Wage levels versus Productivity

President John F. Kennedy believed that “a rising tide lifts all boats” but many question if that remains true today in the business world

They point to data showing that productivity has risen sharply since the end of WW2 whilst wages have stagnated and conclude that productivity-driven economic growth does not necessarily benefit USA workers on average viz:

  • Productivity in the USA up by 243%
  • Wages up 109%

 

The most productive firms are thriving but the least productive ones are failing to keep up – and as firms grow apart in productivity, they also become more unequal in how much they pay their workers:

  • Economics professor Giuseppe Berlingieri (et alia) says: “Such productivity gaps are growing both within countries, between sectors, but also within sectors in the same country – it’s not just what sector you work in but which company you work for”
  • And increasing income inequality is the result – one that is now becoming a major issue in many G7 nations

 

Nations that attempt to shield workers and firms during tough economic times should experience less inequality, both in terms of wages and firm productivity, but this will make it harder for resources to flow from less to more productive firms

What’s beneficial in the short term may be detrimental over time and slow overall productivity growth, also trapping workers in low-paying firms rather than giving them the opportunity to earn higher wages elsewhere

MIT economist David Autor, when asked about the causes of inequality, said: “There are many moving parts here – one of them has clearly been IT – another has been international trade – but I also think the decline of unionisation has mattered a great deal”

However, James Sherk of the Heritage Organisation has a different slant on this issue: “Inequality claims rest on misinterpreted economic statistics – they juxtapose productivity and pay data that cannot be directly compared, leading to inaccurate conclusions”

In particular, he questions whether pay has actually lagged far behind productivity growth because:

  • Average wage growth is calculated, not total compensation which includes other rapidly growing benefits such as health insurance, tuition fees, pension contributions, holiday entitlements
  • Different price indices are used to adjust pay and productivity for inflation
  • Faster depreciation is omitted yet it reduces net income but not gross productivity
  • Known measurement errors in BLS (Bureau of Labor Statistics) data are ignored

 

More careful comparisons show that measured productivity has increased 100 % and average compensation 77 % over the past 40 years – and issues inflating productivity measurements account for most of the 23% difference

Sherk thus believes an apples-to-apples comparison would show employee compensation continues to follow productivity closely, with workers earning more as they become more productive

If so, this has important implications:

  • Many policy-makers mistakenly believe that employees are no longer destined to enjoy the fruits of their labour, even if the economy attains full employment – such fruits are for capitalist shareholders and their lieutenant CEOs mostly
  • Hence, they’ve turned their attention to redistributive economic policies to compensate
  • Better policies would focus on measures that enable Americans to become more productive and command higher pay, such as reducing the cost of higher education or regulatory costs that slow the economic recovery and labour compensation

 

It’s another example of official statistics generating not only opposing views from ‘experts’ but also flawed policies from those in power

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