The Case of Vanishing Wage Growth

Zerohedge recently posted two rather shocking graphs in order to illustrate why wages have been stagnant. What they reveal is that in reality, they are not stagnant at all. As you can see in the above graph the wages of “production and non-supervisory employees” (who for the sake of brevity I will refer to as “non-supervisory employees”) has seen a consistent downtrend starting in 2007. To put it simply, these are the 80% of employees who actually make stuff. But the picture changes quite clearly when you look at their other graph, featured below.

From 2007 to 2010 we would expect everyone’s wages to take a hit since we were in the midst of a terrible recession and this is basically what we see, though supervisors managed to have a good 2009. What I think is more helpful to focus on is the years after the supposed end of the recession. There we see a clearer picture. From 2010 to around 2012 we see a dramatic unidirectional positive trend in supervisory wages as the economy “recovers” while the wages of non-supervisory employees continues on a downward trend. But from 2012 through much of 2013 we see the wages of supervisors go down dramatically and, surprise surprise, for the first time since 2007 we finally see some positive movement in the wages of non-supervisors. However, from 2014 on we see another dramatic, but negative, shift in non-supervisory wages, which is matched by a dramatic increase in the supervisory wages.

The most simple answer to the question “Why does this happen?” would be that wage increases (if we ignore government intervention) are either due to the increased value of the employee or increased perceived value of the employee. The question then becomes, why would supervisors have increased value or increased perceived value?

The first step to understanding this is to shift how we look at “supervisory employees.” In Voltaire’s Bastards, John Ralston Saul outlines the rise of what he refers to as the “technocrat.”

“The new priest is the technocrat — the man who understands the organization, makes use of the technology and controls access to the information, which is a compendium of “facts.” … Like all functioning elites, ours seek to perpetuate themselves for the general good. As always, this involves the creation of an educational system… They are highly sophisticated grease jockeys, trained to make the engine of government and business run but unsuited by training or temperament to drive the car or to have any idea of where it could be steered if events were somehow to put them behind the wheel.”

In other words: supervisors are technocrats. When we see supervisory wages go up, we are seeing the perceived or real value of technocrats going up. As Saul explains, the perceived value of technocrats has been rising basically since Napoleon and in the last 100 years America has seen unidirectional movement toward more bureaucracy in both government and corporations.

Virtually identical programs in business schools and schools of public affairs are turning out people trained in the science of systems management. The Harvard Business School case method is the most famous example of this general obsession with management by solutions, a system in which the logic will always provide support for the conclusions.
It is hardly surprising that there has never been such confidence as there is today within our leadership about their unity of outlook. No matter which way they turn, they find other elites to confirm the reflection of themselves and of one another. Virtually identical programs in business schools and schools of public affairs are turning out people trained in the science of systems management.

The definition of “supervisory employee” is: an employee who has authority to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees. In other words, they are Bureaucratic Technocrats.

Why would the wages of Bureaucratic Technocrats go up? Well one possible answer is that the systems that they operate in have gotten more complex, therefore their knowledge of said systems is more valuable. The other possibility is that this is merely a natural consequence of the vicious cycle described by Saul. Technocrats design the systems and add to their complexity and the system churns out technocrats who are needed to understand the increasingly complex systems they create and complicate. It looks like supervisory wages increase when times are good and decrease when times are bad. Maybe they are like a luxury good, they are believed to be beneficial, so when times are good they are brought on, but when hit by hard times they are the obvious fat that needs to be trimmed since obviously you can’t deliver a good or service without workers, but you can without supervisors. It might also be the case that when times are good companies become more attractive targets for lawsuits, regulations, and taxes, which would increase the value of employees who deal with those things.

In a free market (if one actually existed), market pressures would be the primary force acting on a business and so wages would be closely tied to real value. The government reaction to the financial crisis was not to further liberalize the economy (make it more free) but simply to increase government intervention. This shouldn’t be a surprise if we accept the premise that the government is run by technocrats who believe that the solution to every problem is the creation of more rules and not increasing freedom. Had they responded not by increasing their intervention, but by decreasing it we might have seen an increase in the wages of non-supervisory employees who no doubt have real value. Perhaps the increased intervention was merely a continuation or ramping up of government control dating back to the 1930s and what we are seeing in these charts is simply a continuation of the devaluation of the worker.

In highly regulated markets pressures come from all sides and they affect different businesses in extremely different and unpredictable ways. Some laws might require a company hire more accountants (e.g. the introduction of new or more complicated taxes), some (like those that govern taking a company public) might require hiring more lawyers. The problem with highly regulated and complex systems is that it’s hard to figure out what exactly is going on in them. Too many levers are being pushed and pulled by too many people both within the company, and outside of it. That could be why companies perceive value in supervisory employees where there is none, but on the other hand, that might be precisely why they have value.

Update: I have located a graph that shows the average weekly earnings for non-supervisory employees adjusted for inflation and number of hours worked. It only dates back to 1964, but starting in 1969 we see a pretty consistent and dramatic decline which seems to have bottomed out around the early 90s. However, I wouldn’t be surprised if the apparent rise in earnings wasn’t an illusion created by increased participation in welfare programs, disability, and workers leaving the work force altogether either because of old age (baby boomers retiring) or inability to find work. Even with that “improvement” however, adjusted earnings are down 14.8% from 42 years ago. In other words, there is a longer term trend in non-supervisory earnings.