The most damaging factor to our economy nowadays is the Wage-Productivity gap. This refers to the rise within the hourly output of employees vs. the increase in hourly pay. This idea is described quite well in Chapter half-dozen of economist Ravi Batra's book, "Greenspan's Fraud."
Throughout times of true economic prosperity, wages have kept pace with productivity increases. Employees have shared in the advantages of their increased productivity. The result is that wages remained sufficient to buy our nation's industrial output. Borrowing, or debt-financed client spending, was unnecessary to maintain sufficient client spending to get our production. More production can be purchased because a lot of wages are paid. Demand, created by wages, matches supply, which is created by productivity. This creates a balance that produces large borrowing unnecessary. And such balance maximizes economic "growth."
This balance has not been maintained, however, throughout recent years. It's worsened greatly under the Bush administration. Productivity has increased considerably throughout the Bush years. In distinction, wages have truly decreased. This trend started before Bush took office, but I'll confine the time-frame to December 2001 through March of 2005. These are years for which records are readily accessible from the U.S. Bureau of Labor Statistics. Below could be a graph from the New York Times showing how productivity is outpacing wages
Beginning in January of 2003, productivity (or output per hour) has increased 11.a pair of% through the 1st quarter of 2005. In contrast, hourly wages have declined 2.3% over the identical time period, from an inflation-adjusted $8.thirty two/hour in January, 2003, to $8.13/hour in June, 2005. Production has exceeded the power of wage earners to purchase the assembly by 13.5%. This gap has been filled by client borrowing. The quantity borrowed should steadily increase, in order to stay pace with our increasing industrial production. If it did not, our economy would sink into recession. However, maintaining demand through borrowing is not a sustainable path.
Typically the result of the wage-productivity gap can be seen better from a distance. An example of the result of the wage-productivity gap will be seen with Japan's economy. Once more, this was described by economist Ravi Batra in Chapter half-dozen of his book, "Greenspan's Fraud." Dr. Batra makes a very compelling case that Japan's economic problems resulted from the increasing gap between Japanese wages and productivity. I can paraphrase his explanation here.
Japan experienced extraordinarily fast growth between 1960 and 1975. Throughout that time there was a 168% increase in per capita GDP. Their per capita GDP increased from $2,139 in 1960 to $five,750 in 1975. Real wages increased 217% during that time. Manufacturing productivity increased 264% throughout these 15 years. Japan prospered and its economy grew throughout this era because wages, that create demand, kept up with productivity, which creates supply. There was sufficient WAGE-FINANCED demand to stimulate production. And the required demand was maintained by client income, not client borrowing.
When 1975, productivity growth began to outpace wage growth. The result was a a lot of slower growth in GDP. Between 1975 and 1990, productivity increased 3% more than wages per year. Throughout that amount, wages increased twenty seven%, while productivity increased 86%. The per capita GDP increase was sixty four% from 1975 to 1990. Less of the wealth produced by Japanese staff was being shared with them. Thence, business profits soared, increasing money offered for investment. This caused Japanese investors to over-invest in each the stock market and housing. Japanese stock markets and real estate values soared as a results of this over-investment. Meanwhile, there was insufficient wage-financed demand to keep up with this capital investment.This necessitated increased levels of borrowing to take care of the demand that wages could not maintain.
By 1990 there was a large Japanese stock market bubble and assets bubble. And in 1990 this overvaluation all came crashing down. The Japanese economy has still not recovered fifteen years later. By 2003, the Japanese stock market was still 80% below its peak in 1990. From 1990 via 2002, per capita GDP increased 13%. Compare that with the 168% increase between 1960 and 1975. Compare this latter 15-year increase with the fifty nine% increase during the 27 years from 1975 to 2002. Japan's per capita GDP increased 3 times as much throughout the fifteen years previous to 1975, than it did during the 27 years once 1975. The pre-1975 rate of increase was five times faster than the post-1975 increase.
What caused this slowdown? The rise within the wage-productivity gap. Employee income that would are place to smart use shopping for Japanese goods was siphoned off as corporate profits. Since the benefits of investment capital are restricted by consumer demand, the result was over-investment of Japanese stock and housing markets, and maintenance of consumer demand by borrowing.
Author Resource:
Jeff Patterson has been writing articles online for nearly 2 years now. Not only does this author specialize in Productivity, you can also check out his latest website about
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