Wednesday, October 15, 2014

The Return of the Luddites

William Galston's editorial in the Wall Street Journal exhibits ever-more confusion about why the middle class has lost so much ground in the US in the last five decades.  Galston, like the Luddites of 19th century fame, blames the plight of the middle class on technology.  Here is the ultimate statement of Galston's confusion:

"It is easy to conclude total compensation has been rising briskly even if wages have stalled.  But the facts don't bear out this conjecture.

Between 1981 aand 2014, according to calculations based on the Bureau of Labor Statistics, wages corrected for inflation rose at the anemic rate of 0.3% a year.  But total compensation -- wages plus benefits - hasn't done much better, rising at only 0.6 % a year."

First, it is worth noting that the "total compensation" that Galston cites is rising twice as fast as wages, even if both growth rates are small.  The absolute difference between wages and total compensation over time is huge, given these growth rates.

Second, the issue is not "total compensation," but the price of labor.  It's what employers have to pay, not what employees get that determines the price of labor.  The price of labor has gone through the roof, even if total compensation has risen more slowly (albeit twice as fast as the employee wage).

Why?  There are so many reasons, it's hard to know where to begin.  Think about lawsuits concerning workplace issues -- discrimination, pay equity, family leave, safety issues (real and imagined) and on and on.  These things cost and they cost a lot.  Unfortunately, the brunt of these costs often fall most heavily on those who these kinds of lawsuits are intended to help.  Regardless, such things all raise the cost of labor, but do not show up in "total compensation."

If you passed a law saying that an employer must throw $ 50,000 per year in the ocean for every employee they have, that would be an addition to the price of labor, but it would not show up in Galston's "total compensation."

It is surprising that the idea that increases in the price of labor lower the demand for labor is so hard for economists to fathom.  Equally surprising is the failure to understand that so-called "benefits" and mandates inevitably fall back on employees and serve to directly reduce wages for any given level of the price of labor. 

How can the middle class improve their lot in this situation?  Banning technological growth is not the answer.  How about letting free markets work and eliminate all the government-imposed costs that are added to the price of labor.

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