NCPA - National Center for Policy Analysis

COMPENSATION IS KEEPING PACE WITH RISING PRODUCTIVITY

June 13, 2007

There is a widespread belief in America that productivity is rising but workers are not receiving the fruits of their labor.  Citing government data that wages have lagged far behind increases in worker productivity in recent years, many politicians and journalists contend that America is becoming less economically mobile, says James Sherk, Bradley Fellow in Labor Policy in the Center for Data Analysis at the Heritage Foundation.

This mistaken belief is the result of misunderstanding, says Sherk:

  • It is incorrect to focus on workers' cash income instead of their total compensation; total compensation includes such increasingly important components of workers' pay as health benefits, contributions to retirement plans and paid vacations.
  • These and other employer-provided benefits are not cash income, but they do contribute to workers' well-being.

In addition, those claiming reduced mobility often use the wrong measure of inflation to calculate inflation-adjusted pay:

  • By using the consumer price index (CPI) instead of the implicit price deflator (IPD), these calculations overstate inflation and understate wage growth.
  • The result of this mistake is that wage growth will almost always appear to lag far behind productivity growth, even when workers are making gains.

Workers are not missing out on the fruits of their rising productivity.  Compensation appears to have fallen relative to productivity only when analysts, journalists and politicians use the wrong price index to adjust it for inflation and overlook the difference between cash income and total compensation, says Sherk.  It is time for policymakers and others to retire erroneous and misleading measures that suggest that American workers are falling behind and instead present the data and their conclusions honestly and fairly.

Source: James Sherk, "Analyzing Economic Mobility: Compensation Is Keeping Pace with Rising Productivity," Backgrounder #2040, Heritage Foundation, June 11, 2007.

 

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