Does capital capture all the productivity gains of our modern economy, with labor getting nothing? A short case study in how to deal with competing claims

Thanks to our frequent critic Mr. Adams, we have the opportunity to think about how we deal with “facts” that go against everything we know to be true.  When the latest scientific study comes out claiming that global warming is happening (despite no warming in the last 20 years), or that the minimum wage actually doesn’t cause any negative effects, or almost any other competing claim (especially in the social sciences), how do we assess it?  We don’t want to suffer from confirmation bias–which everyone of us has to some degree–where we only look at evidence that supports our prior beliefs.

Mr. Adams’ forte is to ignore the main points of any post, and seek to identify any perceived weakness in the logic, or less than tight argument in any particular sentence, to criticize your Bereans, and especially our employer.  He is nevertheless welcome to post, because despite his animus towards us, his attack is almost always based on positions that many others on the progressive left hold, such as Paul Krugman here.   We can then examine those arguments and understand some of the fallacious thinking that runs deep in our culture.  So this response is not just to more deeply respond to Mr. Adams (I could have continued on that thread), but to illustrate how I think we should approach technical disagreements more generally.  So earlier this week I posted an agreement with Paul Krugman (surprisingly), and in the course of the thread Mr. Adams challenged my views on rewards to labor.  Here is the pertinent part which we’ll delve more deeply into:

“Entry-level positions are therefore paid according to what they produce.” (Haymond)

Nonsense. There used to be something of a connection between worker productivity and worker wages. Like 8-track tapes and maroon bell bottoms, that connection is long gone. Increased productivity flows upward. As labor unions have declined in number and influence, due to right-to-work laws, workers have not been able to stem the tide. (Adams)

In the subsequent back and forth, Mr. Adams triumphantly produced his proof–a government Bureau of Labor Statistics report which does address the issue, while denigrating my source, since it came from YouTube (despite the fact that the narrator is a highly respected economist and the chair of the George Mason University economics department).  Now at the superficial level he seems to have a point–an obviously (?) impartial government video vs.  some YouTube video.  In his words,

I use BLS data. You use Youtube! Case closed.

We shall see.  The arguments can get wonkish, and a comprehensive technical summary can be found from Heritage here, but we’ll review the basic response below.  The BLS report is well done, in the sense that its conclusions logically follow from its presuppositions and initial assumptions.  But its methodology is not appropriate for its conclusion that:

Since the 1970s, growth in inflation-adjusted, or real, hourly compensation has lagged behind labor productivity growth.

Note that even this claim is nothing like the hyperbole (I’m being generous) of our critic Mr. Adams: to say that compensation has lagged productivity (BLS) is quite a bit different than saying there is no longer a connection between the two (Adams).  But we’ll leave that aside. The BLS report methodology is inappropriate for the following main reasons (there are more–see link above to the Heritage summary):

  1. Using conventional but inappropriate inflation index (the Consumer Price Index).   The claim I (and standard economic theory) make is that labor will tend to be paid according to its marginal revenue product (roughly the dollar value of its productivity).  To compare productivity to compensation, you must use the same inflation index, and as Harvard professor Martin Feldstein* has argued, the index should be based on the firm’s output, since the theory’s claim is that workers get a share of the firm’s output.  The theory says nothing about the ability to buy a general basket of goods.  Since general consumer inflation has grown significantly faster over the last several decades than inflation in the firm’s output, this tends to lead to a gap when the CPI is used to deflate output.  As Feldstein concludes, “basic theory reminds that real compensation should be measured using the same price index that is used to calculate productivity.  When this is done, the rise in compensation has been very similar to the rise in productivity.”  Importantly, Mr. Adams own source shows that much of the issue is removed when using comparable price indices; see the 2nd bullet point on page 61 and 62 of the BLS report.  Both Dean Baker and Feldstein dispute the BLS position that labor’s share has declined appreciably.
  2. Comparing compensation to productivity must consider what left-of-center economist Dean Baker calls “usable” productivity, i.e., productivity net of depreciation.  As the economy has undergone structural changes over the last few decades, with more investment going toward short-lived computers and software, additional depreciation is necessary.  As Baker says, neither labor nor capital “can eat depreciation.”  When this is corrected for, Baker says, “the missing wage growth is considerably less of a mystery.”
  3. The BLS does not address the significant structural change in the economy in terms of the average worker.  We have had a significant increase in immigration, women have continued entering the workforce in greater numbers, etc.  This is the key point Prof Boudreaux made–even if the average has stayed stagnant, every one in the actual workforce could have experienced significant gains, if the new entrants to the workforce are starting from a relatively lower position (which is exactly what you’d expect from the demographic changes we’ve seen).

Now I doubt Mr. Adams (or Professor Krugman, or Professor Stiglitz or Senator Warren) will necessarily buy these changes.  But there is a reason why marginal productivity theory of wages is still the basis of what we teach in economics.   Which is why we need to go further whenever we have competing claims to the empirical answer. Notice what I challenged Mr. Adams on previously (which of course he ignored).  Let’s assume he’s right–what would that mean?  Taking the logic of his position–that labor is relatively undervalued compared to capital (and/or management) and has been for decades–this necessarily means that markets for some reason are unable to arbitrage this price differential, and have ignored this money on the table for decades.  Yet arbitrage (buying cheap and selling dear) is the essence of the market process-this is what markets do every moment.  Yet we’re supposed to believe that all these market participants (the people most likely to see arbitrage opportunities) are leaving big money on the table, yet outside observers in academia (with no direct role in markets) see these opportunities clearly.  Since clearly Mr. Adams, Sen Warren and others have seen this profit potential, I cheer them on to commit their own capital to restore equilibrium.  Their failure to do so, on top of the “failure” of market participants to see as clearly as the academics, speaks volumes as the reality of their vision.  This is the same logic as should be applied in minimum wage discussion, comparable worth for women discussion, etc.   If somehow markets are failing, that just means there is a profit opportunity for someone else to exploit.  The fact that neither knowledgable market participants or self-professed experts in academia are willing to commit their own money to profit from this opportunity is highly suggestive that there actually isn’t any price differential to correct.

We shouldn’t be afraid to do the thought experiment of what the world would look like if our intellectual opponents were right.  If the necessary implications of accepting their position are completely implausible (as I argue in this case), while the implications of your own position are highly plausible, then you should feel more confident in believing that your source for data is more reliable.  Its pretty clear to me who is suffering from confirmation bias in this case.

Yes, its great to be a Berean!

* Martin Feldstein is the President of the National Bureau of Economic Research (the organization that calls official recessions). He is a HIGHLY credible source.

14 thoughts on “Does capital capture all the productivity gains of our modern economy, with labor getting nothing? A short case study in how to deal with competing claims”

  1. Your post is better than your other posts, but is still guilty of flailing around. Your replies to my posts on your other thread were just hopeless.

    You are making this more difficult than it has to be. Obfuscation does not help anyone.

    My point was not that total compensation has not tracked gains in productivity , but that the compensation has flowed upward. Very little of the productivity growth flowed into the paychecks of typical American workers.

    The growth in executive pay since the 1970’s is the smoking gun here. The gains in productivity have gone upwards, to executives, and not really to workers. No serious person would studies executive pay would deny this. Indeed, gains in CEO pay have outpaced earnings growth as well as the increase in stock prices since the 1970’s. CEOs are grossly overpaid in general based on what they produce.

    Since the 1970’s, inflation-adjusted CEO compensation has increased nearly 1000 percent, much greater than the 11 percent or so in a typical worker’s pay.

    Are you OK with that trend? May I presume that Al Dunlap was one of your heroes?

    Imo, information (including youtube videos, lol) from the Economics Department of George Mason as well as the Heritage have to be taken with far more than a grain of salt. Those are not unbiased sources. Heritage is a think tank funded by conservative interests whose positions have and would continue to hurt the average American worker. George Mason too has its own biases, perhaps more so than other universities. Probably not more than Cedarville, whose own intellectual biases are so strong as to overshadow competing points of view. I knew of George Mason’s biases back in the 1980’s, when I was at Cedarville (where I heard that George Mason taught real economics, not evil liberal economics, lol).

  2. I’d love to spend some time deflating your global warming sophistry, but I would prefer to do so on a different thread. Out of courtesy I will give you a few days for you to set one up before I demolish your position.

  3. Interesting post. I like the back and forth from comments between Mr. Adams and yourself, adds different perspectives!

  4. You may have addressed this already in your flurry of technicality, but just in case it wasn’t addressed, I’ll bring it up now. As I’ve heard from you and Dr. Thomas Sowell, there is a difference between statistics and actual people. Individual advancement in wages along with technological advancement in goods and services is much harder to quantify but it’s often more reflective of actual life and how workers are doing better now than before. Let’s just assume, for the sake of the worst case scenario, that workers really are not gaining any real, new wages from their increased productivity. Does that mean that people were worse off in the 1970s than they are today? I think your own words from class adequately answer this question, “That’s ridiculous, I was alive in the 1970s, and people were far more miserable back then.”

  5. I guess I take a more simpleton approach to what I see. If it fits my paradigm, then it must be true, but if it doesn’t, it must not be true.

    Average number of mobile phone subscriptions per 100 persons? 118 in the USA/>95 in the world (The World Bank). When I was a kid, families had one phone to share and it was stuck in the house. We did have one neighbor who had a car radio, but they were the rich family in the neighborhood.

    Over the last 42 years, the average new US house has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from the Census Bureau) to 2,687 square feet last year. (AEI, Mark Perry June 5, 2016)

    In 1970, only luxury cars had electric windows and good stereos. Today it is difficult to find a car, no matter how cheap, with manual roll up windows (personal observation).

    In 1983 it cost me $400 dollars to fly round trip from school to home on Christmas. Today you can still make that trip for $400 if you shop poorly for an airline ticket. At a cumulative inflation of 138% that would be $953 (InflationData.com calculator).

    Gasoline is cheaper today at $2.36/gal then the historical average of $2.64/gal in 2014 dollars (InflationData.com).

    Computers: In 1992 I spent about $3000 for a new laptop computer. It had a huge hard drive at 200 megabytes and 4meg of RAM. I just bought a new laptop with a 500gb Solid State Drive (about the best available to the common man) for $2000. Cheaper both inflation wise and absolute cost wise and infinitely a better computer in ALL ways then my 1992 version.

    I work in the travel industry and more common people and families are taking trips then ever before. And much higher quality trips. When I was a child we drove places to go on vacation. Usually they were close places because the road-time to playtime was a premium. Now families fly to their destinations and their travel-time to playtime ratio is much better.

    You can quote all sorts of sources but from my point of view, life is infinitely better today. People drive better cars (I’ve said before, my 2000 Maxima is a better car in all ways than a 1970 Cadillac), have better communications, better selection of music and staples then we ever had in the recent past or further past. In 1970 I had to wait for summer to get my favorite treat, watermelon. Today, because of the modern miracle of transportation and management, I can buy that watermelon any day of the year.

    Here’s to modern day life (no matter how bad it must statistically be)!!!

  6. I really appreciate the back and forth commenting, and added information. I like how you can address someone in a professional manner when they have a differing viewpoint. It’s like what we talked about in chapel today. Sometimes Christians shy away because they don’t want to get involved or have conflict. However, conflict is necessary to find resolve and challenge our own viewpoints.

  7. I really enjoyed reading the back and forth between you and Mr. Adams. There is a Christ-like way to argue for what is right and I think you demonstrated that in your comments. I really appreciate the way you approached the subject.

  8. Never before have I been so excited to start reading the comments! I enjoyed reading this for two reasons: First, it gave me the confidence to analyze and find fault in reasoning that counters mine. This is a problem I often face with people who don’t share similar beliefs. And two, seeing your process of deconstructing an argument to make it seem futile on an issue that intrigues me was exciting because I would not have known where to start if I were left to do that myself. Greatly enjoyed watching your analysis expand into an argument!

  9. I’ll be honest, the economics behind this post were hard for me to follow at times. If there is one take away, I would say it is at the end when you supposed that the opposing side’s argument came true. This is such a valuable tool that I forget about sometimes to help strengthen the arguments for my position on anything. it helps you think through in a genuine way why other people think what they think! It could even be a respect thing because it shows you want to understand their position.

  10. Back to what I wrote in an earlier thread.

    Jeff H. said that “God values all work that serves others.” I agree wholeheartedly, and I believe that is biblical.

    If that is true, then it seems obvious what this means: If GOD values all labor, so should we. If GOD believes that there is dignity in work, then so should we.

    I am disappointed that Jeff H. has tried to shift the debate away from this point. The point I raised in the other thread was not so much about economics, but about our responsibility as Christians.

    If the “market”–by no means a natural phenomenon that exists on a fair and level-playing field–says that God’s claim that all labor should not be considered as binding, should Christians merely throw up their hands and just accept things they way they are? Is that how Christians have approached abortion? I don’t think so.

    If we Christians sit around and accept reality without challenging it, what good are we? Are we in this just for ourselves? Isn’t that what being selfish is all about?

    From what I have read about the average parental income of Cedarville students in 2016-17, it seems true that most students have no idea how hard it is to make a living on anything less than a living wage. That is the upside and downside of growing up wealthy. If we don’t see a major problem, it is easy to conclude that it is really much of a problem, and that others who talk about the problem are overreacting.

    I invite students to open their eyes and look around. And do something. And, no, prayer is not enough. Spending an afternoon at a food bank (what is that?) or volunteering a few hours a semester at a homeless shelter as part of a “Christian ministry” is a start, but that is it.

    If God values the labor of all, shouldn’t we? If we choose not to, then how can we say that we are honoring and obeying God? Obviously, we cannot.

    I will save my global warming comments for another time.

  11. “If that is true, then it seems obvious what this means: If GOD values all labor, so should we. If GOD believes that there is dignity in work, then so should we. I am disappointed that Jeff H. has tried to shift the debate away from this point” … “If God values the labor of all, shouldn’t we? If we choose not to, then how can we say that we are honoring and obeying God? Obviously, we cannot.”

    Not quite getting your point. No one, to my knowledge, has disagreed that there is dignity in ALL work or said that Christians should not value all work. But it appeared, at least to me, that you were arguing previously that that meant ALL work must then deserve a “living wage” as we define it in the modern United States. It was my interpretation that you were suggesting that a person’s level of support for “living wages” for all jobs, irregardless of the productivity value of the work, should be a metric determining the “authenticity” of that person’s.

    Regardless, the discussion that Dr. Haymond began revolved around the topic of compensation vs. productivity. An economic discussion. So, in terms of who is shifting the debate, you seem to want to change it from an economic to a philosophical one.

    “I will save my global warming comments for another time.”

    Probably a good idea, since if you suddenly went into a global warming dissertation over a barely noticeable passing mention, that most certainly would be changing the subject from the topic at hand.

    Anyway, I do appreciate your thoughts on the matter. Have a nice day :)

  12. I liked how you defended your position. I’ve never read a post that was based off of another post because of people’s comments and how strong they feel about a topic.

  13. I liked reading the back and forth between two very educated professors. It was also nice to see how the disagreements were handled in a Christian manner. It was interesting to see the different viewpoints and different perspectives between the yourself and Mr. Adams.

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