A Thought Experiment On Why Wages Are So Weak

Tyler Durden's picture

By Steven Englander, head of research and strategy at Rafiki Capital Management

I propose a microeconomic rationale for why macro wage performance is so weak, despite tight labor markets. The idea is that we are getting paid less for our job-specific knowledge because technology is making it easier to replace us without major loss of productivity with less skilled workers. The implications for markets:

  • Flattish Phillips curve and low wage inflation continue for an indefinite period
  • Living standards may increase because of lower price relative to wages, not higher wages relative to prices
  • Monetary policy will have to get on with dealing with a low inflation economy -- this means setting aside obsessions about balance sheet reduction and setting up the facility to use fiscal policy as needed when the zero bound is approached
  • It’s relatively positive for equities in innovating sectors
  • Long-term bond yields will be driven by monetary policy fears, not long-term inflation worries
  • Short-term policy rate moved will be capped by the sensitivity of the economy to interest rates which may not be large. Note that this cuts both ways – both tightening and easing may be ineffective.

The thought experiment

My idea is that wages are driven by how scared your boss is that you are going to leave. If replacing you, retraining your successor and waiting for him to climb the experience curve is costly, he will pay a lot to keep you from leaving. If you are a cog in a wheel, then he won’t care much.

Imagine an economy of a bus driver, a taxi driver, a cook, a translator, a baby sitter, a doctor and a foreign exchange strategist.... Conceptually you can measure average job specific content by asking the following question: if you randomly reallocated jobs among these workers how much would productivity fall? For example, if the FX strategist was given the cook’s job and the cook became a doctor and the doctor a taxi driver and so on, what would happen?

Say in Economy A, there is specific knowledge or character traits needed: a bus driver needs the specifics of driving a bus safely, a taxi driver knowledge of the street grid, the translator an excellent command of relevant languages, the baby sitter some proven degree of responsibility, the cook of recipes and technique, the doctor the body of medical knowledge, the FX strategist how to say ‘current account’ and so on. Now imagine the chaos and productivity loss, if the random reallocation occurred and none of the occupants of new jobs had the required skills.

Now, say in Economy B, the bus is programmed to avoid dangerous manoeuvres, all taxi drivers have a GPS (unlike NYC where none seem to), the translator has automated translation at his fingertips, the baby sitter is aware the house and liquor cabinets are cameraed, the cook has a set of packets to mix (or almost equivalently the packets are sent to your home for you to mix), the doctor a diagnostic program and the FX strategist a chatty virtual assistant that can say ‘current account’. If a random job reallocation occurred in this economy the productivity loss would be much less. My conjecture is that wages would be lower
because there would be no need to bid to retain workers if they were readily substitutable, or if the same jobs could be filled with less specialized workers with no major productivity loss.

Wage compression is very likely to be a feature in Economy B relative to Economy A – that is, the premium one receives for job specific knowledge and experience would fall. If you throw in a bit of capital saving technological progress from the sharing economy and economies of scale from the low marginal cost of replicating many IT-based innovations, you could end up with a kind of immiserization of parts of the skilled and semi-skilled working classes.

Evidence is partial, but it is not straight forward to test this speculation. Figure 1 shows wage levels in selected industry groupings. Note that wages in motor vehicles and parts (bright blue) started way above over industries, but is now average for durable goods (red line) and below education and health services (green line) which started way below. Motor vehicles and parts are now way below the average wage in the private sector, having started above 50% higher in the 1990s.

In Figure 2 we index these industries to 100 in 2000. We note that wages in leisure and hospitality (light blue) and education and health (green) have both grown faster than in durables manufacturing (red) and above the average for all private industries. Vert similar patterns emerge if we index to 2011.

So wages have grown slower in high paying industries, faster in low paying industries and the net is the mediocre observed wage growth. What isn’t consistent is Atlanta Fed wage evidence that suggests the quit rate is back to normal for this time of the cycle and the wage premium for quitters is as high as it was in the early 2000s. The other side is that the Atlanta Fed data shows the gap between increases of skilled and unskilled workers as having narrowed.

Macro/market implications

The problem for central banks is that we know little of what triggers such shifts in labor market power, how long they last and what ends them. As long as these shifts persist, the Phillips Curve will look flatter in  two-dimensional Unemployment Rate/Wage Inflation space. A well-specified wage equation that account for such structural changes would have a steeper inflation/unemployment trade off than one without the term but capturing the effects we discuss above is not so easy.

The type of technological progress would imply lower price pressures because the wage weakness would be transmitted in part into prices. (Full disclosure, you have to believe that there is an unmeasured component of actual productivity change here, although it may show up as quality-adjusted labor productivity, rather than standard output per-worker or worker-hour).

These disinflationary pressures may be hard to fight. Combine this with investment that is not overly responsive to interest rates and you have a situation where getting the inflation that you want may be impossible without risking undesirable levels of asset price inflation. It sounds as if the Fed is already there. There is nothing inevitable about this outcome, but it emerges easily if the disinflationary pressures are strong enough and the interest rate responsiveness is low enough.

One policy response is to live with it. Ultra-low inflation countries such as Japan and Switzerland have done just fine by many measures and the zero bound becomes an issue in a recession, not during an extended recovery. By ignoring it you have some ability to rein in asset market exuberance, but you are compromising on inflation and possibly activity targets.

This does not necessarily stop you from raising rates, but you are faced with a dilemma. If raising rates is effective you end up with the downturn you wanted to avoid, if raising rates is ineffective you are fooling
yourself in thinking that the margin versus the zero bound means that you are all clear in the next downturn. Being able to raise policy rates to three percent without tanking the economy very likely means that you can cut them in the next recession, you won’t have much of an impact. Hawks would argue that reducing the risk of a financial market bubble reduces the risk of a recession down the road.

It seems to me that whichever way you turn, fiscal policy has to be taken out of the doghouse. Post election, Fed officials reversed their pre-election love affair with fiscal policy, arguing that the economy does not need it. One might say that if the inflation undershoot turns out to be persistent, fiscal policy will become even more necessary to offset structural pressures. And if you think that high liquidity is contributing to asset market ebullience, then a bit of fiscal stimulus combined with monetary tightening can maintain activity and unwind some of the asset market pressures.

Modest long-term price pressures are probably positive on the fixed income side. Long-term disinflationary pressures and modest investment will keep downward pressure on long-term bond yields even if the Fed tightens at the short end in response to fiscal policy. The use of fiscal likely means being more relaxed about the size of the balance sheet. Debt-to-GDP would have to grow both cyclically and structurally, but debt servicing may not grow very rapidly because of the low inflation and the Fed’s interest income being recycled back to the Treasury. Short-term policy rates may swing around a lot versus stable but relatively low long-term rates.

The central bank could take a hard line and maintain or shrink the balance sheet even as fiscal expansion was put in place. Still, it would hardly help macroeconomic stabilization if government finances were called into question, so willy-nilly it is likely that the balance sheet would absorb some of the debt incurred via fiscal policy.

Caveat emptor – this analysis is pretty long term. In the short to medium term, I expect central banks like the Fed and ECB to try and follow up their rhetoric with liquidity tightening and for this to be reflected in long-term rates. Only if/when it turns out that the tightening is unsustainable will the forces I discuss above come into play.

On the equity side, if you can replace a skilled worker with a less skilled worker that is an attractive proposition. It is not as exciting as booming demand but it still reaches the bottom line. The social consequences are mixed. It is possible that this reduces the returns to certain types of training and education, both specialized and generic, but overall demand for relatively undifferentiated blue-collar labor will go up as will their wages. Improvements in living standards are likely to come via lower prices than higher wages. This is hardly the American dream. However, it is often difficult to put together policies that efficiently offset technological forces to provide distributional equity, and if other jurisdictions are not so focussed on distribution, you can end up with the worst of both worlds. It is possible that workers will drift to occupations where differentiated skills can earn a higher return – so maybe fewer doctors and lawyers but more dancers with the stars.

If you look at any central bank econometric model, the demand side has decades of development, the supply-side and particularly the modelling of technological change is primitive, distribution is virtually  nonexistent and asset market bubbles a problem because they should not exist in the model world. These secondary issues have become first order issues. Unaddressed they mean incomplete policy regimes and surprising and disappointing outcomes.

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LetThemEatRand's picture

They did tell us that computer technology would give us more leisure time.  They didn't mention that it would be spent dumpster diving for food.

Sam Clemons's picture

Was Ted Kaciznsky right about technology society eroding moral fabric through leisure? Note I don't agree with what else he did.

I always thought this is the cumulative effect of understating inflation for thirty years now. Many companies use CPI for determining wage inflation raises.

When you understate it by 3-10% for years, it adds up to lots of money. This decreases the worker share of the economy and may partially explain why the top is making more than ever.

Caloot's picture

1/3 of working age Americans who are not in the labor force can easily enter it when it benefits them to do so, easily offsetting wages. Stated differently, the unemployment rate is bogus.   I bet that rate would actually have to be negative before wage pressures accelerate. 

Kidbuck's picture

Affirmative action hires at BLS. The whole article is bullshit when it starts out with the patently false premise that unemployment is low.

JelloBeyonce's picture

At least a few get it.

This article is complete garbage.  It reads like a propaganda piece from the new feudal lords.


Why Wages Are So Weak?

1.  Competition has been consolidated.  Fewer mega-corporations own more of the subsidiary businesses.  By gobbling up companies, the mega-corporations reduce the number of possible employment choices/alternatives.

  • By reducing the employment options, they can control wages (if employees can't move to a competitor for higher wages because the competitor is owned by the same mega-corporation, wages remain stagnant).
  • Employees either have to put up with lower wages, or become unemployed.  It's a game of little or nothing for employees.

2.  Beyond overt corporate consolidations, a few large global money management firms control most of the largest companies, via large stock holdings. 

  • Money management firms like BlackRock, Vanguard, State Street, Fidelity, JP Morgan, and a few others often control "competitors" in the same industries (examples - Coke and Pepsi are owned by the same largest shareholders, ditto for Home Depot & Lowes, the six largest airlines, the six largest banks, Apple, Microsoft & Google, Verizon & AT&T, etc.).
  • In fact, if you look at the largest companies in the largest industries, you will find similar ownership of the same largest money management firms, via the largest stock holdings.
  • These money management firms, as the largest stock holders, can effectively control company policy of the companies they own.....or threaten to replace the Exec's & Boards of those companies.  They can thereby control and covertly coordinate operational decisions, like wages, benefits, etc.  This further reduces employee options of upward income mobility.

3.  A greater percentage of corporate revenue is going to high salaries for Executives and stock buybacks in order to boost EPS, rather than going to non-Executive employees.  Again, for regular employees, it's a "put up or shut up" scenario.

4.  The BLS unemployment figures are completely bogus.  They simply keep reducing the number of unemployed officially counted, thus reducing the available workforce. 

  • The economy is based on like 66 percent consumer & business sentiment, in other words the better people think things are the more they spend, hire, and increase wages.
    • By portraying better-than-truth unemployment numbers, the BLS has held out  continued hopes of improving consumer & business sentiment, thereby stimulating job & wage growth.  This has proven a failed strategy however.  

5.  With lower labor participation, and higher true unemployment numbers, there are fewer people with the disposable income necessary to spend more.

  • With fewer total people spending, and less total money being spent, corporate revenue is still stagnant, resulting in less total business revenue to spend on better wages & more jobs.  It's a catch-22/vicious-cycle situation.
  • While fewer people are gaining more ground in any economic improvement (the 1 percent and higher), the spending by those people are not making up the difference for the lack of spending by the remaining masses.

6.  Data shows the ultra-wealthy are hoarders of liquid capital.  Thus the more liquid capital they amass & hoard, the less liquid capital is being circulated back into the economy, meaning less for everyone else....again resulting in a vicious-cycle.

  • But hey, they don't care if more have less, as long as they continue to amass more. 
  • This system will eventually implode if allowed to continue at present pace, but by then the world will be a complete system of Lord/Serf relationships, much like medevial times adn the Lords won't care, because they'll own even more of everything.


wizteknet's picture

Outsourced jobs, exported jobs, illegal immigration causing low wages you forgot these, dont forget the H1b bomb in the room!

Stuck on Zero's picture

Wages are weak and growth abysmal when there's a giant cancer sucking the life of of the economy i.e. government.

Kidbuck's picture

Ted was wrong period. As a mechanic technology improved every year in my field for the 40 years I worked. Because it replaced skilled labor with skilled machines my value decreased every year in real dollars despite promotions, certifications, degrees etc. This meant I had to work MORE hours just to stay afloat. Thus I had less leisure time.

DrData02's picture

That would mean that Ted was right. His position was that computer technology would adversely impact human beings. That's why he was trying to blow up computer scientists.

Kidbuck's picture

OK, Ted was right that some people would get more leisure due to tech advances. If I were more prescient and talented I'd have chosen a different profession. However, I also benefited from computer technology in many areas of my life, open heart surgery, more reliable cars, better medical tests, online training, testing, and degrees, connection with world wide communities with shared interests such as ZH. On balance I see computer technology offering more good choices than bad.

It is difficult to know what trends stole our leisure the most. Certainly the federal reserve stealing our wealth through inflation leads the list. Income taxes and other taxes required to support the nanny state, which sucked women into the work force because one income no longer supported a family also contributed mightily.

Sam Clemons's picture

Some people have much more leisure. I don't either.

The entitlement class, one could argue, solely exists and is capable of being supported because of marchines, tech and cheap energy.


They're the ones breeding, cheating, doing drugs.

lasvegaspersona's picture

googd thing you told us you don't agree with Teds actions... the mere mention of his name made me think ..."this writer is  pure evil...."

Bemused Observer's picture

Ted got it wrong there. It isn't leisure that's killing us, it is the 'time-suck' that technology has brought us. We don't have more time, we actually have less time, because that technology makes a thousand little 'demands' upon us every day...change your password, do this, do that, do this THAT way, do that THIS way, log in, log out, enter your password, change your password, update your files, download the update, update the download, change your password, back up your files, reboot, reformat, and WHY HAVEN'T YOU CHANGED YOUR PASSWORD YET? WE'VE TOLD YOU 3 TIMES ALREADY! YOU WILL NOW BE LOCKED OUT OF YOUR ACCOUNT UNTIL YOU'VE DONE AS YOUR TOLD!...sincerely, Bill Gates.

ThankUGartman's picture

Oh hey Bill, for a second I thought George Carlin was still alive.

ThankUGartman's picture

The Technology is good but there's still a lot of human error involved. At least in my experience. Productivity increases have not been met with significant raises mediocre

Vladislav Surkov's picture







Ethereal's picture

I am waiting for the day that I can take my entire wage using Bitcoin or Ethereum. I think it is about 18 months out. 


Mena Arkansas's picture

Yeah, greedy fucking employers exploiting workers so they can boost their share price and buy that third vacation home in Aspen has nothing to do with it.

LetThemEatRand's picture

I've read so many articles that suggest that automation is the enemy of the middle class, but that fail to explain why Western businesses continue to spend huge amounts of money relocating to China if automation is a truly viable alternative to human workers.  Why do these companies all want cheap labor if they can hire a robot?  The proof is in the pudding.

PeeramidIdeologies's picture

The robots have failed, they always fail. Software is the black swan nobody seems to be talking about. I can't think of many white collar jobs that can't be done more effectively with software.

factorypreset's picture

The reality is that only the most wealthy companies (and well funded government agencies) can afford the software (and programmers) that could render many of said company's white collar jobs obsolete.  

Add to the aforementioned that the payoff for these projects would likely  be 3 - 5 years out at the earliest and that the risk they will not actually be implemented properly is high (again they cannot afford the best and the brightest to begin with) most companies will resign themselves with the status quo until they go out of business or are forced to change.  

Archibald Buttle's picture

i thought that marshall brain had an interesting perspective on the way computers/robots could eventually be put into service replacing workers. 


lucyvp's picture

In the customer service realm, whenever I call wit a problem.   Be it home appliance, insurance, hr - benefits.  It seems that the person on the other end is just reading pages from a decision tree on a computer.  They have no additional knowledge to offer.  Many times they read to me off the company website which I have right in front of me.   If they could just perfect speach recognition slightly and have a slightly less siri voice response, the entire industry of help desk can be replaced.

lasvegaspersona's picture

In medicine we are alreday getting tele-med. The government will push this but the redsults will be shitty medicine...BUT because it is cheaper, we will be told it is great.

EuroPox's picture

Robots may be the enemy of mouthy, middle class puddings but they have not yet developed one that comes close to a skinny Chinese girl.

EuroPox's picture

I made the mistake of watching the video in your linked item ... maybe they will be of interest to muslim migrants - or others of low IQ (and taste).

Archibald Buttle's picture

since you took the bullet by clicking on the link, how about some details? save the rest of the curious the pain !-)

Proctologist's picture

Robots require capital investment up front. Maybe one day they'll get beyond servers at fast food restaurants and specific tasks on assembly lines.

If robots aren't affordable now, will they ever be?

Or maybe it's just the Chinese culture plus the cheap labor is the perfect combo for the Western capitalists. There's cheaper labor in Africa, after all.

Archibald Buttle's picture

can i take "access to capital at low/zero/negative cost" for 500 alex?

people will get raises once the cost of borrowing forces businesses to earn, and then save capital to fund cash purchases of the robots. 

PorscheNoSub's picture

My corporate experience so far tells me you may give them too much credit. US business *management* at large is devoid of original or creative thinking. I have seen in 4 separate companies the same exact damn playbook that was run by the retail and automative industries 15+ years ago: outsource to Asia (or NA equivalent - Mexico) whether thats manufacturing in China, IT in India, etc. I remember reading 5 years ago how the early offshoring companies were now re-shoring because it wasn't worth it in logistics/quality/whatever at the same time my then company centralized and offshored all of our internal departments to Manila - just in time to be wiped out by a typhoon.


In a nutshell they are on autopilot recycling the same business plan. And more often than not the same players which may explain the same plays even more. The company from my example above shake and baked the top management with a professional flip team just off their last "job". Carpetbaggers the whole lot selling snake oil.

Bemused Observer's picture

What the robotics folks never talk about is how much these robots cost to maintain, and how much is someone willing to invest in new tech, in a world where new tech so quickly becomes old and obsolete tech.

Those are 2 very good reasons why an employer might not be completely on board with the idea of a robotic workforce. Why would I invest so heavily in a technology that may well be obsolete before I've made the first payment on the loan I took out to buy it? And what am I going to be shelling out for maintainance, upgrades, etc? If my profit margins are already thin, I have little room for error here. I can predict what my human costs would be, even with all the minimum wage stuff going on. I have little idea what my robotic costs might end up being. Plus, if I make an error with human employees, I can fire them, transfer them to another department, etc. What do I do if my workforce is robotic and I wish to change course?  I own the robots, so can't 'fire' them. I'll be taking care of those stupid robots whether they are working or not. I suppose I could sell them...into the booming market for old, used tech devices...*snort!* Or I can 'transfer' them, but then I have to re-program them, with all those attendant costs...these robotic workers start to sound more like a tar baby than an innovation.

If I'm a huge global corporation with unlimited funds, maybe I take a chance. But as a regular businessman, it sounds to me like rolling the dice in a game I don't fully understand and have no control over.

Xredsx's picture

Well i still blame government policy. Everything is connected to government policy one way or another. And we are getting poorer because money creation is debt creation. It's like simple +/- physics. If we spend all our own tax money within our own borders such as rebuilding the country. We will all get rich. Global trade will give us peace on earth.

slightlyskeptical's picture

Spot on. Our currency needs to operate like bitcoin where work results in the creation of new currency units. Borrowing our money into existance is the biggest fraud ever.

Archibald Buttle's picture

sounds like a gold standard to me. or a lengthy debate about what exactly constitutes "work."

FreeEarCandy's picture
Why Wages Are So Weak

Robotics and Tech. In a word...INNOVATION  

coast1's picture

ever seen the album cover from steely dan album "royal scam"....I will be sharing a few of their songs tmrw.....dont take me alive, and any major dude..  luv u guys :-)

coast1's picture

silver will be used to build the new technology...

CRM114's picture

I'm getting quite bored with the ever-more fantastic attempts to explain away the obvious, which is that the data is total bollocks.

Start from the true position that unemployment is about 14%, and inflation 6.5%, and that workers' rights do not in practice exist in at least 40% of jobs.

Now, with those three stats, everything makes sense.

Low to no wage growth, low expenditure, credit abuse through the roof, etc.

Fourth point: Productivity declines do not matter if competitors cannot enter the markets. 

The solution of major companies is to bribe Government to allow them a cartel, by a host of restrictive practices and regulatory barriers. That way, you no longer need to be good, or even adequate, you simply need to be slightly less shit than your supposed 'competitors' - those guys you have lunch with at the country club.

coast1's picture

according to shadowstats, unemloyment is closer to 25%...they dont count those who ended their unemployment etc..and some article says 100 million not working, which would make it more like 40%...dunno, just sayin...I cant find ork, and everyond else I seem to run into is working part-time, which is counted as full time by their stats..

CRM114's picture


It is hard to get an accurate handle on just what real unemployment, etc are, since so much effort has been put into suppressing such data.

PeeramidIdeologies's picture

Very erroneous to attemt to quantify such a diverse field of data points so simply.

But if you wanted to gain some perspective on the topic try considering wages in businesses that serve a global market vs local markets.

Competition and margins, IMO, I see it every day.

JailBanksters's picture

The US eCONomy should have been buried every year since 2009.

Why hasn't it been given the last rights yet ?

All I know is, the worse things get, the crazier the Governments decisions get, the working class get poorer and those born into the Non-Working Class get richer.

Will we ever see Presifent Maddog Matttis ?, Not sure how the World is going to like that name though

he should change it to either President Howling Mad Mantis or President Maddog Mantis


Last of the Middle Class's picture

umm, because all the jobs are gone and there are 25 applicants for every opening and congress has once again, by refusing to repeal ObamaSare, granted sainthood to the insurance and Pharma industry over some 23% of the economy. Just a thought, you see.

Rebelrebel7's picture

That, and the fact that everyone realizes that the BLS and Fed numbers are nothing but a total fabrication!

fulliautomatix's picture

The current 'successful' behavioural paradigm is "Fuck them before they fuck you." (*citation needed). This particularly applies in any circumstance where there is a ladder to climb: the manager does not want competent people working under him or her, because the competent person is a threat to the manager's job. A competent person with balls is going to get fired when they squeeze management for higher wages through the threat of resignation - they are usually found (by management) to be behaving in a fashion inconsistent with the organisation's 'values'. A competent person with sense is going to stay quiet and contribute to the manager's success, in the hope of the paradigm not applying and their contribution being recognised and rewarded. But... so...

The pointy bit of the conflict is where the senior management is able to say to their underlings - "Our role is to provide the shareholder with the best return - this is a legally mandated role." This appeal to a higher authority, the law of the land, is an excuse for not having to lead a happy workforce (happiness is never one of the 'values' of an organisation, even if it is implied) - they may do what they like to their underlings in the knowledge that their behaviour is protected (mandated even) by law. Thus, senior management's behaviour is demonstrably not in favour of those under them in the organisational hierarchy and the middle and junior management take their cue from their seniors. Of course, there are variations in results - bad managers get bad results because the people under them cannot work efficiently, so managers are required to do a lot in the way of PR (lying) to hold their end up. Whilst this lying is usually inconsistent with the values of the organisation - any form of inefficiency deliberately introduced to your communications is an expensive whim at best - it is nonetheless condoned: hypocrisy is a minor embarrassment, a bit like herpes.

When employees are inducted into an organisation their expected behaviour is explained to them in detail. With the recognition that the organisation is required to exist in order to perform comes the need to be able to control the behaviours of the employees of the organisation - direct and monitor, punish and reward. Selection for advancement, more often than not, is of people who successfully thwart the behavioural expectations and get what they want. This process is neither strange nor inexplicable when you consider that the people doing the selecting are of the same ilk; it is predictable.


The best bit, though, the very best bit is that it has been senior management that gets the lion's share of the profits. This is only an inconsistent result if you consider it probable that a hypocritical senior management will behave inconsistently. The PR spin is that the people making up the organisation do, in fact receive a measured proportion of the business' profits, as much as they ever did. The same argument is used for the shareholder returns. Profits are measured before bonuses and paid out after. The breakdown in remuneration across the organisation is a usually a design based on "trickle down economics", or the "fuck them before they fuck you" paradigm, take your pick - this would explain why employees are getting paid less.

Rick Cerone's picture

Parasitical greed is a thought.

rejected's picture

People keep rattling the 'skills' word in a Waiter, Bartender, burger flipper, lawn mowing shelf stocking economy.

I worked in telecommunications where a little skill is necessary and the company had no problems eliminating us. Every 3 months a lay off list,,,, and economists wonder why we weren't spending more!.