Technology Won’t Help Laborers: The Real Cause Behind Wage Stagnation
Tags: Inequality, Labor, Jobs, Economics, Technology

We live in a world where job creation and workforce growth are not growing in sync. When workforce growth outpaces job creation, both unemployment and inequality tend to increase. This condition is not improved, but in fact worsened by technological advancement. Many industries that previously relied a lot on human labor have to shift and at the same time minimize the labor capacity of job creation. Moreover, technological improvement strengthens company independence from labor influence as many of the union labor fade away. It is not surprising then, that since the past 30 years, while productivity has been rapidly increasing, wage growth has remained largely stagnant. One question naturally arises: Why did this happen? Is the rapid pace of technological growth all to blace? or were there also issues with our economic system that continuously weakened the power of labor?

Growth in inequality has occurred in various countries since 1980, but at different rates. According to the 2018 World Inequality Report, during the period 1980–2016, the top 10% of people with the highest income in countries on the European continent experienced income growth of 35–40%, while North America, China, India, and Russia experienced growth of 45- 50%.[1]. This inequality growth in line with the growing percentage of income for the top 1% of society which experienced growth that varies from 5–30%[2]. In some extreme cases, some countries start at a high percentage of inequality, and it has maintained until today, such as countries in Sub-Saharan Africa and the Middle East. Short story, income inequality reduces labor productivity and leads to economic instability because it affects people’s health and education. The trend of inequality growth that tends to be positive in various countries is a sign that inequality problem must be solved.

One of the root causes of the unequal income distribution problem is wage growth which has tended to stagnate in the last few decades, especially for people in the middle and lower income class. Data shows that productivity had increased by 74% while the hourly compensation received by each worker only increased by 9% in the period 1973–2013[3]. This is surprising, as one of the main drivers for wage growth is usually improvement in labor productivity. Jason Furman, former President Barack Obama’s economic adviser, stated that better productivity growth has the potential to be the most potent source of stimulants for sustainable wage growth across the income spectrum[4]. Wages are supposed to grow faster when productivity increases, and the unemployment rate falls because productivity growth also leads to an increase in the cost of workers’ wages which is a form of additional compensation for the increased performance of these workers. The declining unemployment rate is evidenced by the 2018 OECD Employment Outlook report, which states that the employment rate continues to increase, which initially reached 61.7% in 2017 and predicted to continue to grow to reach 62.5% in the fourth quarter of 2019 in OECD countries[5]. Wage growth that is not in line with productivity shows that the owner capital benefited more from the results obtained from the productivity in a much higher proportion than the workers.

The decoupling of productivity and wages raises questions regarding the magnitude of the results we should be able to enjoy from the increase in productivity itself. To answer this question, we can look at the share of income growth of different groups of people. During the period 1979–2013 the top 1% of the population enjoyed a wage growth of 138%, while the bottom 90% of people only experienced a wage growth of 15% which should have grown 32% if wages grew evenly across all circles[6]. We can elaborate this evidence with wage growth for middle-income and low-income workers who tend to grow very slowly compared to high-income workers. According to data from 1979 to 2013, the hourly wages received by low-income workers decreased by 5%, middle-income workers only grew by 6%, and hourly wages for high-income workers experienced an increase in wages by 41%[7].

The data above is from 350 companies in America which are sorted by their level of sales and show that the number of CEO wages, which was initially 20 times higher than the ordinary workers in 1965, increased to 296 times greater in 2013[8]. We can draw some conclusions from these evidence: increasing productivity in the late 20th to early 21st century has been only enjoyed by a handful of groups, such as owners and top management positions.

Furthermore, this imbalance raises a new question of whether wage reductions only occur for people with low education or in all classes. According to 1989–2014 data, wages for young university graduates have decreased since 2000. This is exacerbated by the decline in health insurance received by recent college graduates, from 61% in 1989 to 31% in 2012, and high school graduates experienced a much more significant decline from 24% in 1989 to 7% in 2012.[9]. This decline is not only detrimental to society in terms of income; more than that, inequality also threatens the lives of workers with the lack of health insurance coverage.

All of this evidence leads to the main question: How could all this happen? Productivity that should be enjoyed by all groups but tend to emphasize and only focus on upper-income groups must be the main root of the problem. Some theories try to explain why wage growth tends to be rigid and why only a small handful enjoy the benefits of productivity. However, we can reduce and discuss the core of the problem into two concepts. The first concept is related to the theory of sticky wages (in short term context). The second is a decrease in collective bargaining (in long term context), which can summarize all of the problems related to wage growth, which tends to stagnate and unequal income distribution.

According to the Central Bank of Ireland report, there are two main reasons why companies do not want to reduce wages: the belief that the action will reduce the morale and the worker willingness, and leave the most productive workers as a consequence of such actions[10]. Apart from reluctance to reduce wages, companies also tend not to increase wages for the obvious reason, namely cost savings (profitability). As per basic Microeconomic Theory, where companies tend to move based on the profit motive. On one hand, this sticky wage occurs to anticipate the company’s inability to pay for labour when there is turmoil in the economy. On the other, this theory only explains from the demand side of labour (firms) without explaining why labour cannot force or influence companies to increase wages (the supply side). At the same time, there is clear evidence that the proportion of business productivity results tends to be dominated by top management income, as evidenced at the beginning of the article.

Therefore, we need to describe aspects of a decrease in collective bargaining that occur in the market into three main components, as an effort to explain the inability of workers to force an increase in company wages. The three main components referred to are underlying shifts in technology and globalization, shifts in institutions and politics and bargaining power, and underinvestment in the commons.

Underlying shifts in technology and globalization

In theory, an increase in productivity will increase wages because the leisure sacrificed by labour will be more significant to meet the demand for productivity. However, along with the development of the era, the quantity of labour required for several sectors, which initially had a labour-intensive industry, experienced a shift to the capital-intensive industry because humans’ role in that sector was replaced by technology. Researchers reveal that one robot will replace 3.3 jobs in a country as a whole for every additional[11]. These technological advances, of course, slightly reduce the reasons mentioned at the beginning of the paper regarding the stagnation of workers’ compensation growth, even though productivity continues to grow. Shifts in technology and globalization (international trade) could decrease less-skilled workers employment and present new products with better quality, and it would reduce employer pressure to pay wages for less-skilled workers because the technology will replace it[12].

Apart from technology, globalization also has an essential role in wage growth. One study in the United States estimates that one-third of the growth in wage inequality in America is due to an increase in immigration in the 1980s, an effect of two to three times as large as that attributed to imports of good[13]. The economies of developing countries tend to be poorer, and workers tend to be lower than employers, so opening up the economy will help inequality that occurs in these countries; however, this should be detrimental to the wages of workers in developed countries because of the entry of cheaper labour[14]. Besides, developed countries tend to have a much higher income than developing countries at the same job, not because the people in developed countries tend to be more productive but because the developed countries exercise control related to immigration[15].

We can draw a red line in terms of technological development and globalization. The advent of technology that can make production processes much cheaper, efficient, and practical will reduce companies’ dependence on workers who can be replaced by this technology. Also, the high flow of globalization has an impact on companies’ ability to be able to employ workers at lower wages. Companies’ flexibility to share expenditures for wages (capital intensive industry) should raise new questions related to where is a labour force against employers interest which should protests and demands?

Shifts in institutions and politics and bargaining power

The bargaining power of a worker to increase wages is closely related to workers’ participation in the labour union. Labour unions have the political power to bargain over wages to both employers and the government. However, union density in the industry (manufacturing, mining, constructing, utilities) of OECD countries decreased from nearly 40% in 1980 to 20% in 2019 (28 million to 13 million in less than 40 years)[16]. The massive decline in the number of labour union members was caused by closing down and downsizing of highly unionized industries, such as, coal mining, steel, and shipyards; the increase in subcontracting (with much lower union density rates in smaller firms); the rising share of temporary and work agency employment (often with low levels of union membership); the shift from manual to non-manual work; and the substitution of usually highly unionized job of skilled and craft workers by robots and digital programs (technology)[17].

To prove the previous paragraph’s initial statement, we will construct a scenario comparing estimated income growth with and without 1979 union labour density. Based on the graph above, we can analyze that if union labour density were still in the condition in 1979, the wages of male

workers would increase by 14%, while women with union labour density in 1979 will see a 7% increase in wages.[18]. In non-college degrees, there is an increase in the percentage of wages for male workers by 3% and 2% more for female worker[19]. Meanwhile, for workers with a high school diploma or less education, there is a stagnation in wages or 9% for male worker and an increase of 3% for female worker[20].

Through the evidence presented in the previous paragraph, we can conclude the importance of labour unions as an effort to increase workers’ bargaining power to obtain a decent wage. It cannot be denied that the decline in labour unions is caused by various factors related to globalization and technology. The shift in humans’ role in the industry caused by technological advances must be considered not to be too detrimental to workers. After understanding the impact of decreasing the bargaining power of labour unions and the effect of technology and globalization, we have come to the final factor that has an essential role in improving both the quality of workers and industry, namely underinvestment commons.

Underinvestment in the commons

Investment in the public sector is one of the primary responsibilities that a government must undertake. The government must anticipate the harmful effects of technological progress, increasing globalization, and decreasing union labour. For example, take rampant outsourcing. In the US, outsourcing drives up unemployment because outsourced jobs are often more than the number of unemployed Americans[21]. The central tendency to provide outsourcing is to reduce company costs by providing cheaper wages than the wages of the domestic workforce at the same or even better quality level. Outsourcing has led to an increase in the size of the outsourcing market in America, which in 2007 was only 34 billion U.S. dollars, but grew to reach 62 billion U.S. dollars in 2019[22].

American companies usually carry out three forms of outsourcing: technology experts outsourcing (usually from China and India), call center outsourcing (generally from India and the Philippines), and human resources outsourcing. However, outsourcing goes both ways for developing or developed countries; it increases the level of competitiveness of companies in the global market, but it can also slow down wage growth due to the tendency of companies to seek labour with the same or better quality, but at lower wages.

The main reason companies do not want to invest massively in their workforce’s quality is the high turnover rate of workers. For example, the US’s turnover rate has continued to increase steadily since 2014, and the growth had increased by 22.9% in 2019[23]. Turnover can harm the company in three ways; companies do not enjoy the benefits of from the invested workforce, the financial losses, and the impact on teaching and learning activities because it disrupts regardless of whether the skills learned are generic or firm-specific[24]. Underinvestment in the commons, especially related to workforce quality, will have an impact on the increasing level of employers’ reluctance to employ permanent workers due to losses incurred on a turnover basis. This will make employers more likely to subcontract workers because they could find labour with better quality, lower costs (without the need to provide training), and better work commitment (due to wages based on short-term contracts).

In the long run, underinvestment to this demography will have negative implications for wage growth because companies are increasingly less dependent on permanent workers. Ironically, only the permanent worker has the political power to demand an increase in wages than contract workers. Therefore, it is necessary to have efforts and government intervention to ensure labour providers’ safety to provide job training.

Conclusions

In conclusion, technology improvement can help increase labor productivity, but at the same time replaces our job creation capacity. Globalization and technology improvements affect the competitiveness of the global market more than ever. Through globalization, we could hire cheaper and more compatible workforce, and this modernization affects the company’s decision to hire subcontract workers and eliminate the influence and power of labor unions.

The government should anticipate market failure to accommodate these matters. There needs to be political will, both from the government and the community, to help marginalized communities jointly due to the unfavourable social conditions and economic systems. As problems related to productivity and wage growth seem to have been solved with the advent of technology, the government currently only needs to ensure that the wages earned are proportional to the worker’s performance, and this shall be possible by strengthening the position of workers in wage decision-making through the law. Also, implementing a job creation policy or pre-work program (Kartu Pra-Kerja) is beneficial for those who are not fortunate to overcome inequality (and these people are increasing in number).

Finally, the government must return to being aware of the original function and mandate of forming a country. How do we, as policymakers, realize the main goal of economic development? Improving both monetary and non-monetary factors, which are the level of people’s income and the community’s quality, shall be beneficial to bring society to their prosperity.

Written by: Albert Ludi Angkawibawa

Edited by: Miftah Rasheed, Faris Abdurrachman, & Rama Vandika

Illustrated by: Della Anissa

[1] Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman.World Inequality 2018.(-:World Inequality Lab,2017), 42.

[2] Ibid 44.

[3] Why the GAP Between Worker Pay and Productivity is so Problematic.(2015, February 2).Retrieved September 31, 2020, from https://www.theatlantic.com/business/archive/2015/02/why-the-gap-between-worker-pay-and-productivity-is-so-problematic/385931/

[4] Worker Productivity Spikes.(2019, May 3). Retrieved 8 October, 2020, from https://www.vox.com/2019/5/3/18526788/worker-productivity-spikes

[5]Rising Employment Overshadowed by Unprecedented Wage Stagnation. Retrieved 9 October, 2020, from https://www.oecd.org/newsroom/rising-employment-overshadowed-by-unprecedented-wage-stagnation.htm

[6]Lawrence Mishel, Elise Gould, and Josh Bivens.Wage Stagnation in Nine Charts.(Washington,DC:Economic Policy Institute, 2015), 5.

[7] Ibid 6.

[8] Ibid 9.

[9] Ibid 7–8.

[10] Philip Du C., Theodora Kosma, Martina Lawless, Julian Messina, and Tairi Room.2015.”Why Firms Avoid Cutting Wages: Survey Evidence from European Firms”.Research Article (2015):32. https://journals.sagepub.com/doi/10.1177/0019793915586973

[11] How many jobs do robots really replace?.(2020, May 4).Retrieved 9 September, 2020, from https://news.mit.edu/2020/how-many-jobs-robots-replace-0504

[12]Why Wages aren’t Growing in America?.(2017, September 10). Retrieved 8 September, 2020, from https://hbr.org/2017/10/why-wages-arent-growing-in-america?registration=success

[13] https://www.imf.org/external/pubs/ft/issues11/

[14] Abhijit V. Banerjee and Esther Duflo.Good Economics for Hard Time.(New York: Public Affairs, 2019):55.

[15] Ha Joon Chang.23 Things They Don’t Tell You About Capitalism.(London:Penguin Books,2010):26

[16]Michael Watt, Mohammed Mwamadzingo, Ariel Castro, Nezam Qahoush, etc.2019.”The Future of Work: Trade Unions in transformation”.International Journal of Labour Research (2019 VoL 9 Issue 1–2) : 22. https://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/---actrav/documents/publication/wcms_731147.pdf

[17] Ibid 22.

[18] Jake Rosenfeld, Patrick Denice, and Jennifer Laird.Wage Union Decline Lower Wages Nonunion Workers.(Washintong,DC:Economic Policy Institute, 2016), 16.

[19] Ibid 17.

[20] Ibid 18.

[21]Kimberly Amedo.How Outsourcing Jobs Affects the US Economy.(2020, October 20).Retrieved 9 September from https://www.thebalance.com/how-outsourcing-jobs-affects-the-u-s-economy-3306279

[22] Statista Research Departement.Total Contract Value of the Outsourcing market in The Americas from 2000 to 2019.(November 4, 2020). Retrieved 9 September 2020 from https://www.statista.com/statistics/189815/annual-total-contract-value--american-outsourcing-market/#

[23] Workplace Turnover Rates on The Rise.( November 13,2018). Retrieved 9 November, 2020, from https://www.worldatwork.org/workspan/articles/workplace-turnover-rates-on-the-rise

[24] John H. Bishop.Do Most Employers and Workers Underinvest in Training and Learning on the Job?.(January 1, 1993). Retrieved 9 September 2020 from https://core.ac.uk/download/pdf/144994991.pdf