructure, along with better access to quality education, worker training, and health care. America’s growth over the past decade has been unique in many ways. But if its productivity malaise is allowed to persist, the expansion will remain uniquely unbalanced and unhealthy. © Project Syndicate
The most important factor behind sluggish wage growth is probably weak productivity growth.
Another factor is declining union membership. In the early 1980s, nearly one-quarter of the US labor force was unionized. Today, that figure has fallen to about one-tenth. Non-union workers earn, on average, about 20% less than their unionized counterparts. A less unionized labor force works more cheaply and, perhaps, more flexibly, making it more attractive for companies to hire. But the most important factor behind sluggish wage growth is probably weak productivity growth. Average labor productivity in the US (and in most other advanced economies) has slumped in the past decade. Despite the explosive growth in information technology, the average worker is not becoming more productive. If output per hour worked is not rising much, then the number of hours worked must
Larry Hatheway is Group Head of Investment Solutions and Group Chief Economist at GAM.
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August 2019
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