Hard Work Doesn’t Pay (Why I Save So Much, Part 2)

On Tuesday I started trying to explain why I save and invest such a high percentage of my income at such a (relatively) young age.

In that post, we spent some time exploring how a high savings rate can buy you options and can free up how you spend your time in the future. It was an optimistic pitch for saving.

Today will be a bit less optimistic. It will be about a sad truth of our modern economy. (And, more positively, what you can do about it.)

Hard work doesn’t pay.

At least, not as much as it used to.

Bowley’s Law

In economics, there is a rule called Bowley’s Law. Named for Arthur Bowley, the British economist who discovered it, the law states that the percentage of income going to labor and the percentage of income going to capital in a country remain relatively constant over time.

To better understand this, let’s pretend we’re talking about a single company rather than a country.

Let’s say that a company is selling widgets for $1 each. Of that dollar, 60 cents goes to the workers who made it. If that company is selling $100,000 worth of widgets in a year, then the workers are getting paid $60,000.

Bowley’s Law says that if that company grows to sell $1,000,000 worth of widgets, those workers will get around $600,000. As the economy grows, the share that goes to workers stays constant.

In the same way, the share that goes to capital (the shareholders of our company) stays constant. If the company’s sales 10x from $100,000 to $1,000,000, the shareholders will get 10x the value.

This is great! A rising tide lifts all boats. When the economy does better workers do better and shareholders do better. Everybody wins.

The problem is that Bowley’s Law is no longer true.

The Decline of Labor

The following graph shows the share of income going to labor in the United States from 1947 to 2016:

If Bowley’s Law were true, we would expect to see a lot of short term movement, but long term stability. That may look something like the section from 1947 to 1970. There are some ups and downs, but the center is pretty consistent.

From 1970 to around 1995 we see a gradual trend downward. This is a period where the amount that we pay workers is falling, but not sharply.

There is a recovery from 1995 to 2000 before we immediately fall of a cliff.

We are now at a point where labor’s share is nowhere near its historical range. This means that we are paying much less for work than we used to.

Increased Productivity

I spend a good amount of time reading blogs and listening to podcasts in the entrepreneur space as well as the personal finance space. In both of these worlds, the advice to “create more value” prevails. If you work harder, you will be rewarded. The market rewards value.

But does it anymore?

Worker productivity has skyrocketed. Workers today are twice as productive as workers 30 years ago.

And yet, their salaries have barely moved.

If you really want to know why Millennials can’t afford houses, stop blaming avocado toast and start looking at a system that pays them 50% of what they’re worth.

This is stark.

Prior to 1970, workers were rewarded for their increasing productivity. When workers were more productive, they made more money. The lines on the graph match up almost exactly.

Since then, worker compensation has been completely divorced from productivity. Workers are being far more productive, but are not seeing any corresponding raise. Even the slight raise that does appear in this graph is largely illusory. “Compensation” on this graph includes health care benefits. As the cost of health care rises drastically, workers are seeing their “compensation” increase without seeing any more money in their paycheck.

The Rise of Profits

With productivity rising, companies are making a whole lot more money. And if they aren’t paying any more to their workers, then companies must have increasing profits.

And boy are there profits.

So that’s where our productivity gains are going.

The economy is growing. Companies are growing. Profits are growing.

But instead of sharing those profits with workers, the benefit of the growth is going entirely to shareholders.

The System Needs to Be Fixed

My preference is to fix the system.

I want workers to be paid what they are worth. If people are becoming more productive and more efficient, then they should be paid for that.

Corporate profits are at an all-time high and yet many of those corporations refuse to pay their workers a living wage. It is morally wrong and needs to be corrected.

If that doesn’t sell you, then the system needs to be fixed to save itself.

Inequality is worse than at any point since 1929. Judging by the graphs above, it looks as if it will only increase in the years ahead. This can only lead to a more and more frustrated electorate seeking more and more drastic change. And that can go awry very quickly.

Accepting Trends

With that mini-rant out of the way, I don’t have the power to fix the system. I will do what I can and I will keep advocating for change, but this is a big problem and I am one person.

In the meantime, I have to assume that the trends will hold.

Work will continue to be less and less rewarded. Capital will continue to be more and more valuable.

Because of this, it makes sense to build up as much capital as possible as early in my life as possible.

The reason that the 1% is pulling away from the rest of the country at a rapid pace is because they have more of their money in investments.

The reason that the 0.01% is pulling away from the 1% even faster is because they have even more of their money in investments.

While I don’t intend to catch the 1%, it stands to reason that the quicker you can jump on this trend, the less far behind you will be left.

If the trends reverse, then I will be able to make a fair wage in the workplace. If they don’t, then my money will make money faster than I could. Either way, my family will be financially stable and secure.

So what do you think? Are these trends problematic to others? Am I just a tin foil hat alarmist? Do you see flaws in my plan or my reasoning? Do you want to debate economic policy? Join us in the comments!

38 thoughts on “Hard Work Doesn’t Pay (Why I Save So Much, Part 2)”

    1. Great points, Emily. I did a lot of research on this and intended to include causes in the article, but it felt like it was more tangential and outside the scope of what I was really addressing.

      From the research that I’ve done, there is plenty of blame to go around. The decline in income going to labor is happening all across the developed world, but it is happening far faster in the United States. The global factors appear to be led by automation, but globalization plays a role as well. The United States has drastically sped the process up through the decline of unions, deregulation, and declining to enforce anti-trust laws.
      Matt recently posted…Make Space to Be WrongMy Profile

  1. This does have me reaching for my tin foil hat, for sure. I think we’ve seen such a rise in productivity from the advent of technology. It’s so much faster to get things done nowadays that we have no choice but to be productive. :/ But I do agree that hard work doesn’t always pay off. This was a hard lesson I learned once I became an adult, but it’s true!
    Mrs. Picky Pincher recently posted…How to Treat Yo’self To A Home Spa DayMy Profile

    1. I think the rise in productivity is certainly due to technology, but it has been since at least the industrial revolution. We’re twice as productive as we were 30 years ago, when we were twice as productive as we were 30 years before that. The big difference is that workers used to get paid for that increased productivity, where they don’t anymore. It’s a strange new world to navigate.

      Thanks for the comment!
      Matt recently posted…Make Space to Be WrongMy Profile

  2. I definitely think about this all the time. I haven’t quite figured out how to incentivize companies/shareholders that it’s better for workers to make more money. Definitely not an easy solution out there to a complex problem. I’m sure in the future we may look back and say how easy it is in hindsight but it’s definitely confounding in the short term.
    Mustard Seed Money recently posted…Which Is the Best Retirement Account for You?My Profile

    1. It is definitely a complex problem without a single solution. We could improve the problem by improving regulation and by bringing back unions, but it wouldn’t solve the problem entirely. Ultimately we may end up needing something like a universal basic income to help as more and more people struggle to make ends meet.

      Thanks for stopping by!
      Matt recently posted…Make Space to Be WrongMy Profile

  3. This article had some very interesting data. I don’t think this trend is going to stop anytime soon. Like you said, it’s hard to convince shareholders that paying workers more is a good thing. However, continue to ask more of your workforce, while pay stays stagnant, eventually laborers leave the company and then no one’s making anything.

  4. There have been several shifts that contribute to this in some way though I can’t parse out exactly how much of a factor each one is: the cultural shift from companies rewarding loyalty (pensions) to expecting it without offering anything in return; compensation, promotions and raises being tied to your ability to negotiate more than your performance; increasingly vocal shareholders demanding their money like the whining from shareholders about an airline considering paying their pilots more, for example, saying shareholders get paid last. That last one had me rolling my eyes. As a shareholder, yes, I would like the pilots who actually fly the dang planes to be paid competitively enough that they keep flying! The alternative is no flights and incidentally no business and no shareholder income. Seemed like a duh moment to me but it’s reflective of our culture.

    I’ve been compensated pretty well over the years but that’s only because I was both highly productive and was willing and able to advocate for raises and promotions. Had I not said anything at every possible turn, I bet I’d be making half my current salary.
    Revanche @ A Gai Shan Life recently posted…Sunny pessimist or what’s the other thing?My Profile

    1. There are definitely a lot of factors, which makes it hard to solve or correct. The cultural shift is a big part of it. I agree with everything you said and would add that we’ve moved to a system where we compensate high-level executives based on short-term stock movement, which incentivizes caring more about the shareholders in the short term than the long-term health and success of the company. People don’t take the time to step back and look at the big picture anymore.

      Thanks for the thoughtful comment, Revanche!
      Matt recently posted…Is It Worth It? (Why I Save So Much, Part 4)My Profile

  5. I think what it’s going to take for the workers to participate more in the profits is for them to also become shareholders in the company. Whether that be stock incentives for meeting measurable outcomes, or Employee Stock purchase plans, that way the shareholders continue to win and the workers have incentive to continue great output so they can participate in the profits.
    But so many people are afraid to have their Investments and their paychecks tied to the same horse… We’ve all seen what happened at Enron, with employees losing their life savings.
    Of course this is likely only a solution for publicly traded companies.

    1. That could help. It would essentially add some capital on top of the labor to supplement the paycheck. You are right, though, that it would only work with publicly traded companies. Plus, I imagine low-skilled workers would be the hardest hit by the decline in labor value and I can’t imagine McDonald’s offering stock options to their employees or Marriott offering an ESPP for its cleaning staff.

      Thanks for the comment, Josh!
      Matt recently posted…Is It Worth It? (Why I Save So Much, Part 4)My Profile

  6. Very interesting take, and very true I guess. My view on this isn’t necessarily that we have to ‘fix’ it. By that I mean that it’s impossible to go to the same way or situation that we were in many years ago. Revolutions are often the cause of a shifting economic trend, as we have seen in the industrial. Like then, I believe we are in the midst (or maybe just at the start) of a new one, of which we don’t know what the future yet entails. But we have to find the opportunities that comes with it and use it to improve our current systems.

    What I was curious about, are the graphs you use about the numbers in the US? Your comment about the difference being higher in the US than in EU intrigued me (as a person living in the EU).

    1. The graphs and data that I used here are for the US. The same trend is happening across the developed world due to automation and globalization, but the US is more drastic because we also have largely killed off unions (so workers have no collective bargaining rights to fight for higher salaries), we have deregulated industry drastically, and we have mostly stopped enforcing anti-trust laws (so companies can merge, corner markets, and drive up prices).

      I do think a lot of this is not really something to “fix” as much as it is something to ride out and adapt to. I believe that the economy is going to be fine in the long term, but will have a lot of flux and uncertainty in the near future.

      Thanks for the comment!
      Matt recently posted…Brace Yourself for the Next RecessionMy Profile

    1. It’s kind of crazy, right? We don’t see the changes day-to-day, so we don’t really notice them happening unless we stop and look at the numbers over longer periods of time. I’d love to be able to correct course and get us back to historical levels, but in the meantime investing helps!

      Thanks for stopping by!
      Matt recently posted…As Happy as an Old PersonMy Profile

  7. Man, I left this long, involved comment and then I accidentally closed the window somehow before posting.
    This is my favorite post all year. It’s so true, so important, and impacts so many people in a very real way. It’s also why “bringing back jobs” that used to exist won’t work on its own… Even if the industry could justify it. They wouldn’t give employees the same lifestyle that they did back when unions had more strength.
    To loosely comment on a prevailing theme I’ve seen in other comments, I think both globalization and the US’s slaughter of unions are both symptoms of corporate greed that we have allowed to go unchecked. If companies can’t abuse workers here, they’ll go somewhere else with cheaper labor and looser labor laws.
    Such important info, and so smartly and simply written. *slow clap*

    1. Thank you for the kind words. I appreciate it.

      You are completely right. The problem is too complex and too deep to be solved with cheap political slogans and simplistic solutions. The corporate culture absolutely needs to change before we can really get people back to making reasonable wages.
      Matt recently posted…As Happy as an Old PersonMy Profile

  8. You kind of delve into the political world here which I appreciate. Us millennials keep telling older generations that something isn’t right and they continue to tell us we are crazy. But we’re not. I have the same mindset as you. I need to build my capital quickly because my work is under valued. Great post!

    1. Thanks, Omar. I agree about the push-back when we point these things out to the older generations. I am curious to see what happens when the millennials take over the corporate and political power from the boomers. Will we see a change in culture? Will we correct course? Or will we just start acting the way that the boomers are acting now?
      Matt recently posted…As Happy as an Old PersonMy Profile

  9. Having lived through a lot of the decline of the middle-class, I can attest to its existence. There are lots of different reasons, and, as you point out in the comments, no simple solution. More accountability for for our politicians, better voter turn-out, moving to better paying jobs when you can instead of becoming entrenched in one geographical location (big issue for us here in Appalachia), and a lot of other little moves could start moving the needle back in the right direction.

    One aside, the graph you use of worker’s share is based on a an index where 100 appears to be the norm (akin to a percentage measurement), the profits graph seems to be based on absolute numbers. I’d wager that if the worker’s graph were also based on absolute numbers, it would look quite different.

    1. For sure. The workers share would look even more painful if we were looking at the dollar values rather than the percentage of the share. And we definitely need to work on some of those smaller steps that you identify. While the problem is not entirely solvable by any individual, we can all take steps to help.

      Thanks for stopping by!
      Matt recently posted…As Happy as an Old PersonMy Profile

  10. Terrific piece! How did they measure productivity? I had a pretty good friend who was an executive in a mid size tech firm and he told me (and I guess he’s bias) that it’s also government greed. More taxes, more legality, more hoops that cost the company more money to function etc. It’s a lot of finger pointing all around and no one wants a piece of the blame pie.

    I watched a YouTube video (pretty popular, maybe you’ve seen it) where it lays out the difference between the .1% and the .01%. The .01% had triple the wealth of the 1% and five times that by the end of their natural life.

    1. Thanks, Lily. The productivity graph is from the Federal Reserve Bank of St. Louis, which measures productivity based on GDP. Here is an article explaining how that gets measured: https://www.stlouisfed.org/on-the-economy/2015/march/how-should-labor-productivity-be-measured

      The legality question would differ industry by industry. Newer industries always end up going through a roller coaster of under-regulation followed by over-regulation and back again before settling in on a reasonable standard. The government as a whole, however, has been more focused on deregulation since Reagan.

      As far as taxes, corporations are paying far less in taxes than they used to. There is certainly a lot more complaining about “burdensome taxes” than there used to be, but that doesn’t seem to be based in reality. (https://upload.wikimedia.org/wikipedia/commons/thumb/e/eb/U.S._Federal_Corporate_Income_Tax_Receipts_and_Pre-Tax_Profits.png/1280px-U.S._Federal_Corporate_Income_Tax_Receipts_and_Pre-Tax_Profits.png)

      And that YouTube video is really powerful. Everything about inequality is so much worse than everyone believes once you actually look at the numbers.
      Matt recently posted…As Happy as an Old PersonMy Profile

  11. I believe we need to consider that some of the increased production we are discussing here is the result of a financial reinvestment made by the companies in question. I’m not completely confident the productivity gains and increased profits are purely a result of more a more efficient workforce. A company purchasing a piece of equipment to increase profitability would have to share the profits of that investment equally in order to keep the trend at 60%, I’m not sure that makes sense to shareholders and investors.

    1. That’s a fair thought if the productivity gains are due to financial reinvestment unrelated to the workers. I think the problem is that there is no evidence to support that idea. If that were the case given the trends that exist, we would have to assume that all productivity gains prior to 1970 were because of worker efficiency and all productivity gains after 1970 were entirely due to financial reinvestment unrelated to workers.

      That’s not to say that it is impossible, but I don’t see anything that could lead to that explanation making sense. Is there something that you think I’m missing there?

      Thanks for stopping by, Pat.
      Matt recently posted…As Happy as an Old PersonMy Profile

  12. This is an excellent post. I don’t agree with many of the opinion parts though. It’s difficult to understand the reasons, other than the classics of supply and demand. It has hit the United States harder most likely because other countries have added so much additional labor and now robotics are doing the same.

    I think the “reasons” for labor unions declining is that they can’t compete with that oversupply.

    On another note, I thought your headline was going to refer to how the harder you work, the more you get taxed, making it less profitable!

  13. You are reading my mind. Everything in this country incentivizes capital and ownership. Wages, tax policy, interest rates…all of it benefits ownership of capital. You are right that the current system is untenable and change will come if even by force. Right now many people still by into the idea of a hard work meritocracy and when that doesn’t materialize in their lives the first inclination is to blame other working class people who they view as undeserving. It never occurs to people that the broader system is the cause of their woes because that can rock the very foundation of one’s belief system. Thank you for putting this out there. More people need to read it.

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