Lack of real wage increases in the United States

The latest theory, which seems to have some evidence to back it up, is that wage growth is being restrained by increasing monopolization of industrial sectors.

There are four types of markets: perfect competition, monopolistic competition, oligopoly and monopoly. Three of them are fairly self explanatory including perfect competition, but a brief explanation of perfect competition.

This form of market doesn't fully exist, the closest is said to be wheat production. A simple rule of thumb on this is that if the largest single wheat farmer in the world stopped producing wheat, would that have any impact on the price? Almost certainly not.

Monopolistic competition is many markets, if not most, though this is the one type of market with which most people probably aren't familiar with the term. This is a market with similar products that each try to differentiate themselves. A good example of this is razors. They all do the same basic function, but there are dozens, if not hundreds of slightly different razors. Of course, advertising attempts to make these slight differences seem enormous so as to allow the producer their own little monopoly in an otherwise highly competitive market.

Most producers, especially large producers (and this isn't just in manufacturing) attempt to make themselves monopolies in a number of ways, advertising is just one. Undercutting other competitors is another and so is regulatory capture. New businesses or other competitors try and undercut these monopolies and would be monopolies with, in the best spirit of competition, new products.

This is the 'creative destruction' that Joseph Schumpeter argued made capitalism dynamic and ultimately the only successful economic system. Think of the near monopoly that Microsoft had in the Personal Computer market that was ultimately undercut by smart phones.

'Creative destruction' is the natural push and pull of capitalism. Businesses seek to monopolize and other businesses seek to undercut monopoly or attempts at monopoly by undercutting them. So, in many sectors there has been a push towards monopolization and a pull of new inventions that, at best, open up the sector again to greater competition and new innovations.

So, what has changed since the great recession and going before that?

A single producer in a consumer market is known as a monopoly. A single employer in a labor market is called a monopsony. There have been a lot of new economic arguments and research that this is the reason for stagnant wages.

The paper"written by Jos" Azar of IESE Business School at the University of Navarra, Ioana Marinescu of the University of Pennsylvania, and Marshall Steinbaum of the Roosevelt Institute"argues that, across different cities and different fields, hiring is concentrated among a relatively small number of businesses, which may have given managers the ability to keep wages lower than if there were more companies vying for talent.
https://slate.com...

So, what is causing this increase? monopolies and monopsonies should be undercut by 'creative destruction' as had been the case up until the 1980s at least.

I used to think the cause of the lack of innovation was the great recession itself. When I was a private investor looking over corporate financial statements, during a downturn it was easy to notice that one of the easiest things for businesses to cut back on was spending on research and development. This was compounded by the Great Recession itself being caused by a capital crisis which caused lending to freeze, making it more difficult for new businesses to start.

However, my theory may not have been correct: https://www.mckinsey.com...

But, I do think the basic argument of very few new innovations being introduced is largely true, at least easily noticeable ones. The smart phone business and the fairly significant change to society caused by 'apps' seems to be slowing down (though some apps are getting increasingly sophisticated) and all I've read about in terms of major new innovations (of course there are steady improvements in some areas like alternative energy) is 3D printing and Virtual Reality and Augmented Reality, which, at least for a consumer market, still hardly any consumer seems to be interested in. Even the hyped Artificial Intelligence market both for consumers and business to business is still very small ($8 billion worldwide in 2016 https://www.forbes.com...)

This article looks into the reasons why innovations likely are slowing down:

https://www.economist.com/news/finance-and-economics/21729746-exploitation-currently-available-knowledge-far-complete-cost

The cost of innovation has risen, and productivity has suffered

 

And this is the research paper the article is based on: https://web.stanford.edu/~chadj/IdeaPF.pdf

Are Ideas Getting Harder to Find?

 

 

From the article:

That, for instance, is the view of Robert Gordon, an economist at Northwestern University, whose bleak book, “The Rise and Fall of American Growth”, reckons that the era of economic revolution is behind us.

Is it? A recent paper by Nicholas Bloom, Charles Jones and Michael Webb of Stanford University, and John Van Reenen of the Massachusetts Institute of Technology, provides relevant evidence. Though striking an agnostic position as to whether humanity has used up all its eureka moments, they nonetheless conclude that new ideas are getting more expensive to find. The authors consider four different case studies, within which they compare research “inputs” (such as the money spent on researchers and lab equipment) and outputs...Yet they reckon that, across the economy as a whole, the notion that the cost of ideas is rising holds true. Since the 1930s, the effective number of researchers at work has increased by a factor of 23. But annual growth in productivity has declined 


So, this would provide one clear reason why not only are many businesses in monopolistic markets not all that interested in investing in their businesses and why it's increasingly difficult for new businesses to come along and displace them. When I was going to college a frequently heard phrase was "you grow or you die." That may not be so true anymore.

It may take additional breakthroughs in artificial intelligence to again lower the costs of research and especially development.

Until that time, there are a number of ideas of dealing with monopsonies similar to breaking up the trusts but let's not forget old fashion redistributive policies: simply increase the taxes on dividends and capital gains that are mostly received by those who have captured most of the wealth based on productivity gains to the 'normal rate.'

Comments

Autumn Cote Added May 13, 2018 - 8:46am
Many thanks for your first submission to Writer Beat.  Please note, to help increase your readership, I highly recommend adding a author image/avatar to your account.  If you don't know how to do it, I'll be happy to help.  
Dino Manalis Added May 13, 2018 - 8:59am
Wages are picking up and many are concerned this will cause the Fed to raise interest rates more quickly.  A stronger economy leads to better wages as well.
Thomas Sutrina Added May 13, 2018 - 9:06am
Perfect competition examples I would use is car repair, hair cutting, etc. because they are more familiar to everyone.  And it does exist because in reality you can choose a licensed or non-licensed person to do the work.  In effect the license is meaningless because the skewing of the market by government wanting it's cut can not be enforced. 
 
Farming is regulated and the export import is regulated thus governments have skew your example.  Farmers can not get around or ignore the regulations.
 
I have worked as a creator of innovation and you need to understand that the vast majority of innovation is step innovation that can be better understood as improving the existing products.  Your shaver example, is the manufacture going from one blade to two and today to five.  Does it actually improve the shave?  Or the apps on your phone that do more things but do not change the nature of the information actually provided.  Having 10 emojis or 100 emojis is innovation.  What dollar value do either of these examples add?
 
>>'Creative destruction' is the natural push and pull of capitalism.>>  I see it as creation of barriers to competition is the push and pull of capitalism.  And the government is the primary creator of those barriers.  So it is artificially created. 
 
The economic boom under Reagan and not Trump is simply the elimination of destructive barriers preventing the free market from competing. 
 
The reason socialist governments have poor economies is because they believe in government created barriers.  It is only destructive in that barriers prevent the market from experiencing alternatives.  Government stops innovation. 
 
Google and face Book created their own monopolies because they had great products and everyone know it.  Government has done nothing as it did in the industrial growth after the civil war to stop practices in which the companies created barriers to competition.  Nobel is a world wide example of how to create a private constructed monopoly.  
 
You need to review the future predictions history.  The Farmers Almanac predicts weather better.  So I think anyone that says thing like this are typically wrong.  >>That, for instance, is the view of Robert Gordon, an economist at Northwestern University, whose bleak book, “The Rise and Fall of American Growth”, reckons that the era of economic revolution is behind us.>>  If socialism wins then he will be correct but I bet that is not one of his reasons.  The nations with the greatest amount of spontaneous order will be the leaders of an economic revolution.  The reason is simple. More people given the opportunity to try something and fail the more successes will occur.  It is a simple game of numbers.  The odds are very poor but not absolute zero. 
George N Romey Added May 13, 2018 - 6:56pm
The surge in large corporations, offshoring, technology, greed at the top and skills mismatch are all contributing to stagnant if not declining wages. We've never had all of these factors at once in the US.  It's a new paradigm that we are being forced to contend with.
Jeff Jackson Added May 13, 2018 - 9:02pm
Great article Adam. One aspect that I didn't see, and this is an important part of American business, is comparative advantage. Advertising does a lot of comparative advantage, telling you that one car is safer than another, or this model has greater resale value, or other such advantages, and that is why you should buy that product.
Thomas, the government passed the Sherman Antitrust Act  in 1890 to stop monopolies that were squeezing out competitors and then raising prices because they had killed off all of the competition. The American markets have been restrained in some ways because certain players dominated the market and raised prices to unreal levels because of lack of competition. When several major players control every aspect of a market, you get bad results, which was on reason that during the Great Recession, like it or not, the government prevented certain companies from going bankrupt.
Silicon Valley has attempted to stop the companies from "poaching" talent, and they have informal agreements not to poach talent from other firms. While I do believe that to some extent wages have been capped, there are a multitude of reasons, one of which might be that CEOs now earn hundreds and even thousands of times what the average worker makes. It's hard to pay the workers at Chipotle $18.00 an hour when every store gives up $1,200 per month just to pay the $25 million that the CEO makes.
Adam Tondowsky Added May 13, 2018 - 10:08pm
"Wages are picking up and many are concerned this will cause the Fed to raise interest rates more quickly.  A stronger economy leads to better wages as well."
 
In fact, real wages, wages net of inflation, are not really picking up for workers as a whole.  The overall increase in wages pretty much mirrors the increase in inflation.
Adam Tondowsky Added May 13, 2018 - 10:11pm
"Farming is regulated and the export import is regulated thus governments have skew your example.  Farmers can not get around or ignore the regulations."
 
I was only referring to wheat farming.  I believe you are correct that their is a price floor on wheat in the United States through farm subsidies, however I was referring to the world market price for wheat.
Thomas Sutrina Added May 13, 2018 - 10:14pm
Jeff J.,  how about an update on >>Sherman Antitrust Act  in 1890 to stop monopolies that were squeezing out competitors and then raising prices because they had killed off all of the competition.>> I see the swamp winning and Sherman loosing.  What is your take everyone.  
 
Back to those farmers that are pure capitalist.  I live in Illinois and ~ 1/3 of the corn crop turns into fuel that is subsidized by government.  And by all analysis doesn't save energy.  Now if fuel was made from grass clippings and didn't save fuel at least the grass was going to get cut.   And we have the food stamps program and subsidies for farmers to not plant.  Government cheese is a joke. 
 
So I want to understand Adam why economist are still using this example?  
 
Jeff J., you talk about >>Silicon Valley has attempted to stop the companies from "poaching" talent, and they have informal agreements not to poach talent from other firms. >> But the real poaching is happening in China with the Universities of America training them and silicon valley teaching them their technology.  Also the Chinese government twists arms to get access to the market of giving technology to them.  how do we deal with that real problematic poaching?  Obviously this is allowed and promoted by the lack of government interest.  Again liberal belief and global business interest work against national interests.
Adam Tondowsky Added May 13, 2018 - 10:38pm
Thomas, because it's a world wide example.  You are correct there is a defacto floor price on wheat in the United States.
Jeff Jackson Added May 14, 2018 - 8:17am
I agree Thomas, we are selling our technology to foreign nations who wish us harm like the Chinese, no doubt about it. Where are the free markets when you are fighting a cyber-war?
Thomas Sutrina Added May 14, 2018 - 8:48am
Adam farming is a major part in the economy of many nations and world wide.  However, hair cutting is also world side.  Car repair and other transportation vehicle repair is world wide.
Adam Tondowsky Added May 14, 2018 - 9:32am
Thomas, sure but hair cutting and vehicle repair can't be traded all over the world.
Even A Broken Clock Added May 14, 2018 - 9:32am
Adam, welcome to Writerbeat. It is good to see someone who is knowledgeable about economics post here. Hope to see more posts.
 
I'll be curious to see how many of the contributors to WB call you out for your solution to speed up innovation, i.e., progressive taxation on the fruits of capital. There are a significant number of posters here who follow the Randian philosophy that taxation represents theft, and will expound that theme ad nauseum.
Adam Tondowsky Added May 14, 2018 - 9:43am
Even a broken clock, one or more of the articles I posted a link to suggested that higher taxes might push companies to speed up innovation (the 'income effect' suggests that if taxes are raised companies will try and make up for this lost income.) However, the 'substitution effect' suggests the opposite. I personally have no opinion on that.

All I wrote is that taxes on capital gains and dividends should be raised to redistribute some of the wealth that has been increasingly taken by the 'investor class' due to this increase in monopsony in order to counterbalance a little the economic playing field having been tilted in the direction of investors.
Bill H. Added May 14, 2018 - 11:26am
 
We see the product of the level of corporate greed that really began to take off after the turn of the century. "Bean Counters" began calling the shots at many companies, so the order of the day was meeting the "bottom line" and having a good month-end stockholder report. The table turned on the employees in that rather than being groomed to move up the ladder and count on receiving a decent pay increase every year, they were now trained to constantly fear losing their jobs and would not dare ask for a pay increase. They also watched their benefits disappear in many cases, and watched job openings within the company being filled by people who were being paid half of what they were making. In many cases, these new workers were imported from other countries using the "H1-B visa", or replaced by contractors who in many cases use undocumented workers. Those who were left were forced to join the "24/7, Blackberry-toting, spend your vacation and weekends on conference calls" crowd, or fear loosing their jobs as the rest of the crew.
Kurt Bresler Added May 14, 2018 - 12:29pm
Lack of real wage increases in the United States
Everytime the US borrows money or gives away food stamps it lowers the value of your wages. 
When the US floods the market with dollars which have not been earned, then there is more money introduced into the market which eventually leads to more demand,  The borrowed Dollars trickle down through contractors, to subcontractors, then to employees.  The wage earner now must compete with these dollars which have realistically increased the demand for products and raised the prices.  The wage earner now competes indirectly with the US debt.  and the money he or she spends (your wages) buy less. 
 
When it comes to food stamps and give away programs .  When you buy groceries you now have to compete with others, people who are given food stamps and who get to buy food with money they do not have to work for.  Prices can be raised due to increased demand of a product and that means you pay more for the same product and so your wages are worth less because it takes more of your dollars to buy the products.
Thomas Sutrina Added May 14, 2018 - 12:44pm
So an illegal immigrant that comes to America can not cut hair or fix cars?  It is traded by the person performing the service around the world and in all places.  In all places these services can not be totally regulated by the state.  Even in communist China you will find it being done without a state license.  And the officials look the other way because they need and want better service.
 
What you are trying to do is to limit the definition of free trade to items.  I choose to expand the definition to the bargaining between individuals where a trade occurs when both agree.  Free trade in the activity not the items traded.
Cliff M. Added May 14, 2018 - 9:52pm
Imperfect competition is the current rule in the construction market. Illegal labor has dominated since the recession at a deep discount .Pre- recession wage levels for skilled labor have yet to return with only a few bright spots .After the recession when the carpenter labor force was basically cut in half with much of the labor done with black market labor the going wage rates dropped over 30%. Since they have come back a little to  15 % less.I am curious as to how wages in other industries have fared.The gig economy of being hired for one  project long or short has also become prevalent.
Gerrilea Added May 15, 2018 - 6:37am
Adam, I cannot agree with your analysis of the "great recession".  There was innovation, they created paper wealth through derivatives initiated with liar loans and phantom mortgages. The "lending freeze" was simple, they didn't really have any money in the first place.
 
They took those fake documents and stole real assets from millions, worldwide and are still doing it today.
 
Why we have no "creative destruction" is the credit agencies that rated those fake documents as AAA have never been held to account, they're still in business.  The creators of that "paper wealth" were never prosecuted either.
 
As for wage suppression, it's all about the propaganda Americans have been fed for the past 80+ yrs and increasingly so since the '80's. "Unions are bad", full stop. 
 
American corporations were given tax breaks and real incentives to offshore their operations.  The ones that stayed found it was easier to pay off and outright buy our politicians to extend patent rights in perpetuity (almost) and R&D wasn't necessary if they could change one thing in a product and extend their patent on an existing product.  Pharmaceuticals are notorious for this bullshit.  They get a "new" patent on an old product and then market it for other "conditions", ones it was never designed for.
 
Regulations are the next key, you touched on it with "regulatory capture". The fraud in the "abc" agencies and how they are used to destroy innovation and creativity can't be understated.  Selective enforcement adds to this problem.
 
All these things add up to stagnation.  Real unemployment stands around 9.8% and higher, depending on who you reference.  THIS means employers don't have to pay higher wages, give better incentives or benefits.  "Take and do the job or I'll find someone else!"
 
The "creative destruction" you reference is exactly what happened, just not in the way you describe.
 
 
George N Romey Added May 15, 2018 - 5:27pm
Our economy such as it is remains based upon hocus pocus finance. Innovation has died replaced by predatory finance. Like all hoaxes this one will one day collapse leaving something far worse than the 1930s.
John Minehan Added May 19, 2018 - 9:03am
There was a book about 20 years ago called The End of Science by John Horgan that suggested that we were nearing the end of major scientific breakthroughs (defined as major changes to bodies of knowledge) with more minor insights becoming the norm.  The author also felt this would somewhat slow technological progress, as scientific advancement had been fueling the growth in technology for the last century (which was NOT common before). 
John Minehan Added May 19, 2018 - 9:20am
Nassim Nicholas Taleb has suggested that he thinks growth in technology (and other aspects of society) will probably become more dependent on amateurs (or craftsmen and not credentialed "professionals")  "playing around."
 
If that is true, there may be some level of "J-curve" that would slow growth before the transition is complete.  (Although Gates and Jobs in the 1970s argue against this view.) 
 
I think the stagnation in wages is actually a function of the fact that from a managerial accountant's prospective (but NOT an economist's) growth in productivity are a function of capital and NOT of labor.
 
If you are an economist and a business produces more products per hour, that is an increase in productivity.  If you are a manager or a managerial accountant you will want to know WHY the productivity improved.
 
If that productivity is due to eliminating workers and automating the process, that is attributable to capital, rather than labor inputs. 
 
In contrast, if I don't automate the process, I have the same number of workers and we introduced six sigma or quality circles or TQM/CQI and productivity improves, from a managerial accounting POV, that is attributable to labor inputs, rather than to capital.
 
The latter, and not the former, justifies a wage increase.  There is more of the former than the latter.  Further, in what has been a tight labor market there is little demand for increased wages where the alternative is no wages.     
David Montaigne Added May 20, 2018 - 8:24am
Demand for labor has been falling, and skilled labor is less available, as more high school graduates come into the workforce with high expectations but minimal knowledge, experience, or skills.  Not all have been raised as snowflakes, but far too many reach the age of adulthood without adequate preparation for independence or productive work.
Adam Tondowsky Added May 20, 2018 - 7:15pm
John Minehan, if a person's job changes significantly due to the greater use of capital, it is reasonable to expect to receive remuneration for learning new skills, having more complex work...
 
It is usually not the case that automation replaces all jobs, but changes the skills required for remaining workers (or adds to the skills required.)
 
Many businesses may also choose to expand out put with lower expenses per unit of output, resulting in potentially even less lost jobs.
John Minehan Added May 20, 2018 - 7:35pm
"John Minehan, if a person's job changes significantly due to the greater use of capital, it is reasonable to expect to receive remuneration for learning new skills, having more complex work..."
 
If it requires more skills. 
 
Often, automation lets an employer use less skilled personnel.   (Bank loan officers with years of experience replaced by less skilled people using expert systems.)
 
"Many businesses may also choose to expand out put with lower expenses per unit of output, resulting in potentially even less lost jobs."
 
One effective way of doing that (where legally possible) is to outsource work.  Instead of employing the folks in the mail room, out source to a company that runs mail rooms.  (Drucker's famous article, Fire the Mail Room.") 
 
While it does let people grow in their area of competence, these also tend to be smaller entities that pay less money.
 
Alternatively, in some areas you can out- source to independent contractors.  There are some legal restrictions, they actually have to be independent workers who you give "mission-type orders," but I thing a lot of work would be better done in this way. 
 
All of this is legitimate and all of this keeps wage growth slower than it has been.       
  
Jeff Michka Added May 20, 2018 - 9:35pm
I find this discussion interesting from several perspectives, one being I went back to work after a couple of years being "retired."  Why?  My wife and I are making plans to live in either Tuscany or somewhere in Spain for a few months when she retires next year.  The extra money I 'm bringing in, on top of SSI will get us a new car while there, so worth it to me.  I went back to the employer I retired from.  Actually am making more than when I left per hour..  I'm back to designing brake shapes and extrusions.  Well, actually the three millennials, new  MEs, are doing the work as part of being trained in company practices in the department.  It was thought I'd be a good choice for training them, having literally "wrote the book" for the company in my last go around.  Plus, even working part time beats not doing much productive stuff.   I will be there less than a year now, but it's okay with them.  I realize it's part-time workers business relies on more and more, and admit, if full time, I 'd want more, but it's fine as is.  I don't feel guilty, depriving some guy of a job, since I'm not, but clearly I'm not needed full time, saving keeping this bumbling trio from having sex with their cellphones moment to moment, or encouraging them not to treat the few women in the department like shit, which seems practice now for kids their age.  Dealing with millennials is the worst part of the job.  They know the best about everything.  Just ask them. LOL  I don't think there's much demand for higher wages, given workplace behaviors and a refusal to stand up by workers for those wages when guts are needed.  Remember it's management AND labor that need to work this out, not a solo enterprise.