TOTAL COMPENSATION AND LABOR PRODUCTIVITY
January 6, 2009
The relation between wages and worker productivity is a key determinant of the standard of living of the employed population. According to research by economist Martin Feldstein, the share of national income going to employees is at about the same level as it was in 1970. But the use of an incorrect inflation adjustment has resulted in skewed findings showing a large and increasing gap between productivity and wages.
Feldstein notes that the level of productivity (measured as output per hour) doubled in the U.S. non-farm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at about the same annual rate during that period, when adjusted for inflation. According to Feldstein:
- The doubling of productivity since 1970 represented a 1.9 percent annual rate of increase, while real compensation per hour rose at 1.7 percent per year.
- Between 2000 and 2007, productivity rose at a more rapid 2.9 percent per year and compensation rose nearly as fast, at 2.5 percent per year.
- Total labor compensation has been remarkably stable since the 1970s, at 66 percent of national income in 1970 to 65 percent in 2007.
Feldstein concludes that two principal measurement mistakes have led some analysts to conclude that labor income growth has not kept up with productivity growth:
- The first is a focus on wages rather than total compensation; because of the rise in non-cash benefits, wages have not risen as rapidly as total compensation.
- The second measurement problem is the way in which nominal output and nominal compensation are converted to real values before making the comparison using two different deflators; he concludes one deflator should be used for measuring both productivity and compensation.
Source: Lester Picker, "Total Compensation Reflects Growth in Productivity," NBER Digest, October 2008 and Martin Feldstein, "Did Wages Reflect Growth in Productivity?" National Bureau of Economic Research, Working Paper 13953, April 2008.
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