A Thought Experiment On Why Wages Are So Weak

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.

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