Earning Less – Why The Poor Get Poorer

by Guest Author Lance Roberts of Streettalk Live

Working harder – earning less. That is what today’s release of productivity and labor costs showed us. With that also comes the realization that a lot more people would be reciting the classic prose of Johnny Paycheck’s “Take This Job And Shove It” if they thought they had an option to find work elsewhere.

This report, of course, shines the light on one of the primary reasons that the poor keep getting poorer even as the economy struggles to recover at the weakest rate of any post-WWII period on record. In the most recent release of the data – productivity slowed in the fourth quarter even as hours worked rose.   Non-farm business productivity eased to an annualized 0.7 percent in the fourth quarter as hours worked increased an annualized 2.9 percent after a 0.9 percent gain the third quarter.  This in turn is also a bad sign for corporate profit margins as unit labor costs rose sharply at an annualized 1.2 percent, following a 2.1 percent decrease in the third quarter. Can you say “margin compression?”

Compensation did rise slightly in the 4th quarter but is still running at a negative rate of 1.2% from last year. Working longer hours but earning less – the plight of the average American continues.

However, beyond the media headlines, there is more to the current levels of productivity and labor costs than meets the eye. The decline in real hourly compensation has also dragged output per hour of all persons lower. This is an interesting data point as the media continues to try and point to all the reasons why we are NOT currently in a recession. However, the last time we had falling output and negative real compensation was during the last recession in 2008.

Furthermore, when it comes to a recovery in employment, it is cheaper, particularly when the government keeps extending 100% tax credits for businesses capital good spending, to implant technology whenever possible to keep employment down. Businesses remainly keenly focused on the bottom line particularly as payroll and benefit costs continue to climb each year as aggregate end demand drags. However, if businesses can increase productivity without increasing employment those net gains flow directly to the bottom line. This attitude, of course, not only stifles the need for employment but also lowers wage requirements as the available labor pool competes for fewer jobs.

Don’t believe me. Just think about all of the receptionist jobs that have been replaced by automated machines:

  • Press 1 for English (Should that even be necessary in America?)
  • Press 2 for Customer Service (Isn’t that why you called in the first place?)
  • Press 3 to be placed on permanent hold (When calling your electric company).

Increasing productivity, lowering costs and increasing profit margins. In a slow growth economy this has become the clarion call to corporate CEO’s. Of course, productivity has always been a close companion to overall economic growth and the magnitude of the recent decline in productivity should be concerning to those adamantly promoting a “no recession” call.

Working more and earning less. That is struggle faced by the average American today as each dollar buys less than it did before. Statistically, the economy may be recovering. However, for the average American it is a far more depressing reality. Capacity utilization still remains far weaker than at the peak of the last economic cycle and employment relative to the total working age populatioin remains mired at lows. These components all feed back into the mental and financial state of the consumer which, in turn, impacts businesses future investment and hiring decisions – or lack thereof.

The economy continues to roll off indications that the future quarters ahead will most likely be substantially weaker than those of the recent past. However, the real story here is that there is little hope for an already struggling middle class to gain any ground in an economic climate that continues to stack the cards against them.

Lance Roberts

(c) Streettalk Live

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About the Author

Lance Roberts is the host of Streettalk Live and author of many online articles pertaining to economics and the financial sector. Lance Roberts is also Chief Editor of the X-Report, a weekly nationwide newsletter. His investment strategies have been featured on CNBC, Fox News and Fox Business News. He has been quoted by many publications such as Reuters, The Wall Street Journal and The Washington Post. He has also been featured on some of the biggest and most popular financial blogs.