Sunday, November 6, 2011

Flat Wages Results of Sociology, not Politics?

This first plot in this gallery of what OWS is really about was something that struck me. I have friends who argue they don't say enough about where they get their data from, but I don't buy that. My gut tells me that this is real and you don't have to play games with the data to see it. That leads to the interesting question of what caused it. The plot highlights 1980 as the tipping point. That would indicate that the problem was induced by policy changes brought in during the Reagan administration. However, the real peak is before 1980 and it looks like wages actually stopped growing as quickly around 1973. There might be some type of policy changes that led to this, but I was recently hit by an alternate explanation that is more sociological in nature. I wanted to throw it out there and see what people think. (Disclaimer: I am neither a sociologist nor an economist.)

This idea was born from an image in my head of the US in the 1950s in a "Beaver Cleaver" world where employers cared for their employees. I'm sure this image is a largely fictitious stereotype, but it started the ball rolling. There are a few factors that I see as having changed in the last six decades that could contribute to this. Cities have grown, people commute further to work, and fewer employers are really locally owned. What really matters here is that in the past you had a situation where employers were more likely to live in a fairly tight knit community with their employees and have regular interactions with them. The movement of people into cities ( and the growth of large corporate chains have altered this landscape.

I that 1950s world you don't have to assume that employers were kinder and really wanted to look out for their employees. However, they did live closer to their employees and they interacted with them more often. Their wives might have played cards together or they went to the same churches. If you were a stereotypical Scrooge, people in the community would know about it and there could be a real cost to you socially and possibly economically. I picture a small town where everyone knows what everyone else is doing. If the local grocer isn't treating his employees well, that will get out. The owner will be shunned and might even lose sales if residents have other options. Basically, failure to treat employees well had real costs to you as an employer.

Over time, communities got bigger and the stores/shops around us increasingly became chains. The number of connections to co-workers outside of the work environment dropped. It became more common that the person setting a person's salary/wages lived in a different city/state. The social cost of paying employees poorly dropped away for more and more employers.

Of course, this is not all a tale of gloom. There were significant efficiencies of scale that came with this transition. This led to things being cheaper. However, that flows back around as well. If you are still locally owned and operated, you have to compete with the larger organizations that aren't. You will wind up dropping your wages to continue to compete. With communities being more spread out and less personal, the social costs of doing this was on the decline anyway.

From a pure economics view, employers always strive to pay their employees only what the market can support. My argument here is that social costs helped to keep the labor market moving upward until the 1970s. At that point, social changes removed those costs and let the labor market operate as a more pure market. In addition, increased specialization reduced the fluidity of the labor market. You have a lot of jobs where you can't just move over to a different company and maintain the same productivity you had with the old employer. That forms a barrier to movement and allows employers to keep wages lower as they don't have to worry about employees leaving as readily for higher wages.

Of course, in this blog I have to pull this back into my main topics so what role does automation play in all of this? It is all over the place. The same social forced that make it easier to keep employee wages lower also make it easier to introduce automation. As automation takes more and more routine jobs, what is left are more specialized tasks that are less transferable from one employer to another. Looking forward, a globalized market has basically no social costs for replacing human workers with automata. The neighbors and friends of the owner of a large corporation aren't going to treat him/her worse when he/she fires all the people working in the parts of the business related to shipping and stocking of goods. The way we can compartmentalize our lives, all the people he/she interacts with are probably do the same thing in their own firms.