1/ Fed Chief Jerome Powell says that the falling percentage of economic growth flowing to workers is "very troubling". He's quite right, but I think he misses some key points. (thread) latimes.com/business/la-fi…
2/ First, I agree with the central thesis. Over recent decades, corporate profits as a share of GDP keep rising and wages as a share of GDP have fallen. That's a problem.
3/ Moreover when corp profits (and cash reserves) are at record highs, there is no logical reason to assume that corporations would pay workers more if they had more cash. That is the single biggest intellectual flaw in @PeterRoskam's tax bill.
4/ BUT... Powell makes what I find to be an all-too-common mistake among academic economists that business owners get in their gut. Specifically, the academics assume that low unemployment will lead to wage growth.
5/ On a pure supply/demand basis, that makes sense. Fewer people looking for work = more pressure on employers to raise wages to attract them. But that presumes that all jobs are the same.
6/ In reality, we've been shifting away from an economy that created jobs across the skill spectrum to an economy that primarily creates very-high and very-low skilled jobs. That means lots of mid-skilled folks who are now under-employed.
7/ So when a machinist loses her job and has to get a job as an uber driver, the employment is constant, but wage (and benefits) growth fall. That's happening all across the economy and is making it harder to use simple supply/demand to explain the wage/unemployment link
8/ Layered on top of that is the revolution in communications and logistics. It used to be that if you wanted to ship product to Boston, you needed a factory/warehouse nearby. Nowadays, there is little difference between having that factory in NH, IL, CA or Shanghai
9/ For companies with multinational footprints (e.g., factories in all those places) that means that they can dispatch their production around the globe, in real-time. That has the practical effect of putting US workers in competition with workers all around the globe.
10/ So go back to supply & demand - that means that there is a TON of labor supply affecting US wages, and US wage growth is no longer simply a factor of domestic GDP & employment data.
11/ So why the rant? Because lots of US business leaders I've worked with intuitively get this and aren't at all surprised by the stagnation in wage inflation. But the Fed Chair's comments seem to ignore those points. That's a problem when we set macroeconomic policy.
12/ Also because there are lots of things that Congress can do to affect wage growth positively if they understand those dynamics. For example:
13/ We could require US companies to hold their foreign employees to the same standards as their US employees to level the playing field for domestic labor.
14/ We could make significant investments in education & research to help businesses to innovate and develop new industries to provide medium skilled jobs that we've lost.
15/ We could provide mid-career training to help workers who's jobs have gone away to move up the skill ladder rather than having to pick up side-hustles and other under-employment gigs.
16/ We could expand our H1B program to make sure that the best & brightest from around the world come to our shores to innovate and deploy their entrepreneurial talents so that we can be the home for future industries.
17/ These are all things we used to do. They're proven to work. And they are completely opposed to Trump's foreign/immigration policy and @PeterRoskam's tax bill. But we can fix that in November. /fin
