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Inequality of Wages and Productivity

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

They point to data showing that productivity has risen sharply since the 1970s whilst wages have stagnated and conclude that productivity-driven economic growth does not necessarily benefit many USA workers

The most productive firms are thriving but the least productive ones are failing to keep up – as firms grow apart in productivity, they also become more unequal in how much they pay workers – increasing income inequality is said to be the result, one that is now becoming a major issue in many G7 nations

Economics professor Giuseppe Berlingieri et alia say: “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”

Countries 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, the claim that pay has lagged far behind productivity growth:

  • Examines wage growth instead of total compensation, which includes other rapidly growing benefits

  • Uses different price indices to adjust pay and productivity for inflation

  • Omits the effect of faster depreciation, which reduces net income but not gross productivity

  • Ignores known measurement errors in BLS (Bureau of Labor Statistics) productivity calculations.

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

An apples-to-apples comparison shows that employee compensation continues to follow productivity closely, with workers earning more as they become more productive.

If so, this has important policy implications:

  • Many policy-makers mistakenly believe that employees are destined to no longer enjoy the fruits of their labour, even if the economy returns to full employment

  • 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

Yet again, official statistics generate opposing views from experts

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