Stuck on the Treadmill of Low Wage Growth

by Alyssa Oursler | November 8, 2012 9:30 am

Stuck on the Treadmill of Low Wage Growth

During the election and its accompanying hot-button issues — including talk of jobs, jobs, jobs — some waving red flags seem to have been overlooked.

Like, say, how much said jobs actually pay.

But now that the ballots are cast and Barack is back, there’s simply no excuse for ignoring this glaring reality. Let’s start with a few numbers:

It all sounds pretty dismal, but could there be a silver lining? The Economix blog[4] tossed out one possible upside:

“Assuming this is not just statistical noise, it’s possible that lower wages are enabling or encouraging employers to hire more workers…. When the price of something falls, buyers can afford more of it.”

That sounds promising. Unfortunately, taking a step back, we can see that isn’t plausible. Here’s why:

Stuck in Efficiency Mode

On Saturday, The New York Times ran an in-depth article[5] about the economy and innovation. The piece divided innovations into three types — empowering, sustaining and efficiency — that should move in a recurring cycle.

The first creates simpler and cheaper products, making them available to more people. This means more jobs because additional workers create the products, distribute them, market them and so on.

Sustaining innovation, the article goes on to say, updates old products with new versions — like new iPhone after new iPhone. It keeps things fresh, but doesn’t create new jobs.

Efficiency innovations, finally, are developments that reduce the cost of making existing goods and services — essentially, the streamlining of operations.

I think it’s pretty easy to see that we’re currently in efficiency-ville. As Josh Brown at The Reformed Broker[6] explains: “Corporations are facing a deceleration in earnings growth and, when that happens, they do not increase spending or hiring.” Instead, they cut costs (just look at info-tech spending[7]), lay off workers and cut wages — as we’ve shown.

The Times article notes the plus side of this third stage is that efficiency innovations free capital, which keeps the cycle moving by funding new empowering innovations and creating new jobs.

In theory.

The problem is that we’re stranded in efficiency-ville. And companies have all this capital but no good ideas to spend it on.

Low Demand, High Uncertainty

Companies simply aren’t going to hire more workers unless they need to. And they’re not going to need new workers until they have fancy new products or innovations that require the manpower.

Those innovations aren’t likely to materialize soon — not from a lack of brainpower, but simply from a lack of research and forward-looking strategy. Consider that a couple months back, an Economic Outlook Index[8] from CEOs of the largest U.S. corporations plunged to the worst level since Q3 2009. CEOs are feeling quite uncertain these days[9] — and that’s not the kind of mindset that lends itself to risk-taking, disruption and reinvention.

Since that report, the uncertainty surrounding who will be leading the country for the next four years has been resolved, but the world remains chock full of other question marks[10]: the fiscal cliff, Europe, the Middle East and so on.

So, corporations are sitting on their hands (and their saved cash) right now, because they aren’t sure what else to do. Innovations — and wages — are paying the price as a result.

There’s no silver lining here — not yet, at least. Just some gloomy numbers until the next big thing comes along.

And who knows how long that could be.

Endnotes:
  1. even for workers who want to work full-time: http://www.nytimes.com/2012/10/28/business/a-part-time-life-as-hours-shrink-and-shift-for-american-workers.html?pagewanted=all&_r=0
  2. dropped 1 cent month-over-month: http://www.bls.gov/news.release/empsit.t24.htm#ces_table8.f.p
  3. smallest increase in wages on record: http://(1.1%25)
  4. The Economix blog: http://economix.blogs.nytimes.com/author/catherine-rampell/
  5. The New York Times ran an in-depth article: http://www.nytimes.com/2012/11/04/business/a-capitalists-dilemma-whoever-becomes-president.html?_r=0&pagewanted=all
  6. The Reformed Broker: http://www.thereformedbroker.com/2012/11/07/fire-in-the-disco/
  7. just look at info-tech spending: http://investorplace.com/2012/10/7-reasons-it-spending-growth-is-stalled/
  8. Economic Outlook Index: http://businessroundtable.org/news-center/americas-ceos-sharply-reduce-expectations-for-u.s.-economy/
  9. quite uncertain these days: http://slant.investorplace.com/2012/10/ceo-consumer-confidence-sentiment/
  10. chock full of other question marks: http://investorplace.com/2012/11/yay-certainty-in-the-u-s-and-chaos-abroad/

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