As the old French saying goes, “the more things change the more they stay the same.”
Policymakers nationally and locally were for some time concerned about unemployment. Now the question is wages. Even though unemployment has declined to more normal levels, wages are rising slowly and worker productivity is declining.
The economic problem behind both concerns is the same: Businesses aren’t investing much.
According to the U.S. Bureau of Labor Statistics, more than 141 million people are employed at nonfarm businesses in the United States, the most ever. Idaho has also reached record employment, with nearly 673,000 nonfarm workers.
As I write, the unemployment rate in the United States stands at 5.4 percent, down from over 10 percent at the height of the recession in 2009. Idaho’s unemployment is well below the national average at 3.8 percent.
Unfortunately, companies aren’t getting much out of the larger workforce.
The BLS reported this month that productivity at nonfarm businesses, or output per hour of work, fell at an annual rate of 1.9 percent in the first three months of this year. This follows a 2.1 percent drop in the fourth quarter of 2014.
Economists watch productivity closely. It is the key to raising our living standard over the long run. We have a much better standard of living than our parents and grandparents, mainly because we are more productive.
Alexander Field writes about this issue in the Concise Encyclopedia of Economics (econlib.org/library/CEE.html). He sums it up this way, “The bottom line: If a country wants its standard of living to rise over the long run, its labor productivity has to go up. And for that to happen, it either has to save more or innovate.”
An hour of work today produces much more in goods and services than in previous generations because we have more capital equipment to work with, like computers, and because companies have improved their production processes. Innovations mean more and more can be done with fewer and fewer employees.
Policymakers want these innovations to translate into faster-growing paychecks. U.S. workers have recently seen some increase in their paychecks, but they may not realize that even more money is going to benefits.
The BLS also reported this month that compensation costs for civilian workers are increasing at an overall annual rate of 2.6 percent. However, benefits, which make up 30 percent of the BLS compensation figures, are 2.7 higher than last year. Over the last decade, total worker compensation attributable to benefits has risen 27 percent, while wages have risen 23 percent.
Meanwhile, businesses are adding little capital to help workers be more productive. The U.S. Bureau of Economic Analysis reported that private investment declined at an annual rate of 2.5 percent during the first quarter of this year. In inflation-adjusted terms, gross private domestic investment in the United States is only 1 percent higher than it was in 2006.
Businesses are paying more for workers but not adding the capital that will help them work better. This is a prescription for a weak economy and weak earnings growth.
The economic problem remains. Unless businesses start finding more incentives to invest, our children’s standard of living won’t be much better than ours.