By: Derek Thompson
July 1, 2011
How is it possible that we're both working harder and finding it more difficult to make a living? Maybe the same thing is making work cheap and life expensive. It's the productivity paradox.
Sped up, slimmed down, squeezed dry, or simply shut out, the American worker faces an unprecedented slump. The numbers say we're getting better at our jobs, but paychecks suggest we're worse off.
Since the recovery began, corporate profits have captured nearly 90 percent of the growth in real income. Wages and salaries have accounted for 1 percent. That's "unprecedented," say Northeastern University economists, but it ain't new. Productivity (that's work/time) has increased seven times faster than wages in the last 30 years.
There's a lot of online ink about the productivity paradox, memorably deemed our "Speed-up Crisis" in a provocative article by Monika Bauerlein and Clara Jeffery, coeditors of Mother Jones. It boils down to one question. Why does it seem like people have to work harder and harder to make the same amount of money?
I want to try to tell this story without using the word corporation. Yes, corporate profits are up 22 percent since 2007 while employment is down. Yes, companies have swapped unionized workforces for universal workforces by letting jobs expire at home while hiring overseas. These are important pieces to the puzzle. But I want to tell the story starting with another piece. Productivity.
Productivity means work divided by time. It tells you how much stuff our economy makes, and how efficiently we make it. Over time, higher productivity leads to wealth. But in the last 30 years, the average worker hasn't felt very enriched by all his or her extra work. Take a look.
Productivity is not evil. For a consumer, it's bliss. It means iPods and cheap toasters. "What people forget about productivity is that it's not just about becoming more efficient by using fewer workers," says James Manyika, Director of the McKinsey Global Institute. "It also means creating more valuable things. For example, Apple has driven productivity by expanding our basket of products." Workers have a less rosy view. If you're in manufacturing or IT services, for example, you've seen millions of jobs turned over to robots and Rajasthan.
This conflict between consumers and workers is an important piece of the productivity puzzle. Workers have lost power since the heyday of organized labor in the mid-20th century. Meanwhile, consumers are in their heyday right now. Family spending dominates the U.S. economy more than any other big economy.
But wait, you're thinking, how can the middle class support a consumer-dominated economy if the middle class isn't making more money? Four reasons. First, in the 1960s, women joined the workforce, and dual-income households grew. Second, in the 1970s and 1980s, white collar workers started putting in longer hours. Third, in the 2000s, the housing boom made families feel richer than their paychecks. Fourth, consumers discovered it was more affordable to buy clothes, food, electronics -- you know, stuff -- despite poor salaries. Why?
Here's a theory. In the last 30 years, productivity grew, but it didn't make you rich because all the benefits went to make stuff cheaper. You can see this in Walmart and on your computer screen. Food and clothes have never been more affordable. Information has never been so easily accessible. Electronics have never been so advanced. Consumer products have never been so diverse, effective, and cheap.
If everything is getting cheaper and better, why don't you feel richer? Because the basic necessities -- homes, gasoline, health care, and education -- are not getting cheaper. Real housing prices slowly increased for 30 years before the housing boom. Real gas prices are the same today as in the 1930s. The cost of health care is growing faster than wages. Higher education costs are growing even faster.
Houses, gasoline, health care and education make up the core of our day-to-day life. The typical American family spends half its money on housing and transportation. The economy spends one out of four dollars on health care ($2.6 trillion) and education ($1 trillion).
The reason these things aren't getting cheaper also goes back to productivity. Productivity is growing fastest where we work -- information, technology, manufacturing, wholesale, services. It is growing slowest around many necessities: health care, education, construction, and government. This chart from McKinsey tells the story.
This is the American worker's saga. The stuff you're making is getting cheaper. The stuff you need is getting more expensive. That's why you feel so squeezed.
"That's a provocative idea," James Manyika tells me on the phone when I read through my theory. "I want to make a key point." The things getting more expensive fall into two categories, he said. You have the failures of productivity, including education, government, construction, and health care. Then you've got natural economic scarcity, like physical living space and crude oil.
"Health care is our most important failure of productivity," he says. "Many of the costs that go into health care are not open to competition. The nice thing about retail is that the costs are transparent. The management fees on your brokerage account are transparent and competitive and competed for. You don't know what the management costs for your health care plan are, because those are opaque. There's less incentive to make them cost effective. That's one reason why you've seen so few gains in health care productivity."
The presumption in Washington is that as long as we have a growing economy, everything will work out, and if productivity rises, jobs and wages will follow. It turns out that growth and productivity, while not at all evil, are not panaceas, either. GDP growth has been decoupled from job growth. Productivity has been decoupled from wages. What's good for work has been decoupled from what's good for workers.
"What can we do about that?" Manyika said at the end of our talk. I waited for him to say something. We're all still waiting.