Labor gains in an era of low productivity growth?
The decline of the labor share of income in the United States—a topic well covered in this space—seems to have paused. As Neil Irwin points out at The Upshot, the data over the past year or so show a rising share of national income going to compensation of labor. At the same time, corporate profits as a share of income are on the decline. Irwin notes that corporate profits accounted for 14.2 percent of income in the middle of 2014 but were closer to 12 percent by the end of last year.
And yesterday morning, the U.S. Bureau of Labor Statistics released data on productivity growth in the first quarter of 2016. The average cost of labor to make another unit of output, known as a unit labor cost, rose by more than 4 percent. Most of that gain was due to rising wages, but also because labor productivity declined by a percentage point.
So what are we to make of a rising labor share when productivity growth is close to zero?
Labor productivity growth has been quite terrible as of late. It declined at an annualized rate of 1.1 percent in the first three months of 2016, while its descent was steeper in the last quarter of 2015 at a 1.8 percent annual rate. This is in keeping with the longer trends of weak labor productivity growth in recent years and the declining total factor productivity growth.
The source of weak productivity growth is one of the most important economic questions right now, but it doesn’t seem like we’re going to definitively answer it soon. Jared Bernstein runs through some interesting possibilities, including a malfunctioning financial system, a slack macroeconomy, and dysfunctional government. But mechanically, the recent struggles of labor productivity may have to do with the industries where workers are being hired.
Since the start of the fourth quarter of 2015, the largest gains in employment have been in low-productivity industries such as leisure and hospitality, construction, and education and health services. More workers are producing things, but these workers are increasingly in industries where their labor isn’t producing that much more. A recent post by economist Dietz Vollrath shows that this trend has been going on since 2000, as workers have moved into industries that don’t just have low productivity but declining productivity growth as well. These are accounting exercises that can’t tell us the reason for these movements, but they’re instructive. Maybe we want to pay attention to the flow of workers and the dynamism of businesses.
In an era of low or even negligible productivity growth, policymakers may face some choices about what they’d like to achieve. At FT Alphaville, Toby Nangle lays out an “impossible trinity” of high corporate profits, steady inflation of 2 percent, and nominal wage growth of 4 percent. And while increasing productivity in the past hasn’t necessarily led to broadly shared wage growth, it’s definitely necessary. Hopefully, the recent trend is just an anomaly and we’ll soon see more sustained productivity growth. Fingers crossed.
So if inflation-adjusted wage growth exceeds productivity growth, then labor will get relatively more of output. But unless productivity growth jumps up, the absolute gains labor will see will be modest. A world where gains happen on both fronts definitely sounds more preferable.