After Amazon’s pay move, improve productivity to increase wages
The Federal Reserve is not concerned about a sudden outbreak of inflation
Glenn Hubbard
Amazon’s move takes aim at structurally low wages. Over the longer run, sustained growth in average wages is not simply set by companies — it depends on higher productivity growth © Bloomberg
Amazon’s decision to raise the minimum wage for its US workers to $15 an hour promises to improve the lot of its staff and has won plaudits from left-of-centre politicians.
So, with a stronger economy and this move by Amazon, are concerns about sluggish wage growth and the labour market yesterday’s news? Not quite.
Welcome increases in wage growth reflect in large part the recent strength in the US economy.
Fear of so-called secular stagnation is misplaced. The global financial crisis led to substantial slack in productive capacity and the labour market, restraining wage growth.
As the American economy approached full capacity in late 2016, wage growth resumed and has accelerated since in the US, the eurozone and Japan.
In the US, signs of a rapidly tightening labour market can be seen in employers taking longer to fill vacant jobs, the number of companies planning to raise worker compensation and, of course, in rising average hourly earnings. Wage gains would be even greater but for the modest, but larger-than-expected, jump in the labour force participation rate for prime-aged (25-54) workers.
The US Federal Reserve has signalled that it is not concerned about a sudden outbreak of inflation. While continuing its normalisation of monetary policy, the Fed seems content to let labour market gains continue.
That stance was emphasised by Fed chair Jay Powell’s speech in Jackson Hole in August, in which he praised former chair Alan Greenspan’s decision to permit faster wage growth in the 1990s. In that period, Mr Greenspan believed that productivity gains would allow faster non-inflationary wage gains. He was right.
Amazon’s move takes aim at structurally low wages. Over the longer run, sustained growth in average wages is not simply set by companies — it depends on higher productivity growth. And higher wages for more workers require greater skills and retraining. Both productivity and skills can be influenced by public policy. For the US as a whole, non-farm productivity growth generally declined in the 1970s, rose markedly through the 1980s and 1990s, and fell again in more recent years. The good news is that these patterns do not support the pessimistic contention that the US is in the midst of an inexorable decline in productivity growth. In other words, productivity can accelerate.
And, recently, it has. Very recent improvements in productivity growth do not themselves suggest a productivity resurgence, but there are reasons to be optimistic. Business tax and regulatory reforms during 2017 and 2018 should increase investment and productivity growth — and, by extension, wage growth. The 2017 reduction of the US corporate tax rate from 35 to 21 per cent is particularly positive for investment and productivity.
Many economists have concluded that much of the burden of corporate tax falls on labour, not capital, so the rate cut should boost wages. Beyond policy, artificial intelligence promises transformation across industries and activities as a new general purpose technology. It will boost productivity over time.
The tougher task is to bolster wage gains across the board, particularly for lower-skilled workers. This is what Amazon tackled with its higher minimum wage. Businesses should be free to hire or retain the workers they need and to raise wages as they see fit — think, for instance, of Henry Ford’s decision a century ago to pay his workers enough that the best workers would reliably work for Ford. If a higher wage is in a company’s interest, it will pay it. Beyond that, a broader push for higher pay requires higher productivity and skills.
A bold agenda to give more Americans the opportunity for a pay rise would centre on skill acquisition and training. Community colleges offer a good place to start.
Imagine a successor to the 19th-century Morrill acts that established “land-grant” colleges, some of which grew into today’s great public universities. A federal block-grant programme could provide new funding to community colleges, contingent on degree completion rates and labour market outcomes. Community college support can also be linked to public partnerships for training with companies.
Amazon itself is a pioneer here with a community college partnership to create a degree programme in cloud computing. Life-long learning accounts could fund training options for more experienced workers in transition, too. And tax policy could boost human capital and wages by offering job training tax credits to employers.
Today’s strong labour market and solid wage gains are a good thing. The bold wage increase offered by multibillionaire Jeff Bezos has taken the spotlight. But in the next act in the drama, policymakers need to be on stage, too. Sustained wage gains require them to play more than a supporting role.
The writer is dean of Columbia Business School and was chairman of the US Council of Economic Advisers in 2001-03
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