Role of Wages of the Common Worker in Oil Prices, Collapse

In their book Secular Cycles, Peter Turchin and Surgey Nefedov point out the important role falling wages of the common workers played in early collapses. I got to thinking that this might be an issue with our current situation as well, including the low level of oil prices.

I explain this in two presentations. The first one is called “Overview of a Networked Economy“. The second one is called, “Economic Growth and Diminishing Returns.”

A couple of (amateurish) slides that need explanation are the following ones:

Standard definition of economic growth

The cloud above my representation of the economy is supposed to represent the cloud of goods and services that the economy makes. Many people would like us to believe that as long as this cloud is growing, everything is fine.

What Peter Turchin discovered is that there is a smaller cloud that really needs to be growing, as well.

This cloud is the after-tax income of the common worker. If this isn’t growing, then it is hard to collect enough taxes. The ultimate downfall comes from government downfall, because of the problems of the common worker.

Wages of Common Worker

The above slide is an attempt to show the after-tax income of common workers as a subset within the GDP cloud. (It probably should be much smaller.)

Common workers are ones who will tend to buy mostly goods and not too many services. In fact, the goods that they buy are not necessarily even high tech goods. If these workers cut back on goods that use a lot of commodities in their production, this cutback could contribute to all of the other pressures we are now seeing toward lower commodity prices, and make it much harder for oil prices to rise again.

If we want common workers to do better, it looks to me like we need an increasing supply of cheap-to-extract oil (low priced would help as well).

To see the full story, you will need to click on the links above.

I will be leaving on March 13 to spend four weeks lecturing and traveling in China. (My family will not be coming along, so I won’t be leaving an empty house here.) Hopefully I will have a chance to write a “regular” post between now and then–the two presentations are from this series. I don’t expect to be able to write posts while I am in China because China does not allow access to the WordPress site where I write my posts.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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332 Responses to Role of Wages of the Common Worker in Oil Prices, Collapse

  1. In Australia, the Federal budget problem is not caused by a lack of income tax, but by lower company tax after the GFC

    28/5/2014
    Australian budget hit by global financial crisis and high oil prices (part 1)
    http://crudeoilpeak.info/australian-budget-hit-by-gfc-and-high-oil-prices-part-1

    9/6/2014
    Australian GDP per capita growth slowed while oil prices went up (part 2 of budget 2014 series)
    http://crudeoilpeak.info/australian-gdp-per-capita-growth-slowed-while-oil-prices-went-up-part-2

    Even if oil prices are (temporarily) lower now, the damage of higher oil prices in the last years has irreversibly been done.

    • John Doyle says:

      There is no budget crisis in Australia. That was all a political smokescreen by incompetent government policies. As I have said before, Taxation pays for nothing in the way of funding a government’s budget. The central bank provides all the money the government spends.
      We need politicians who understand money and we don’t have any!

    • Interesting! I liked the graph showing the drop in tax revenue after 2008.

  2. Don Stewart says:

    Dear Gail and All
    Charles Hugh Smith has an interesting post today on China. It’s not about energy supplies. It is, instead, a Marxian critique of the financialization in China and overcapacity with the consequent bankruptcies. The result is falling wages for all those who are not directly protected by the State/Cartel power structure. Similar to Turchin, but different.

    http://www.oftwominds.com/blog.html

    Don Stewart

    • Thanks! Interesting.

      • Don Stewart says:

        Gail
        Don’t know if you agree with this, but there are parallels between US tight oil and the China boom. In both cases, there was plenty of easy money and lots of speculation. In both cases, production is outrunning demand and prices are falling. Why isn’t demand keeping up with production? Charles proposes the Marxian explanation. In the US, we know that the bottom 90 percent have suffered a loss of real income. One might try to tie that to Net Energy in one way or the other, or perhaps a sort of Marxian explanation, as, for example, Picketty. Or a combination of the two.

        China is a little more complicated because their strategy was built on exports. If Europe and the US are experiencing ‘peak demand’, for whatever reason, then overcapacity with the resultant damage to both capital and wages will follow. Even if energy wasn’t a problem in China (e.g., plenty of cheap coal), they would have had trouble because of the trouble in Europe and the US.

        Don Stewart

        • Yes. I think though that there is a thermodynamic reason for the shift in wage distribution, although I am not sure I can describe it correctly. There now isn’t enough to go around if goods and services are distributed fairly equally. This is hidden, if the wealthy get a disproportionate share, because they don’t “spend” most of their share. This problem seems to be the case whenever there is a shortfall. China is facing a lack of customers from the US and Europe because of income disparities, whether or not it has income disparities of its own.

          • Don Stewart says:

            Gail
            Let me suggest a thought to you. In a perfectly flexible Complex Adaptive System the system ramps up if more energy becomes available, and ramps down if less energy becomes available. The mainstream economists at the time of the Great Depression thought that unemployment was impossible, because the system would adjust to whatever happened. In the face of the evidence, they came up with the rationalization that there was ‘stickiness’ in the system, and it did not adjust rapidly enough. For example, wages did not fall as quickly as they should, so that the price of labor remained ‘too high’ and there was unemployment. Keynes thought that the government expenditures could be used to break the economy out of its lethargy.

            If we believed that Society could come up with a perfectly flexible Complex Adaptive Economic System in response to reduced fossil fuel energy flows, then our problems would be manageable. There still might be people starving, but the overall system would be OK. As you point out, one of the analogs to the sticky wages from the 1930s is the legal obligations associated with debt. Debt doesn’t go away, unless the government inflates it away or the government falls and simply disappears. Debt makes the suffering much worse, since it prevents society from moving rapidly to a lower energy Complex Adaptive Economic System.

            Think of Dickens’ story A Christmas Carol. The employees visualize a Complex Adaptive System which equitably shares the resources for the benefit of everyone in the firm. Scrooge visualizes a very rigid system which gives him what he thinks he has earned. At the present time, Greece has tried to convince Germany that an equitable Complex Adaptive Economic System requires that Germany forgive some of the debts that Greece is legally obligated for. Germany wants to see the letter of the law enforced, regardless of the human consequences. When the bailout of Greece was enacted, the real result was that Germany handed some money to Greece, which handed it on to German banks. In reality, Germany bailed out its own banks. Greece was told by the Troika that if it cut its expenditures, growth would return and it could pay its debts. Growth has not returned and Greece cannot pay its debts. If we viewed the bailout as a contract… Greece cuts spending and the Troika guarantees growth…then the Troika has failed to uphold its end of the bargain, and the bargain is null and void.

            What actually needs to happen is for Greece and the rest of Europe and the whole world, for that matter, to adjust to lower throughput of fossil fuel energy. But the Powers That Be are blind to the necessity, and are determined to keep the debt system cosmetically intact. Keeping the debt system cosmetically intact, in a world without enough cheap fossil fuels, is guaranteed to lower wages. Which leads to the woes that Marx described. Which leads to more desperate attempts to shore up the debt system. Which leads to collapse.

            Don Stewart

            • James says:

              What actually needs to happen is for Greece and the rest of Europe and the whole world, for that matter, to adjust to lower throughput of fossil fuel energy.

              Well, you certainly don’t ask for much do you? The problem is, the international debt payment system is woven into the basic fabric of our lives now. Adjusting all those debts simultaneously (as they would need to be) and equitably would be an enormous(!!!) undertaking, to say the least. [I’d liken it to coming up with an enormously large and complex workbook of spreadsheets of interlocking complex and confusing formulas, many of which are opaque to anyone but the person who wrote them, applying a one time adjustment figure (Copy>Paste Special>Multiply or Divide), and then hoping it all worked out. But of course it wouldn’t even be nearly that easy in the real world in which we live!] And that’s assuming you could get everyone (anyone?) on board with it in the first place. As we’ve seen already and you’ve illustrated above, the rich and the powerful are hardly inclined to be so benevolent. That’s how they got to be rich and powerful in the first place!

              Which leads to more desperate attempts to shore up the debt system. Which leads to collapse.

              Like it or not, that’s our very near term outcome I’m afraid. Won’t be the first time, but it might be the last.

  3. VPK says:

    This post is dedicated to our self imposed in exile “Paul”, and I know what his reply would be,
    Desperate acts done to continue BAU http://www.latimes.com/local/lanow/la-me-ln-pits-oil-wastewater-20150226-story.html officials in Kern County discovered that oil producers have been dumping chemical-laden wastewater into hundreds of unlined pits that are operating without proper permits.

    Inspections completed this week by the Central Valley Regional Water Quality Control Board revealed the existence of more than 300 previously unidentified waste sites. The water board’s review found that more than one-third of the region’s active disposal pits are operating without permission.

    The pits raise new water quality concerns in a region where agricultural fields sit side by side with oil fields and where California’s ongoing drought has made protecting groundwater supplies paramount.

  4. edpell says:

    Gail, hope you have an enjoyable trip. I look forward to hearing what young people in China think of the future.

    • xabier says:

      But would they dare say what they think?

      A situation which is, of course, fast developing in the West, with total surveillance and ever-wider definitions of ‘terrorism’ and ‘insults to the State’.

  5. Director of Russian center for strategic analysis-prognosis predicts US internal implosion and ending of its global hegemony by 2020-25, are they reading too much Orlov-Kunstler or what? Very good overall analysis by the way.
    http://actualcomment.ru/chego-khochet-putin.html

  6. john c green jr says:

    Gail,
    Didn’t read all 118 comments so this might have been commented on before.
    On slide 31 of 3. Economic Growth & Diminishing Returns you state:
    “Most common job in America is “truck driver”. Doesn’t make sense to me.
    This list puts “Heavy and tractor-trailer truck drivers” in 15th place at
    1.446 million vs. #1 retail salespersons at 4.155 million:

    http://tinyurl.com/p87gs2x

    Doubt there are an additional 2.709 million small truck drivers.

    This list doesn’t include truck driver in the top ten:

    http://www.businessinsider.com/most-popular-jobs-in-america-2014-4

    This list doesn’t include truck driver in the top ten:

    http://247wallst.com/special-report/2014/04/24/americas-most-and-least-common-jobs/1/

    What am I missing?

    • VPK says:

      If that is your “issue” with the topic, maybe you are missing “something”. Perhaps you should backtrack and start from the beginning. I think you missed the whole point of her message.

    • VPK says:

      Did a minute google search and found this for you, John;
      http://www.washingtonpost.com/blogs/wonkblog/wp/2015/02/06/why-america-is-now-a-nation-of-truck-drivers/
      Why America is now a nation of truck drivers
      Quoctrung Bui of NPR’s Planet Money has mapped the most common job in each state based on U.S. Census Bureau data. The results might surprise you: Beyond a few farmers, secretaries, customer service people and computer analysts, America basically looks like a nation of truck drivers….
      In addition, the way the government counts truck drivers makes them a relatively large category. All truck drivers and delivery people are counted together, whereas primary school teachers and secondary school teachers are split into separate groups, for example.
      But beyond methodology, the dominance of the truck driver reveals a few interesting things about the American economy. First, truck driving is more immune to the pressures that have affected American jobs in past decades, since driving can’t be outsourced or automated (at least not yet).
      Hope this help in clearing the matter and enjoy the ride

    • I am taking this from the 2014 numbers in this link http://www.npr.org/blogs/money/2015/02/05/382664837/map-the-most-common-job-in-every-state

      I am sure they combined together a lot of different kinds together (short distance, long distance, local) into a single category.

  7. john c green jr says:

    VPK,
    The URL you gave is based on Census Bureau
    data. The two URLs I gave are both based on
    Bureau of Labor Statistics data. I suspect one
    of two things is going on 1) The left hand doesn’t
    know what the right hand is doing 2) there are
    lies, damned lies, and statistics. Perhaps both.

    The introduction to the article you quoted says:

    > Why does truck driving dominate the map? It’s
    > partially because of how the Census Bureau
    > categorizes its data. First, Planet Money
    > excluded two categories from the map because
    > they are incredibly broad and vague – “managers
    > not elsewhere classified” and “salespersons not
    > elsewhere classified.” So it’s possible that
    > the U.S. is actually a nation of vaguely defined
    > salespeople.

    Perhaps if they weren’t excluded we’d be a nation
    of Amway and other MLM salespersons. 🙂

    Although I listen to a lot on NPR and watch a lot
    of PBS Planet Money is something I hadn’t paid
    attention to. Just spent an hour on its Facebook
    page and will check out Planet Money podcasts
    going forwards. Thanks!

  8. Don Stewart says:

    Dear Gail and All
    Someone here has said that QE benefits the average citizen by boosting pension funds.

    See this chart article and scroll down to the chart which shows the sources of money flowing into the stock market:
    http://www.zerohedge.com/news/2015-02-28/here-reason-why-stocks-just-had-their-best-month-october-2011

    Corporations buying their own stock with the easy money supplied by the Central Banks is the largest inflow of money. Pension funds and individuals have been negative sources of funds now for several years.

    Don Stewart

  9. Don Stewart says:

    Dear Gail and All
    I previously mentioned Alain de Botton’s new book The News. I’m not sure exactly what the following thoughts have to do with survival in tough times, but I offer them for what they are worth. First, see the new way to make millions of dollars in TV and movies

    http://www.latimes.com/entertainment/movies/moviesnow/la-et-mn-fifty-shades-of-grey-and-the-dawn-of-movie-hate-watching-20150217-story.html#page=1

    So, in our poverty stricken world, people have spent near half a billion dollars to see a movie they know they are not going to like, so they can tweet their friends while the movie is showing, indicating how superior they themselves are to the garbage on the screen. The only question is if the movies can figure out how to do ‘movie hate watching’ as well as television does ‘series hate watching’.

    de Botton devotes a chapter to Tragedy. He begins with a look at Greek tragedy. For one week each year, the theaters in Athens were devoted to new tragedies written by the playwrights. Everybody understood what was expected. We would see, for example, a man much like ourselves, Oedipus, brought low by his own innate characteristics and the workings of fate. What people were expected to take away was the vivid perception that they need to control themselves, walking the fine line required to stay out of deep trouble.

    I suppose the messages one might absorb from 50 Shades are:
    One, indulge in kinky sex and marry a billionaire, while achieving deep sexual satisfaction.
    Two, life’s greatest joy is to spend one’s money watching trash, but which viewing gives one the privilege of showing how superior one is using Twitter.

    de Botton analyzes each kind of tragedy we are likely to see in the news, and shows how they may help us maintain homeostasis. He says ‘Tragedies shouldn’t only help us be good, they should also prompt us to be kind’.

    That statement is about as far as I think one can get from a theater dedicating a special room for those who want to send nasty twitter tweets.

    Now, if you are of a certain frame of mind, I suggest you sip your tea and think gleefully about how, when the Collapse comes, all these foolish virgins, having failed to keep oil in their lamps, will be left out in the cold. Darwin may have the last laugh…but I admit that Hollywood is having more success at the moment.

    Don Stewart

  10. edpell says:

    “Even the United States, which fought a revolutionary war against the British Empire, remains under the Crown/Rothschild thumb via the Federal Reserve, Pilgrim Society and Virginia Corporation. The US is used by the Crown/Rothschilds as a Hessianized mercenary force to protect their vast financial empire.” on the murder of Nemtsov
    https://hendersonlefthook.wordpress.com/2015/02/28/nemtsov-the-end-of-the-british-empire/

    • Artleads says:

      GREAT article, edpel! A very wise cousin of mine living in London has been telling me this over the past twenty years. But this article makes it very clear that the British Empire never went away. It was just too damn subtle and clever for anyone else to notice.

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