According to one investment newsletter, Jonathan Tepper is a “wicked smart” economist, investment advisor, former banker, former Rhodes scholar who speaks “five languages fluently with no accents,” an outsider-insider American who grew up in Europe, a bestselling business author and founder of an international macroeconomic research and investment strategy firm who asset managers from around the world turn to for advice.
Still, Tepper is puzzled. “Why,” he questioned on his eponymous website this past February, “are wages growing so slowly despite a growing economy and a booming stock market?”
Tepper is well placed to ask—and answer.
Variant Perception, the company he started, makes its living predicting where the economy is heading based on “leading indicators.” Building permits, for example, are a leading indicator that signal whether the economy will turn up or down.” One of the first signs of the 2008 recession, Tepper explains, was the plummet in the number of house building permits issued in 2005-06. (If you want to know whether the markets take him seriously, Google “Tepper… Australia… housing bubble.”)
After ticking along predictively and predictably for decades, Tepper says wage leading indicators have now “broken down badly… All the signs that should lead to higher wages are present. Employers are saying it is hard to find workers and many small businesses say they expect to raise wages, initial unemployment claims are extremely low. This should be an economy that is good for workers to get higher wages, yet wages stink.”
Given the “gaping disparity” between worker and CEO pay, “you might imagine managers were superstars and the average worker was bad at his job. But that is hardly the case.” Workers are producing more goods with less labor, and companies are making higher profits, but the benefits are not being shared with workers.
Tepper’s diagnosis of what ails wages— told in the economists’ favoured “youcan- see-from-the-following-chart” charts, graphs, lines and squiggles, each drawn from “dozens of academic studies”—seems straightforward enough.
The corporate world is shrinking. Two corporations now control 90 per cent of the beer Americans drink; four players control the entire U.S. beef market. That makes it easier for companies to goose average “markups,” which have risen from 18 per cent in 1980 to 70 per cent in 2014. Consider luxury goods, “where the right logo on a handbag will make the leather sell for a lot more than it costs to make.” Increasing mark-ups, says one study Tepper quotes, “naturally gives rise to a decrease in the labor share…”
Corporate concentration also leads to monopsony. Huh? “In a monopoly, there is only one seller,” Tepper offers helpfully, “while in a monopsony, there is only one buyer.” (A classic example of an Atlantic Canada monopsony would be a rural community where the fish plant is the only employer.) One study he quotes showed “going from a very competitive to a highly concentrated job market is associated with a 15-25 per cent decline in wages.”
Making awful even worse, he says, is the collapse of unions as a “countervailing force” against corporate concentration. If you think fewer strikes is a good sign, think again. “There is an extremely high correlation historically between the index of the number of strikes in the U.S. with the wage growth of workers. Today, strikes are extremely rare, and this in part explains why wages are so low.”
OK, that’s the problem. How to solve it? Unfortunately, you’ll have to wait—at least for Tepper’s answer. He’s currently co-writing a new book, The Myth of Capitalism: Monopolies and the Death of Competition.
But here’s a hint: Tepper quotes Jeremy Grantham, a British investor who manages one of the largest asset funds in the world. Grantham’s favourite phrase is: “reversion to the mean,” which means all investment up-and-downs eventually revert to their historical averages. “If [profit] margins don’t revert,” Grantham offers ominously, “something has gone wrong with capitalism.”