Non Tradable Sector Dominance Has Economic Effects

More specifically, this historically recent sectoral dominance, includes dramatic effects on wage structure and long term growth potential, which have yet to be addressed. A recent Brookings article, "Thirteen Facts About Wage Growth", provides useful framing in this blog post for what continues to transpire, particularly since the turn of the century. From the article:

Fact 1: The share of economic output workers receive has generally fallen over the past few decades.

While this is true, there's a contextual issue in the above statement, which - if not taken into account - can obscure missing clues re both wage structure and economic stagnation. Due to imbalances (human capital requirements) in required inputs as contrast with outputs, the relative output potential of non tradable sector activity, is dramatically less than tradable sector output. Consequently, less output takes place which could otherwise accrue to either nominal wage aggregates or real wage benefits. That said, contextual framing for missing output is important not just because of its implications for wages, but also the renewed expectations of Washington, for increased revenue through legislative tax cuts.

In the centuries when tradable sector activity remained dominant, for instance, innovation often led directly to consequent gains in both wage growth and actual marketplace dimensions. Yet innovation that corresponds with non tradable sector time based product, tends to be more important for the relief of budgetary burdens, then the support of wage aggregates or marketplace capacity.

Since the structural dominance of input intensive activity leads to less output overall, entire economies bear the additional costs. Even though central bankers clumsily attempt to reduce non tradable sector internal inflation, via less than complete monetary representation, the main effect is instead a slow but steady reduction of a society's total economic commitments. Thus the central banker response to non tradable sector crowding, unfortuantely intensifies the initial crowding effect. Meanwhile, the lack of flexible income options for time based services, has made it difficult for lower income levels to fully participate in non tradable sector activity, in spite of its present dominance.

Fact one required a long response, since the lost potential output of non tradable sector activity is by far the most important consideration, for either lost consumption capacity or sufficient revenue sources for governmental needs. However, I also want to touch on some of the other points raised by Brookings:

Fact 2: Wages have risen for those in the top of the distribution but stagnated for those in the bottom and middle.

When tradable sector formation was dominant, more revenue was composed of income which derived from total output. Management shared this revenue with workers, for workers shared in the creation of the product. Whereas in non tradable sector activity, it is simpler for business owners to assume ultimate responsibility, for the knowledge based product they represent. Given these conditions, today's time based service providers are under no obligation to share output revenue with employees, and may choose to compensate employees according to other criteria.

Consequently, much of today's non tradable sector knowledge based work has wide income variance by system design. While skills variance among employers and employers may not be as wide as income variance implies, there's little room for skills egalitarianism, given the revenue streams which these forms of organizational capacity rely upon. Likewise, much of today's dominant pass through businesses, derive income from non tradable sector activity, which in turn limits potential growth gains from tax cuts.  Again, from the initial Brookings article:

Fact 3: The education wage premium rose sharply until about 2000, contributing to rising wage inequality.

Non tradable sector activity dominance was just beginning to make its full effects known, at the turn of the century. One notes - for instance - when some of the initial losses took place in marketplace share, for a wide range of tradable sector product. Among these were tradable product as represented in my own workplace (at that time), for alternative healthcare OTC remedies.  As revenue claims for non tradable sector time based product began to displace the market share of tradable sector product, less overall output was the result. In aggregate, this also meant that fewer individuals would gain full monetary compensation from either tradable sector or non tradable sector employment.

Fact 7 from Brookings, also warrants a mention:

Workers have become less likely to move to a different state or to a different job, reducing wage growth.

Mobility is more closely associated with tradable sector activity, in large part because its organizational capacity and product definition, is dynamic and still evolving. Whereas, too much of today's non tradable sector activity - especially time/knowledge based product and housing - are rigidly defined. This lack of flexibility only adds to the perception of non tradable sector product as lacking in mobility, rooted in geographic preferences and too closely tied to specific revenue flows.

While most points made in the first Brookings article have relevance, some are more important for economic outcomes than others. However, the second Brookings article (re pass through businesses) reminded me how non tradable sector dominance would reduce growth potential from recently proposed tax reductions. When economies were still tradable sector dominant, reductions in taxes were far more capable of contributing to economic vitality via additional capital to increase output. Today, additional income gains from tax reductions, are relatively more likely to accrue to what is already well compensated skills capacity. The problem? Time based product - regardless of compensation - cannot multiply itself to create additional output and marketplace capacity.