Income Inequality, Productivity and Economic Growth
One of the big conundrums economists and politicians struggle with, is the lower growth of overall productivity, especially in what is called developed economies. This is not true of course across all industries, sectors and branches of the economy but in general, productivity growth has been slower than wished and lower then it used to be in the mid 20th century.
Income inequality has already been named as a result of low productivity by some and blamed for it by others. The argument explaining it as a result – a bogus one in the eyes of this author and some economists and sociologists – is that those who are more productive due to hard work, education, talent etc. are being rewarded; while less motivated or skillled employees simply do not increase their productivity and are therefore rewarded with less. Since these tend to be the same people every year, their income gap will increase over time….Q.E.D. and all that jazz and etc…. well, I doubt it so do read on.
On the other side of this argument, most of those blaiming the lack of productivity increase on income inequality, state as an important claim, that less income equals less health & less education, resulting in lower productivity. In term that blame means lack of increase in the share of employees in profits, so no increase in wages and you have a perfect self reinforcing loop that seems to give a great explanation. Lazyness or inability to improve results should not be rewarded we are told. But top managment will always outsmart the system by having some KPIS** twicked to provide a certain bonus almost no matter what happens (I was there myself, it’s not an assumption).
The argument put hereforth is very different but explains better the phenomena of lower porductivity growth. All arguing parties use the same data sets to substantiate the claims. How to establish who’s most likely to be nearest to the truth, requires further more detailed research and will be suggested in a coming blog entry.
Here is the claim and the rationality behind it –
Try to think about the issue from a different point of view. The growth of income inequality over the past 30-40 years or so, shows clearly that a very large part of both GDP and GDP per capita growth, actually went to the Procentians, the top 1% of the economic ladder*.
(Side remark – important but not essential) If you think about it for a minute, you would also realize that even within the procentians there are huge income and wealth inequalities. So we can reasonably conclude that an absurdly large part of this economic growth actually ended up with just 0,1% of the population in many countries. (There will be large variances within that from Germany to USA for example). Let’s call this part of society for convenience Promilians. But really, don’t feel sorry for any Procentians, even the least overadvantaged are in a different universe to ours.
As the distribution data shows (http://wid.world – World Inequality Database set up by Piketty and his team) the lagest part of the economic growth, callit here the incentive meant to reward performances, has been attributed mentally, physically and pecuniarily to the Promilans and Procentians. These “Superstar Performers” created all the additional value and therefore get the wealth, goes the argument and are therefore rewarded. It is of course more nuanced than that but I wanted to start the discussion with a provocation.
Considering that rewards are given to only a few at the top, why should other members of the workforce really keep doing their best to increase productivity?
No reason really. As simple as that. Almost, do read on for more details.
Would you work harder or smarter if you knew that all the gains of your additional productivity go to someone else? Some would obviously but there are good explanations as will be detailed below. These are sufficient to explain the current productivity growth, as “sluggish” as it seems to many politicians and economists. Some productivity growth will always be there. These gains in productivity would be brought about maybe by individuals finding some of the satisfaction at work simply by thinking of better, more convenient, efficient, cleaner or otherwise improved results. Their reward is endogenous to themselves. Knowing they have achieved an improvement is its own satisfaction. Or maybe an appreciation from peers and colleagues is sufficent to some. Eventually, some of these people too will at a certain stage get tired of seeing the rewards go regularly to people in the top of the organization.
Another group contributing to the productivity increases we see, are the ambitious people. Those that want to advance in the organizational hierarchy. For such people, the advancements to be received (hopefully) are the reward. They expect to have social and pecuniary gains. They hope to benefit from higher socioeconomic status within and without the company with the increments in position and wages that are associated with such efforts in our meritocracy. We believe that a large part of any productivity registered in big parts of the economy are generated by this group. As it is a small part of the workforce, growth can be expected to be smaller than if all workers were motivated and contributed.
Some do of course do get properly rewarded and paid for special skills. This is a minority. Looking at the data of productivity by sector makes this clear (https://www.bls.gov/opub/mlr/2016/article/measuring-quarterly-labor-productivity-by-industry.htm). The data for US shows how value added and growth are strongest for the information and finance sectors with the rest trailing behind significantly. This set of data for the OECD is regretably no longer published and was removed from the archives. Probably was not considered of enough interest. The link I saved for this blog now infomrs that the data set is no longer available. (Please send the link if you manage to find the data)
Sectors with high pay show higher productivity growth. That is to be expected according to the existing paradigm of how productivity is rewarded.
The claim here is that it is actually the other way around.
People become more productive in these sectors because greater rewards are what they expect. The salaries of people are usually agreed before they start. Incentives’ systems are set in place to motivate in advance, not to reward in case that by chance more results were delivered. Intinsically, such industries will also attract more ambitious actors from the outset. So we have two self reinrforcing loops contributing.
At the other end of labor hierarchy, think of a street or office cleaner, a construction worker. What would they gain by working smarter? By finding more efficient ways to complete their work? Usually that will only result in them producing more for the same wages. The gains will go to management or the owners. The only way for a person in this kind of position to gain usually, would be a promotion. Only a few really want this probably. Even reaching higher is stilla long way from getting to a place where you may feel fairly rewarded.
To repeat in different words, morals and ethics may play a role for some. Personal feeling of achievement, of knowing one has left a mark on an industry, a company, a process or maybe just for oneself. We do something that leaves a little mark or a dent in the grand scheme of existence and gives a personal feeling of achievemen or fulfilment and meaning in life. That can drive some of the people some of the time. But, as was said before by grander personalities, it won’t work for all of the people all of the time.
How far that can take productivity? Reasonably far enough for Procentians to increase their millions and for Promilians their billions. Up to a point…..and we are at a point where the middle and less than middle classes are probably just getting very tired from not sharing the fruits. Less motivation, less productivity growth.
Just a simple example: you are a middle manager in a large company. The company has an increase in profits in the last business year of 3%. The CEO walks home with 5 million, or 50 million. $ or €. Doesn’t really matter much. The complete board takes another 10, 20, 50 million in bonuses. Some get several times their annual salary that is already at a six or seven figures’ magnitude. The unit you manage in the company, has actually improved performance by 10%. If you will receive a bonus of 10 or 15% of your annual income, you are probably lucky. Your team, that worked with you to implement those improvements will get at best trophies, medals or if really lucky, 2 or 3 or the real wopping 5% as a bonus to their annual income. Definitely not a reward several folds their annual incone as the big chiefs do.
Anyone has an idea?
Beats me completely.
There is no justifiction and the only reasoning is that top management was able to hijack the system for itself. Not as a conspiracy (I don’t believe in those as a rule), but by incremental collusion under the auspices of social conventions. . Now, take those millions – say 100 to simplify the argument – top management received and divide them between all employees that contributed to the growth. If the company has 11.000 employees, of which thousands contributed to the growth in some form but only very few are rewarded very well, a group of a few dozens may receive a handsom reward and maybe a larger group of a few hundreds, some reward. The rest get a pitance if anything at all and they know it in advance. Why bother? If rewards for improvements leading to higher gains that result from increased productivity and output alway go to the small group at the top, what motiviation does any other employee have to increase their productivity?
It’s time to turn the table around. The fruits need to be shared more equally in order for most to have more: more income and even morer important, more say about society and their personal lives. A power that comes with having a bigger stake in society. One of the answers lies in cooperatives, others in the tax laws and more in the financial system. Over time I hope to discuss and ekaborate on all hese topics. Co0ntributions of ideas and content are welcome. Credit with name will always be given if wanted or hidden if requested.
The more people know they can get a fair share of growth, the more productive they will be.
The question if everlasting growth is what we need or want, is a diffferent discussion.
*Picketty’s databased mentioned in this blog is a good source of knowledge and information. Recommend to read Reich, Stigliz, Milanovic and many others. (If you still cant find the corroboration write me)
** KPI – Key Performance Indicators. For those unfamiliar with the terms, these are the measured results of various parts of activity in a company. Managers get rewarded according to a formula defining how much bonus they get for fulfilling each indicator. Profits are obviously a “hard” indicator and don’t gurantee a bonus. An increase of 2% in new customers for example, when in the past the oncrease was typically 2-3%, is a “soft” indicator. It is almost guaranteed to happen and so a part of the bonus to be paid.