Friday, January 18, 2013

A Comment on What’s Causing the Rise in Inequality

I was at the ASSA session where Larry Mishel faced off against David Autor, and I came away thinking, like Jared Bernstein, that the EPI view of the world holds more water than the it’s-all-technology argument that Autor was defending.  The timing issues, including the discontinuities in the wage structure traceable to the early 1980s, are important, for instance.

Nevertheless, I think the whole debate suffers from insularity.  The critical technological developments of recent decades, especially digitization, computing and networking, have swept over the entire world.  They have transformed work in every developed country and much of the developing world.  Meanwhile, the dramatic rise in inequality, and the portions of the earnings distribution most impacted, differ tremendously.  You simply don’t see the same change in profile in most of continental Europe or Japan that you find in the US data.

Understanding these differences is where explanation would begin, in my opinion.  And here’s a hypothesis: analysts of income inequality in the US suffer from a dynamic, self-reinforcing lamppost effect.  They begin with a model of the world in which only the individual characteristics that workers bring to the market should matter for wage determination.  Then, to measure what’s taking place, they set up or utilize systems, like the CPS, to collect these individual data: your age, marital status, education, occupation and earnings.  Armed with this information, they crunch and recrunch the numbers to see which aspects of worker characteristics play the most important role.  The struggle to produce a convincing labor supply-based story generates demand for even more detailed individual-level observation on workers.  No doubt big data will be brought to bear shortly on this topic.

But what if the critical drivers of the wage structure have to do with the way work is organized in production systems?  I’m thinking here of decisions regarding how much autonomy workers can have at different levels within an organization, what monitoring and incentive mechanisms are adopted, how extensive are internal job ladders, etc.  All of these are affected by technology, of course, but only as refracted through organizational strategy, governance systems, market structure and the like.  We know about these things mostly through case studies because systematic data are not collected on them.  Anyone who has compared work organization and management across the “varieties of capitalism” knows that these matters are crucial, but it is difficult to construct formal tests in the absence of large sample data.  At best, matching workers to industry-level variables like age-adjusted average tenure and capital-labor ratios can generate proxies for what we really ought to measure directly but don’t.  (I have a little experience with the use of these proxies and am tempted to do more work with them.)

As for the policy implications, I think the change-in-the-nature-and-structure-of-firms story has rather radical implications.  How can we change how work gets done in America?

Addendum: This past week Gerald Davis’ book Managed by the Markets, has been the main assigned reading in the class I’m teaching.  It is excellent in describing, lucidly and concretely, how financialization has changed the American corporation.  This is the sort of account that could be written only by someone who has devoted a career to corporate finance and governance research.  It is a bit less effective when it strays into political theory and cultural criticism and also too Anglo-Saxon-centric, but at least what it says still makes sense if you know a bit about how the rest of the world is evolving.


Unknown said...

I constantly hear the refrain that while a worker may start on the bottom rung of the ladder, hard work and talent will move them up and earn them a better salary and that job with benefits. This is generally presented as a rationale for great disparity between entry level jobs and the executive elite as well as a way to blame everyone who hasn't been successful for their current position in life. But let's be honest. Isn't pretty much every business structure a pyramid with the main difference being the steepness of the slope?

I always pictured a thought experiment where you staffed a business with 1,000 clones who had received identical educations and training. everyone eventually going to work their way up the ladder? Of course not. The same holds in the real world and I just don't hear traditionalists admit this.

Jazzbumpa said...

What about asymmetry in the employer-employee power relationship?

Or is it just coincidence that the decline of the middle class has been in lock step with the decline in collective bargaining?


John said...

Thank God I finally made it into retirement. After it was too late to get out and start over I had invested too many years in a company (and business model) which was becoming obsolete.

I would have jumped ship years earlier and changed course, probably retiring at 65 or later (instead of 57). But I have observed over the years that modern companies no longer invest much time or money in really training and developing subordinates to climb the ladder. Following a wave of mergers and acquisitions in the Seventies (which left many years of sweat on the ground)the buzzword became "outsourcing" as equity capitalists overtook venture capitalists.

All the recent prating about "job creators" rang dissonant in my ears. The only real job creator is demand for products or services. No sensible investor gets up in the morning trying to figure out how many jobs he can create. And to suggest otherwise is to reveal a basic ignorance of how a balance sheet works. Any business undergrad can tell you that Labor is a liability against the profit line.

The now-obsolete business model was to cultivate company people to perform the company mission, whatever that was, product or service, and mentor a hierarchy of subordinates from top to bottom. But big fish eat the smaller ones, so the payroll, PR, legal or other departments that service a hundred people can with a little tweaking take care of three times as many as the economy of scale kicks in.

It's a sign of the times and perhaps unavoidable. But the time, energy and, yes, money that is required to properly train and develop employees the old-fashioned way was the human equivalent of capital investment. Unfortunately that has become a value subordinated to ROI on paper and in the bank.

Peter Dorman said...


Of course, there's an asymmetry, but the nature and extent of it changes over time and location. That's a big part of the story.

As for collective bargaining, causation works in both directions: the change in work organization and management strategy undermines the basis for CB, and the decline of CB exacerbates structural change inimical to workers. I'm in favor of labor law reform, but I don't think that alone will be enough to significantly alter the landscape.

greg said...

It is the bosses who decide what everybody gets paid. They pay themselves too much, and everyone else not enough. See:

It used to be that the bosses had to compete for labor, and so had to pay more for it. Now they don't. And now that they have the power not to, they abuse it.

John said...

It is the bosses who decide what everybody gets paid.

I beg to differ. Wages are determined by the marketplace. "Wages" and "prices" follow the same dynamic of supply and demand. When there is an abundance of anything the value (i.e. price, wage) goes down. Co when lots of people are willing and able to do a job then there is no apparent reason for any organization in a competitive market to pay employees more than their competition.

I said "apparent" deliberately, because there are exceptions that prove the rule. Costco comes to mind, since the CEO compensates himself relatively low by national metrics, doesn't sell anything that has more than a fixed profit margin and pays even the lowest person on the chart a good wage, well above state and federal minimums. Likewise, Chick-fil-a is closed on Sundays, which is a significant benefit in a competitive labor market equivalent to higher pay.

But in both cases these companies (and there are probably many more smaller ones that never make the spotlights) realize that their employees are more valuable than what the marketplace indicates. Consequently they are more likely to be profitable (assuming they don't make other mistakes operationally) than the competition.

These are the exceptions, however. As a rule entry-level wages are set by local markets. And they are not always low wages. In markets where employees at all levels are hard to find, wages go up, not down. I'm thinking of the North Dakota oil boom where fast-food workers make a helluva lot more than their counterparts in most of the country. It's an extreme example but illustrates the point.

Charts with aggregate numbers tend to treat larger economies, whether local, regional or national, as big pies that just need to be divided more equitably. Unfortunately that is now how the marketplace works.

In places where there are too few employment options wages at the bottom will always be savagely low for the same reason that good water is expensive in the Middle East -- supply and demand. We in America rarely witness that dynamic, but now is one of those times when we do. As unemployment grows a downward feedback loop is triggered which drives wages at the bottom ever lower. In such an environment those at the top have little or no reason to be either thrifty or unselfish.

Procopius said...

I've been thinking that one of the reasons Republicans have been so insistent on sabotaging economic recovery is because their sponsors want high unemployment to continue. As other commenters have pointed out, wages are (to a large estent) set by the market. When large numbers of people are unemployed, wages tend to fall, increasing profits. Over the last four years we have seen exactly that. Median wages in all sectore have fallen, and profits in all industries have risen.

I know there are problems with Marx. His labor theory of value is surely flawed, but he observed some things about Capitalism that seem to hold true over time. He asserted that Capitalism requires a vast "reserve army of the unemployed" to keep wages down. I think the beginning of the increase in inequality can be traced to Volckers savage imposition of unemployment in the 1970s to combat inflation. That, followed by Reagan's war on unions, set the stage for the destruction of collective bargaining we've experienced, the weakening of unions to the point of their destruction, and the stagnation of wages that has occurred since the 1980s.

Dan Crawford said...

@ John,

Cheap water in the Middle East implies high prices as an ironic statement.? Role of pricing / value?

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