Demographic Change and the Balance of Power Between Capital and Labor

by Reihan Salam

Megan McArdle wades into a fascinating ongoing conversation concerning the sources of the “stagflation” of the 1970s. Steve Randy Waldman has suggested that inflationary policy was a coherent response to the influx of the Baby Boomers into the workforce; Karl Smith has weighed in on the Waldman thesis. And now Megan extends Steve’s line of thinking:

If we look to the baby-boom bulge to explain the 1970s, we should probably also look to demographics to explain the 1950s and 1960s. To wit: In World War II, somewhere north of 400,000 Americans serving in the military were killed, maimed too badly to work, or missing. That depressed the size of the labor force. That cohort was followed in the 1950s by the Great Depression babies, the products of a greatly depressed birthrate. So you had two decades of lower than normal workforce growth.

This potentially explains not only the greater productivity of the era (higher than normal ratio of workers to capital assets), but also the low levels of inequality. If you look at what followed the Black Death (admittedly an extreme example, but extreme examples are often where it’s easiest to see common phenomena), the great dying was followed by rising wages and productivity, because you had more land per worker and fewer mouths to feed. But it was also followed by a radical shift in social relations. Feudal landowners had enormous power, and wealth, in the Europe of 1300. But after the plague passed, their lands were suddenly worth dramatically less because they couldn’t compel workers to show up and perform the labor that kept those lands producing. The labor shortage made the common folk much wealthier, but it made people who lived off capital poorer, because relatively scarce labor was now much more valuable than plentiful capital.

Scott Winship has been arguing along these lines in a series of articles. Last Summer, Scott made the following observation in NR:

[M]ale earnings have lagged behind productivity growth over the past few decades. The simple explanation is that in earlier decades (during the peak union years), male-earnings growth outpaced productivity increases, and the past few decades have seen men’s earnings fall back to earth. (Women’s-earnings growth, meanwhile, has far exceeded productivity increases.)

When we misunderstand the sources of the “Great Compression,” we are likely to back the wrong remedies for spurring wage growth.