Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 18 of 36 The Markets for the Factors of Production
Section 16 of 20
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You said:
[Per Figure C] Why the recent years divergence?
ChatGPT said:
Early Period: 1950–1973
Productivity and real wages rose in lockstep.
Postwar growth, strong unions, and broadly shared prosperity meant the “gap line” (red) stayed near zero.
Turning Point: 1973–1995
Productivity kept rising, but wages slowed.
Oil shocks, inflation, deindustrialization, and weaker union power meant workers no longer captured all productivity gains.
This is where the first sustained divergence appears.
Narrowing: 1995–2006 (IT Boom)
New technologies (computers, internet) boosted productivity growth to ~2.6% annually.
Wages grew almost as quickly (~2.5%), briefly reducing the gap.
A short “catch-up” phase, but it did not restore the earlier balance.
Renewed Divergence: 2007–2024
Productivity grew at ~1.6% annually, but real wages only ~0.8%.
Inflation spikes (2008–09 recession, 2021–22 supply shocks) eroded wage gains.
Globalization and outsourcing continued, funneling gains toward profits and capital.
Labor share of income fell, corporate markups and profit margins widened.
Wage inequality deepened: high-skill workers saw gains, median workers lagged.
Big Picture
1950–1973: Productivity and wages rise together (shared prosperity).
1973–present: Long-term divergence — productivity nearly 4.5× 1950 levels, real wages only about 3.7×.
By 2024, the gap line shows productivity ahead by nearly 80–90 index points relative to wages (1950=100 baseline).
In short: the divergence is a post-1973 phenomenon, briefly narrowed in the late 1990s/early 2000s, but widening again in recent years (2007–2024) due to inflation shocks, weakened labor bargaining power, inequality, and a larger share of productivity gains flowing to profits rather than wages.
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You said:
"and weaker union power meant workers no longer captured all productivity gains" - are you saying 100% of workers unionized would be best?
ChatGPT said:
Great clarification — no, I’m not saying that 100% unionization would be “best.”
Let me unpack this carefully:
1. What unions did in the 1950–1973 era
At their peak (mid-1950s), about one-third of U.S. workers were union members.
This did not mean everyone was unionized, but union contracts set wage and benefit standards that rippled outward — even to non-union sectors.
That helped tie wage growth more closely to productivity growth.
2. Why unions matter for the productivity–pay link
Unions gave workers bargaining power to claim a share of productivity gains.
As union density declined (now <10% of workers), bargaining power weakened.
Result: more of productivity growth flowed into profits and capital income instead of wages.
3. Would 100% unionization be “best”?
Not necessarily.
Full unionization could introduce inefficiencies (rigid work rules, higher costs, risk of reduced competitiveness).
A mix of union and non-union labor can allow flexibility, innovation, and competition.
What the evidence suggests is that a moderate level of union density — enough to influence wage standards but not total — historically correlated with the strongest alignment between productivity and wages.
4. The broader point
The divergence after 1973 isn’t only about unions.
It also reflects:
Globalization and offshoring.
Technological change favoring skilled workers.
Rising corporate market power.
Policy choices (taxation, labor law, minimum wage levels).
Union decline is one important piece, but not a magic fix by itself.
So: I’m not advocating 100% unionization.
I’m saying that in the postwar decades, stronger unions were one reason workers captured a larger share of productivity gains.
Their decline has been one factor among several behind the modern productivity–pay gap.
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You said:
What if there was no unionization at all? Seems more efficient economy with total real wages growth maximized.
ChatGPT said:
That’s a very sharp question — it gets at the trade-off between efficiency and distribution. Let’s think it through:
1. In theory: no unions
In a perfectly competitive labor market, employers would bid up wages until they match workers’ marginal productivity.
In that textbook case, no unions wouldn’t matter — workers would already capture the gains.
But real-world labor markets are rarely perfectly competitive: employers often have monopsony power (few buyers of labor, many sellers).
2. What happens without unions in practice
Lower bargaining power: Without collective leverage, individual workers generally have less ability to negotiate higher wages, benefits, or safe working conditions.
Higher profits, lower wages: Firms with market power can retain more of productivity gains, widening inequality.
Efficiency vs fairness: Output may rise (labor costs lower), but distribution tilts toward capital rather than labor.
Historical evidence: Since unionization fell from ~30% (1950s) to <10% today, productivity has continued rising, but real median wages have grown much more slowly.
3. Does zero unionization “maximize” real wage growth?
Not necessarily.
Real wages might be lower, not higher, if firms face no organized bargaining pressure.
The gap between productivity and wages would likely be even wider.
A portion of potential demand is lost when wages stagnate, which can reduce long-run growth by weakening household consumption (the main driver of U.S. GDP).
4. Efficiency vs total wage growth
Efficiency: Some argue fewer unions → more flexible labor markets, less disruption (fewer strikes), and potentially higher investment.
Total wage growth: The historical record shows moderate unionization was compatible with both strong growth and rising wages (1950–1973).
With no unions at all, the likely outcome is a more unequal economy, where GDP rises but wages for typical workers lag.
Bottom line:
Zero unions might yield short-term efficiency, but it probably would not maximize total real wage growth for workers.
Instead, it would shift a larger share of productivity gains to profits and capital owners, while wage growth for the median worker stagnates.
Historically, some level of unionization has helped ensure workers share in productivity gains, without preventing economic growth.
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You said:
Wouldn't shifting a larger share of productivity gains to profits and capital owners result in more investment and faster growing economy?
ChatGPT said:
That’s a classic debate in economics — you’re touching the heart of the “who should capture productivity gains” question. Let’s break it down:
1. The Case For Capital Capture → Investment-Led Growth
If more productivity gains flow to profits/capital owners, firms and investors have more retained earnings to:
Reinvest in equipment, technology, R&D.
Expand productive capacity.
Boost long-run productivity growth further.
This argument is close to supply-side economics (think: higher profits → higher investment → faster growth).
In theory, this could mean a faster-growing economy, even if wages lag in the short run.
2. The Limits of Capital-Led Growth
Diminishing returns:
Once firms have sufficient capital, extra profits don’t always go to productive investment.
They may flow to stock buybacks, dividends, or financial assets instead of factories, innovation, or jobs.
Weak demand problem:
If wages stagnate, households have less disposable income → aggregate demand grows slower.
Firms may underinvest because they don’t see enough customers to justify expansion.
Empirical pattern: Since the 1980s, the U.S. has seen record-high profits and high shareholder returns — yet productivity growth has been slower than in the 1950–1973 era (when profits were more evenly shared as wages).
3. Balance Matters
Economies need both investment capital and robust consumer demand.
If too much goes to wages → risk of inefficiency, inflation, lower profitability.
If too much goes to profits → risk of weak consumption, underutilized capacity, inequality drag.
Historically, the “Golden Age” (1950–1973) struck a balance: strong profits and strong wage growth → high investment and high demand → fastest sustained U.S. growth in history (~4% GDP annually).
4. What Recent Evidence Suggests
Since the 2000s, corporate profits as a share of GDP are near record highs, but investment has not accelerated proportionately.
Much has gone into financial markets (buybacks, dividends) rather than “real” investment.
Meanwhile, weak wage growth held back household demand, leading to greater reliance on debt and monetary stimulus to support growth.
Bottom Line:
Shifting more gains to profits doesn’t automatically produce a faster-growing economy.
It can, but only if those profits are reinvested in productive capital rather than absorbed in financial markets.
A balanced distribution — enough to reward capital and sustain wage-driven demand — historically delivered the strongest long-run growth.
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You said:
Doesn't "absorbed in financial markets" mean money is flowing through financial markets to other businesses who will invest the money in productive capital?
ChatGPT said:
Excellent push — this is exactly the sort of “second-round effect” economists argue about.
Let’s parse it carefully:
1. What “absorbed in financial markets” means
When profits are paid out as dividends or stock buybacks, they don’t vanish.
They become income for investors:
Some is reinvested in equities/bonds, raising asset prices.
Some is consumed (wealth effect: richer households spend more).
Some is parked in safe assets or speculative vehicles (treasuries, crypto, real estate, etc.).
So yes — money does keep circulating.
2. Why it’s not the same as “productive capital investment”
There’s a difference between:
Primary investment:
A firm directly builds a new factory, buys new equipment, hires engineers → raises future productive capacity.
Secondary trading:
Buying Apple stock from another shareholder on the market.
This does not give Apple new capital to invest (except at IPOs or secondary offerings), it just reallocates ownership.
Most financial flows today are secondary: 90%+ of stock market activity is trading existing securities, not financing new physical investment.
3. Why high financial returns don’t always equal high real investment
Concentration of ownership:
Wealth is concentrated at the top, and marginal propensity to consume or invest in risky projects is lower at those levels.
Safe asset preference: Surplus profits may go into U.S. Treasuries or real estate rather than new factories.
Corporate behavior:
In the last two decades, U.S. corporations have spent more on buybacks + dividends than on R&D + capex combined in many years.
That boosts stock prices but doesn’t expand production.
4. The “finance vs real economy” gap
In theory: profits → investors → new business capital.
In practice: much gets recycled within financial markets, inflating asset prices rather than directly boosting GDP.
This is why economists talk about “financialization”: when capital accumulation in financial assets grows faster than investment in productive assets.
Bottom Line
You’re right that money flowing into financial markets can eventually fund new productive ventures (venture capital, IPOs, corporate bonds).
But most of it recirculates in secondary markets — changing hands rather than creating new machines, labs, or plants.
That’s why the link between profit share and real investment growth has weakened in the U.S. since the 1980s.
Would you like me to back this with a chart of corporate profits vs. net private investment since 1950?
It makes this divergence very clear.
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You said:
So, the excess productivity gains over wages should be taxed away and used and redistributed by government?
ChatGPT said:
You’ve just landed on one of the deepest divides in economic and political philosophy — how to handle the surplus from productivity gains.
Let’s walk through the arguments.
1. The Case For Taxing and Redistributing
Correct the imbalance:
If wages lag productivity, redistributive taxes (progressive income tax, corporate tax, wealth tax) can realign living standards with output growth.
Boost demand:
Transferring income to households with higher marginal propensities to consume (middle/lower-income) can stimulate demand and GDP.
Social insurance:
Revenue can fund public goods (infrastructure, education, healthcare) that both improve welfare and support long-run productivity.
Historical precedent: In the U.S. postwar “golden age,” top marginal tax rates were 70–90%, corporate tax rates were higher, and redistribution helped keep growth broadly shared.
2. The Case Against Heavy Redistribution
Investment disincentive:
If profits are taxed away aggressively, firms and investors may invest less, innovate less, or shift capital abroad.
Efficiency loss:
High taxes can distort behavior — e.g., less risk-taking, more tax avoidance.
Government inefficiency:
Critics argue government may not allocate capital as effectively as private investors, leading to waste.
Equity vs growth trade-off:
Too much redistribution could slow GDP growth even if it reduces inequality.
3. Middle-Ground Approaches
Most modern policy thinking sits between the extremes:
Moderate taxation: Capture some surplus to reduce inequality without killing incentives.
Targeted redistribution: Invest in education, healthcare, childcare, infrastructure → raises long-run productivity and keeps wages growing.
Profit-sharing policies: Encourage firms to link worker pay to productivity directly (employee stock ownership, wage boards, sectoral bargaining).
Automatic stabilizers: Social Security, unemployment insurance, EITC — redistribute during downturns but don’t overly distort investment incentives.
4. Historical Evidence
High-redistribution societies (e.g. Scandinavia): Tax 40–50% of GDP, redistribute heavily, and still achieve high living standards and solid growth.
Low-redistribution societies (e.g. U.S. post-1980): Higher inequality, slower median wage growth, more reliance on debt to sustain consumption.
Extreme no-redistribution societies: Tend toward instability (social unrest, weak demand base).
Bottom line:
Taxing some of the excess productivity gains and redistributing them (especially into education, infrastructure, R&D) can support both fairness and growth.
But fully taxing away all surplus could reduce incentives to invest and innovate.
The most successful economies historically have balanced private capital rewards with strong public investment and redistribution.
(To be continued)
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to be continued
tsuzuku
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