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http://www.heritage.org/research/re...tion-is-keeping-pace-with-rising-productivity
A long read but was wondering your guys opinion on it.
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. This mistaken belief is the result of two misunderstandings.
First, 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.
Second, 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.
When compensation is used instead of income and the correct inflation measure is used to calculate inflation-adjusted compensation, the data show that total compensation has actually increased in tandem with worker productivity. Contrary to the critics' arguments, the data on compensation do not indicate any reduction in economic mobility.
Comparing median wages to average productivity does not necessarily reveal whether workers' pay is rising in step with their productivity, because the Bureau of Labor Statistics does not calculate median productivity growth, only average productivity levels. If productivity growth were concentrated among one group of workers, such as college graduates, those workers' wages would rise. This would cause average wages to rise, but median wages would move little if non-graduates' productivity did not also improve. In this way, comparing average productivity to median wages gives the misleading impression that workers are not receiving the fruits of increased productivity when in fact those workers who have become more productive are earning higher wages.
Recent research suggests that this may be happening. A substantial portion of the increased inequality in America in recent years can be explained by the fact that the use of performance-based pay has increased.[8] Especially productive workers are getting raises that match their productivity. This increases average compensation but has little effect on median pay.
In addition, demographic shifts can skew median family income figures. Divorce rates have risen since the early 1970s. A two-income family with the husband earning $50,000 and the wife working part-time and earning $25,000 has a total family income of $75,000. After a divorce, government statistics would report the couple as two separate families, one with an income of $50,000 and a second with an income of $25,000. A rise in divorce rates or a drop in marriage rates tends to lower median family income, even if wages and salaries remain unchanged.
The Complete Picture: Compensation Has Grown with Productivity
Using the more accurate implicit price deflator to calculate productivity growth and compensation growth reveals that compensation has grown in line with productivity, not lagged, during the past 20 years. Chart 5 shows productivity and compensation growth over the past 20 years, using the IPD to adjust compensation for inflation.
As the chart shows, using the right measure of inflation and looking at total compensation--not just cash income--almost eliminates the difference between compensation growth and productivity growth. Productivity has grown 53 percent since 1987, while real compensation has grown 46 percent. At several points during the late 1990s, compensation growth even exceeded productivity growth.
It is true that productivity has risen somewhat faster than compensation since 2003, but this also happened in the early 1990s and is not an unusual long-term pattern. Wages caught up to productivity in the late 1990s, when low unemployment forced employers to compete for increasingly productive workers. There is every reason to expect a similar outcome in the near future
Conclusion
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.
Using the implicit price deflator--the same measure that the government uses to adjust productivity figures for inflation--shows that there is no large gap between compensation growth and productivity growth. 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.
A long read but was wondering your guys opinion on it.
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. This mistaken belief is the result of two misunderstandings.
First, 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.
Second, 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.
When compensation is used instead of income and the correct inflation measure is used to calculate inflation-adjusted compensation, the data show that total compensation has actually increased in tandem with worker productivity. Contrary to the critics' arguments, the data on compensation do not indicate any reduction in economic mobility.
Comparing median wages to average productivity does not necessarily reveal whether workers' pay is rising in step with their productivity, because the Bureau of Labor Statistics does not calculate median productivity growth, only average productivity levels. If productivity growth were concentrated among one group of workers, such as college graduates, those workers' wages would rise. This would cause average wages to rise, but median wages would move little if non-graduates' productivity did not also improve. In this way, comparing average productivity to median wages gives the misleading impression that workers are not receiving the fruits of increased productivity when in fact those workers who have become more productive are earning higher wages.
Recent research suggests that this may be happening. A substantial portion of the increased inequality in America in recent years can be explained by the fact that the use of performance-based pay has increased.[8] Especially productive workers are getting raises that match their productivity. This increases average compensation but has little effect on median pay.
In addition, demographic shifts can skew median family income figures. Divorce rates have risen since the early 1970s. A two-income family with the husband earning $50,000 and the wife working part-time and earning $25,000 has a total family income of $75,000. After a divorce, government statistics would report the couple as two separate families, one with an income of $50,000 and a second with an income of $25,000. A rise in divorce rates or a drop in marriage rates tends to lower median family income, even if wages and salaries remain unchanged.
The Complete Picture: Compensation Has Grown with Productivity
Using the more accurate implicit price deflator to calculate productivity growth and compensation growth reveals that compensation has grown in line with productivity, not lagged, during the past 20 years. Chart 5 shows productivity and compensation growth over the past 20 years, using the IPD to adjust compensation for inflation.
As the chart shows, using the right measure of inflation and looking at total compensation--not just cash income--almost eliminates the difference between compensation growth and productivity growth. Productivity has grown 53 percent since 1987, while real compensation has grown 46 percent. At several points during the late 1990s, compensation growth even exceeded productivity growth.
It is true that productivity has risen somewhat faster than compensation since 2003, but this also happened in the early 1990s and is not an unusual long-term pattern. Wages caught up to productivity in the late 1990s, when low unemployment forced employers to compete for increasingly productive workers. There is every reason to expect a similar outcome in the near future
Conclusion
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.
Using the implicit price deflator--the same measure that the government uses to adjust productivity figures for inflation--shows that there is no large gap between compensation growth and productivity growth. 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.
