Labor costs took a huge hit of a 4.3 percent drop in the first quarter of 2013 according to the Bureau of Labor Statistics, BLS. This was the largest drop in labor costs since 1947 that resulted from the combination of two things: "a 3.8 percent decrease in hourly compensation and the 0.5 percent increase in productivity." A drop in labor costs is good for business, but bad for wage earners; and if this were a trend, bad for the economy at large. Productivity was down 3 percent in 2009 and 2010. A 0.5 percent rise in worker productivity there might present a glimmer of hope for the economy since rising demand with economic growth will have to be met with more hiring. But worker compensation has been decoupled from productivity--wages have been constant, while corporate profits have see record highs. These numbers are evidence of the deterioration in the middle class (wage earners), in terms of income and employment opportunity; and they reflect a continuing pattern. In an anemic labor market, employers don't need to compete for workers when the unemployment rate 7.3 percent last month from 7.4 percent.
With a redundant supply of labor, it is no surprise that wages are stagnant but the irony is that low wages and record profits should be a recipe for more business hiring. And lower levels of unemployment would be part a supply side impetus for a more robust economic recovery. Yet, that is not happening and that's a conundrum. It is not happening even in the face of declining deficits, which some asserted would increase confidence in government, and lead invariably to investment of large sums of money held by businesses. Spending on investment would then create a demand for labor, leading to lower unemployment and more economic growth. Again, this does not appear to be happening either.
Worker wages have suffered losses for some time. For instance, take an arbitrary year, say 1980--okay, it is not so arbitrary. But it can serve as a benchmark year because the new president instituted policy changes that have had long-term effects for the U.S. economy. President Reagan was an influential president who presided over the demise of the Soviet Union, set in motion like Margaret Thatcher an effective challenge to unionism, and significantly cut top marginal tax rates. But by doing so, he shifted the thinking of the public acceptance of Keynesian economics, and replaced that with a version of Supply Side economics known as Reaganomics. Something else he did in the early 1980s, the president chose to ignore the antitrust laws of the Sherman Act Anti-Trust (1890), and what followed was a slew of mergers, concentrations, and acquisitions. And some of these companies have become "too big' to fail. Returning to 1980, the average CEO compensation was $1,364,524, while the average wage was $30,244. (See Dissident Voice) The average CEO's compensation at the largest companies was 42 times the pay of the average worker. In 2012, on average CEOs made $9.7 million according to Think Progress, and workers earned $48,301, or put differently CEO compensation was abut 200 times as much as worker compensation. In 1980 inflation (CPI-U) was 82.4 and in 2012, it was 226.229. (Source: BLS) The information on average CEO and worker compensations for 1980 and 2012 is more clearly illustrated in the table below.
Most people might be put off by the enormous gap between worker and CEO compensations; but this is a capitalist system, so perhaps the best solution to this inequality in income, is not envy, rather it might be best to join the ranks of the wealthy. But since all of us cannot be CEOs, in fact most of us cannot be CEOs--we need workers to produce the goods and services that all of us consume, including CEOs.
Considerable information both insightful and useful can be captured from the data in table 1. First are the growth rates of CEO compensation, worker compensation, and CPI from 1980 to 2012. Next, the ratios are computed of CEO compensation to worker compensation, which tells us how much more CEOs earn relative to the people who work for them. Then, there is the question, what if workers' compensation kept us with inflation, what would they be earning on average in 2012? Finally, if workers' compensations grew at the same rate as CEOs' compensation how much would workers be earning in 2012?
The data in Table 2 tell some interesting stories. First, column 2 (CEO compensation growth rate) compared with column 3 (Worker compensation growth rate) shows that CEOs' growth rate was greater than workers' by a factor of ten from 1980 to 2012. This is consistent with results I have posted elsewhere (see: No Union is an Island . . .) showing that wages have been flat while profits have been soaring. The manipulation of the data in Table 1 yielded the results in column 4 of Table 2, which in 1980 denotes a CEO-to-worker ratio 45. But in 2012 this ratio had increased to 201--this represents a jump by a factor of more than four times the CEO/Worker compensation in three decades--precisely thirty-two years. If the compensation of workers' percentage increase were the same as the compensation of CEOs, workers would have seen their compensation in 2012 rise to $214035. While these disparities in compensation are outlandish, they are quite modest compared with other estimates. For instance, two quotes from Bloomberg below substantiates this assertion,
"The similarity ends there. Johnson, 54, got a compensation package worth 1,795 times the average wage and benefits of a U.S. department store worker when he was hired in November 2011, according to data compiled by Bloomberg. Gonzales's hourly wage was $8.30 that year."
And the second quote is about the gap between workers and the CEO at a company:
"McDonald's $8.25 Man and $8.78 million CEO Shows Pay Gap.
These disparities in compensation help to explain why AFL-CIO Executive Watch reports, "The richest 1% has more than one-third of the nation's wealth while 60% of Americans barely have any."
My results for CEOs' actual compensation in 2012 were $9,700,000. But it should have been $3,802,020 based on inflation (CPI-U) data. It would appear that CEOs were over remunerated by $5,897,980 in that year. Now, workers were not quite so fortunate. In 2012 workers got on average $48,301 from Table 1. But when inflation is included in the calculus, workers would have earned $84,270 according to Table 2. Workers have been short-changed by being under-remunerated by $35,969.
The logic in the argument that cutting government spending leads to growth is not only inadequate but also mendacious, even the empirical evidence leans against this argument. But the confluence of events such as the Great Recession of 2008-2009, that brought with it the laying off of police officers, firefighters, and teachers; the successful assault of unions, outsourcing, and effects of sequestration, explains the poor growth in labor compensation. Workers' wages have been in the shorthairs of efforts to keep them down for sometime now. These efforts have been largely successful as evidenced by almost stagnant wages or the widening gap between CEO compensation and worker compensation. This cannot be good for the U.S. economy where private consumption is about seventy percent of GDP, especially since the economy is emerging slowly from a major recession.