Labor Ascendant

April 30th, 2015 8:08 pm | by John Jansen |

Greg Ip at the WSJ makes the case that for the first time in many years the relative positions of capital and labor are shifting and that in the short run at least will favor workers.

Via Greg Ip at the WSJ:
By Greg Ip
April 30, 2015 7:32 p.m. ET

For decades, labor’s share of American national income has shrunk while the share that goes to profits has expanded.

There are now tantalizing signs that labor may finally be gaining ground on capital.

Workers in the first quarter of the year recorded their biggest annual gain in pay since 2008, evidence that a steady decline in unemployment is finally having an effect on paychecks.

At the same time, blue-chip companies look likely to record their steepest year-over-year drop in profits since 2009, thanks to a strong dollar and flagging sales both at home and abroad, among other factors.

A shift in the relative fortunes of capital and labor would have important implications both for workers as a group, and for inequality. Worker incomes have suffered both from weak overall economic growth, and the fact that a big chunk of the growth that occurred has gone to profits and shareholders.

In the short run, this trend depends on how much tighter the labor market gets—and whether it stays that way. Both the Federal Reserve and outside economists expect such tightening in the months ahead.
United Auto Workers line worker Michelle Albritton loads stamped wheel housings at the General Motors Pontiac Metal Center in Pontiac, Mich., on Thursday. ENLARGE
United Auto Workers line worker Michelle Albritton loads stamped wheel housings at the General Motors Pontiac Metal Center in Pontiac, Mich., on Thursday. Photo: Carlos Osorio/Associated Press

The picture is murkier over the long haul. Forces such as globalization and technology, both of which have reduced labor’s bargaining power and elevated that of capital, are still very much in play.

Earlier this week the government reported that the economy barely grew in the first quarter, nipped by bad weather and a big drop in exports. But that cloudy report included a silver lining: Workers did relatively well.

Total salaries and benefits rose 1.2% from the fourth quarter, and 4.4% from a year earlier. That lifted labor’s share of gross domestic product to 53.6%, continuing a gradual improvement since hitting a 63-year low of 52.4% in late 2013.

While comparable corporate profit data is unavailable, company reports suggest it’s been a rough first quarter. Per-share earnings of companies in Standard & Poor’s 500-stock index are on track to decline 2.8% from a year earlier, which would be the first annual drop since 2012, and the steepest since 2009, according to Factset. A big factor is the hit to oil-company profits from lower crude prices; another is the strong dollar, which cuts into multinational companies’ foreign sales and profits.

Two forces explain the nascent recovery for labor. First, employment growth has accelerated even though overall GDP has not. More people working means more paychecks. The unemployment rate has fallen to 5.5%, approaching the level the Fed considers full employment.

Second, with a growing share of businesses reporting difficulty finding workers, there are faint signs they are offering higher wages to attract or hold on to workers after years in which pay, adjusted for inflation, went nowhere.

The Labor Department reported Thursday that wages and salaries for private-sector workers rose 2.8% in the year through the first quarter, the best since 2008. This upbeat picture is a bit of a puzzle because the department’s separate monthly measure of average hourly earnings was up just 2.1% in the first quarter, not much different from the trend that’s been in place since 2009.

Part of the divergence may be explained by the fact that the quarterly figures include commissions and other performance-based pay, which rose sharply in the first quarter, and may not be repeated.

Another factor is that low-paying sectors such as leisure and hospitality have been adding jobs faster than the total economy, which holds back average hourly wage growth as the low-wage sectors account for more of the total work force.

By contrast, the new quarterly figure adjusts for that shifting composition of work. Those figures show that wage gains have been a bit more brisk in low-paying sectors such as leisure and hospitality.

There are also anecdotal signs of a turnaround. Wal-Mart, McDonald’s and Target are among the major employers that in recent months have said would boost employees’ pay above the current minimum wage.

All of these trends must be treated with caution. The government compiles labor income and GDP separately, which can make them difficult to compare. Company profit reports are heavily driven by what happens abroad rather than in the U.S. When GDP is adjusted for the depreciation of capital equipment, labor’s share doesn’t show the same long-term decline.

Nor should a rising labor share be welcomed if the total pie isn’t growing. Hiring has been impressive in part because companies have struggled to boost output per worker, or productivity. Without an improvement in productivity, standards of living won’t rise over the long haul.

Then there are the trends that have tilted bargaining power toward capital and away from labor. One is globalization, which means workers and unions are often competing against cheaper labor abroad. Another is technology, can make render some workers’ skills redundant even as it makes others even more productive and thus richer.

Globalization, as measured by exports as a share of world GDP, has slowed, but skills-biased technological change may be accelerating.

Yet even in the presence of such forces, a tight labor market does wonders for workers. Jan Hatzius, an economist at Goldman Sachs, says wage growth gains tend to accelerate notably when unemployment approaches the rate that normally prevails when the economy is at full strength.

That pressure, along with a pickup in productivity, should lift annual wage growth to 3.5% by the end of 2016, Mr. Hatzius says. History suggests he’s right. In the late 1990s, a period of rapid globalization and technological change, unemployment fell close to 4%. Both real wages and labor’s share of GDP surged.

Write to Greg Ip at



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