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Behind the Modern Malaise

For decades, workers have been missing out on many of the gains of economic growth, and countless analyses have been published to explain why. Though the problem is fundamentally economic, it cannot be understood without also accounting for technology, politics, and culture.

LONDON – In describing recent economic history as “the inglorious years,” French economist Daniel Cohen’s title refers primarily to a problem that is also examined in the economist Jan Eeckhout’s book, The Profit Paradox. That problem, as Eeckhout puts it, is “wage stagnation and extreme wage inequality.” Over the past half-century, the situation for workers in most rich countries has deteriorated on average, setting this era apart from the 30 glorious years (les trente glorieuses) after World War II, when West Europeans, Canadians, and Americans enjoyed a near-miraculous period of sustained growth, including broad-based growth in real wages and higher living standards.

What can these authors add to the mountain of analyses churned out in recent years showing how workers have missed out on the benefits of the huge (mainly digital) technology-driven productivity gains of the past 30 years? Part of the answer lies in Eeckhout’s insight that there is more going on here than labor losing out to capital. Even owners of mainstream firms have lost out in relative terms. The gains have accrued instead to the “few capital owners” closest to giant firms’ surging profits, whose share of total value added ballooned from 3% in 1980 to 15% in 2019.

Eeckhout enlivens this general analysis with specific examples, offering firm-specific illustrations of the aggregate profit numbers. For example, Pfizer’s profit-to-payroll ratio rose from 41% in 1980 to 210% in 2019; for both Apple and Facebook, that ratio is now over 300%. And Eeckhout includes striking human stories that bring home the reality of today’s labor market. A woman named Erin, for example, is supposedly a “senior technical adviser,” and yet she makes just $12 per hour before taxes working for a firm in New Mexico to which Apple has outsourced client-support services.

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