Of Course There Is a Class War, David Brooks

New York Times columnist David Brooks, in an article sub-titled "No, Virginia, there is no class war," recently trotted out an old argument about why wage growth has been so sluggish for so many U.S. workers for so long: they're just not very good workers. Specifically, he argues that "wages are still mostly determined by skills and productivity." Ergo, if there is growing inequality in wages, it must be driven by inequality in workers' own productivity.

But the evidence he cites is totally unconvincing on this.

First, he notes that wages for lower-wage workers have recently grown more rapidly than for middle-wage workers. But it's been shown again and again that this is driven in large-part by those states that have raised their minimum wages. It's also been shown that tighter labor markets disproportionately benefit the lowest-paid workers. The argument that changes in relative bargaining power and economic leverage have been the prime mover of wage trends in recent decades is not an argument that wages can never rise, period. When policies change--like minimum wages increase and the Fed allows labor markets to tighten without slamming on the interest rate brakes--good things happen. We just need to change a lot more policies.

Second, he cites a study that looks at wage and productivity growth in high-skill and low-skill industries between 1989 and 2017. The first odd bit of this evidence is that the wage growth he reports the study claims for high and low-skill industries is essentially identical: 26 percent versus 24 percent. The second odd bit is that this means even high-skill industries only gave average annual wage increases of 0.8 percent over that time, even as aggregate productivity grew by almost twice as fast over that time (about 1.4 percent annually). Finally, and most important, using industry-level productivity growth to infer anything about the productivity of individuals working in these industries cannot be done. To put it most simply, productivity growth within an industry can occur because each input used in production gets more productive, or, there is a shift in the mix of inputs. This might sound wonky but I'll explain a bit more in the next paragraph:

This issue of changing the mix of a firm's inputs also nullifies the conclusions he draws from his third and fourth bits of evidence--both of which highlight that there has been growth in the inequality of productivity between firms. Again, changes in a firm's productivity often have nothing to do with individuals' productivity or economy-wide productivity. Take the example of an auto company that once ran the factory cafeteria with its own employees. One day, it decides to fire the cafeteria employees and "rehire" them through a services staffing company. Measured productivity of the auto company will rise--the cafeteria employees didn't make cars and so the firm's output won't change much. But, if the factory cafeteria was a necessary part of the business (say for retaining workers, or at least keeping them onsite during lunch to minimize time away from the assembly line) and must be kept running, then there has been no economy-wide productivity gain that's occurred by spinning off the cafeteria workers into a separate firm. Instead, by throwing the cafeteria workers out of the lead firm, the auto company has reduced these workers' bargaining power and wage declines are likely in their future even as their own productivity has not changed at all.

Finally, we should mention this bit of his column: "Today's successful bosses are doing what they should be doing: increasing productivity, growing their businesses and offering great service."

Does anyone really believe that pay for corporate managers is driven by their personal productivity? Are today's CEOs really that much more productive relative to rank-and-file workers than CEOs were when, say, Microsoft and Apple were founded? CEOs of large public companies made salaries 45 times as large as the pay median workers in their industries in 1989. By 2018, they made 278 times as much. It seems awfully unlikely this was driven entirely by CEOs' own productivity. We know, for example, that CEO pay is largely driven by luck. For example, oil company CEOs receive large pay gains when the global price of oil rises--which they obviously have little control over. And between 2006 and 2015, a study by Ric Marshall and Linda-Eling Lee found that the relationship between CEO pay and what a company's shareholders earned on their investment was negative--meaning that CEOs' pay was not determined by how much they generate in profits.

In its own way, the Brooks column is very useful, highlighting a key political cleavage over what people think drive disparate economic outcomes. Is it simply skills, talent, and hard work, or have institutional and policy changes that disempowered some while protecting others (rule-rigging, to be less polite about it) been the real story? Put me down for the latter view. And it is clear that more and more economists are adopting this view, because it conforms much more tightly to the real-world evidence.