Is There Really a Gap Between Wages and Productivity?

June 5, 2014

Figures suggesting that worker compensation has not kept up with productivity are flawed, explains James Sherk, senior policy analyst at the Heritage Foundation.

Many people encouraging an increase in the minimum wage will cite Bureau of Labor Statistics (BLS) figures showing that productivity since 1973 has gone up 100 percent. Adjusting payroll wages for inflation using the Consumer Price Index, it appears that average wages have simultaneously dropped 7 percent. In short, the argument goes, workers have become more productive, yet they have not been rewarded for their work with higher wages.

But that is not exactly what has happened, and the two figures (productivity increase and the wage decrease) use different sets of data that each use different methodologies. Sherk explains what has actually happened to workers' wages since 1973:

  • The 7 percent decrease in wages only measures hourly earners, meaning that it only includes 60 percent of the American workforce. Moreover, benefits are not included in the wage calculations. But by including the average hourly compensation of all workers, worker compensation has actually risen 30 percent since 1973.
  • Additionally, that figure uses the Consumer Price Index (CPI) to adjust for inflation, which economists agree is not an accurate way to measure inflation. By using the Personal Consumption Expenditures Price Index instead, average hourly compensation has risen 57 percent.
  • The BLS calculated productivity using a different measure of inflation which looks at changes in the cost of goods sold by a company, because the price of their goods determine their ability to pay wages and benefits. Using that figure -- the Implicit Price Deflator for Non-Farm Business -- total compensation has actually increased 77 percent since 1973.
  • The 23 percent gap between the 77 percent rise in wages and the 100 percent rise in productivity is still not entirely correct, because the BLS overstates productivity increases that come from trade. For example, a factory that begins using cheaper inputs from China will see an increase in productivity because it can produce goods at lower cost, but that gain does not come from worker productivity. Half of that 23 percentage point gap, Sherk writes, could be explained by trade.
  • Lastly, the productivity measure does not take into account changes in depreciation rates, which have increased. The depreciation factor is responsible for an additional 5 points of the gap between productivity and wages.

Contrary to popular belief, workers are enjoying the fruits of their labor, Sherk says.

Source:  James Sherk, "Has Worker Compensation Tracked Productivity?" in Income Inequality in America: Fact and Fiction, Economics 21, May 2014.

 

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