Use access key #2 to skip to page content.

Productivity gains



August 02, 2013 – Comments (3)

It's easy to take pot-shots at something you hear on CNBC - the usual folks are just chattering thoughtlessly - but I wanted to take a shot at something I heard today.

Maria Bartiromo was interviewing a guy - a stock picker - about earnings and the business environment, and asked him about productivity gains.   She pointed out, which is true, that even though productivity has continued to go up - 2% annually - for most of the past 10 years, wages have remained stagnant and workers feel that they are not being compensated for their role in delivering those gains.

It's true that productivity of companies has gone up, and that both technology and workers working harder and smarter contributes to this ongoing trend.  But the way that that has juiced earnings is that it has enabled companies to experience earnings growth without hiring new employees, or even by downsizing their labor force.  So, as the overall economy expands, new jobs are not created; people are even getting laid off.

This increases the overall pool of eligible labor by the number of folks laid off; and there are new folks entering the job market right now, young people.  And, in case you didn't notice, entitlements - Social Security and Medicare - are undergoing serious shifts that are causing a lot of people, possibly most people who have a choice in the matter, to continue working until age 70.  Social Security stipend increases are not keeping up with the true costs of living as a retiree, so the incentive to keep working till 70 just gets more and more powerful every year (Hi Larry Kotlikoff!  Telegram from Charlie Munger:  "Never underestimate the power of incentives.")  In addition, Medicare now doesn't kick in until 67, and that is a moving target too.  That's expanding the labor pool considerably - folks who would probably want to retire but have these massive incentives not to do so.

OK, so what happens when demand for a thing (labor, in this case) remains stagnant or decreases, but the supply of that thing goes up?  Prices (in this case, wages) go down.  It's not rocket science.  It's not that employers are choosing to pay less; it's that the market says they can.

This is actually not a bad time to be in a small business where the average turnover on a new hire is 19 months.  There's always some smart young overqualified person coming along to step into the gap.

3 Comments – Post Your Own

#1) On August 03, 2013 at 4:25 PM, JohnCLeven (30.49) wrote:

Great post!

Report this comment
#2) On August 04, 2013 at 11:40 AM, Adegon79 (< 20) wrote:

Nice post - but I just want to correct the Medicare thing - it's still 65 to qualify with no law changes yet to increase that even at a future date.

Report this comment
#3) On August 06, 2013 at 3:40 PM, ikkyu2 (98.17) wrote:

Yeah right, Medicare is still 65.  It's just Social Security income that is being pushed back on a rolling basis so people will retire at an older age.

Report this comment

Featured Broker Partners