Tuesday, March 1st, 2011

The (falling) price of labor

Something happened about 30 years ago to throw a wrench into the workings of the American labor market.

This chart shows the evolution of the productivity of American workers and what they got paid for their work. The two variables tracked closely from the end of World War 2 to around 1979. But as productivity growth started accelerating in the 1980s, workers’ pay was left behind. In the last decade, productivity —the amount of stuff a worker produces in a day— grew twice as fast as what a worker earns for a day of work.

This fits other bits of data. Workers’ share of the economic pie, in the form of pay and benefits, fell from 60% of gross national income in 1980 to about 56% in 2009. 1980 is also the year income inequality started taking off —following half a century of decline. In 1980, the richest 1 % of Americans took 10% of the national income. In 2008 they took 21% of the pie.

Many factors play into these trends. One culprit is undoubtedly the IT revolution that fuelled rapid technological change —which replaced many manufacturing workers with machines. Globalization also played a part, exposing workers to competition from cheaper labor in China and other developing countries. Both trends encouraged the biggest businesses to grow way beyond their borders and capture a growing share of the world’s economic product —fuelling income concentration.

But we should not forget the role played by policy. From the Reagan Revolution of the 1980s to the financial disaster of 2008, every policy lever available to government was deployed to make life easier for business —be it by hobbling pesky labor unions or doing away with cumbersome rules segregating commercial and investment banks.

In 1980, about 22% of workers in the private sector were covered by union contracts. Today only around 7% are. The decline was due in large part to the intense competition wrought by high-tech globalization —which bankrupted unionized companies in the industrial heartland and encouraged new firms to set up in low cost union-averse states.

But stuff like this doesn’t just happen. The spread of rabid anti-union activism among Republicans from Wisconsin and Indiana to Ohio should remind us that the erosion of worker’s rights and compensation isn’t an inevitable consequence of vast economic processes. It’s also a product of specific policy choices.

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