Friday, June 13, 2014

Wages vs. Productivity

Wages and Productivity: 

Often times it has been claimed that wages have not increased with economic growth. Think tanks like the Economic Policy Institute have made this claim by comparing the increase in GDP per hour (economic growth) over time to the increase in median wages adjusted to the Consumer Price Index (CPI). This is wrong for the following reasons:

-Economic theory predicts that workers are paid according to the revenue they bring to their employers. Thus, worker compensation is tied to the price changes in ALL goods and services, not just consumer goods.

-Comparing average productivity to median wages is an apples to oranges comparison. 

-Wages are not the only way workers are compensated for their labor, they are also paid in health care benefits, pensions, etc. Thus, we need to look at worker compensation over time, not just wages. 

- Even if one wanted to see how median compensation changed over time, the correct price index is the Personal Consumption Expenditure (PCE), since the CPI is widely believed to overstate inflation. According to the Federal Reserve, "[We] carefully considered both indexes [CPI and PCE] when evaluating which metric to target and concluded that PCE inflation is the better measure. [1]"

Luckily a 2013 study has examined all these things [2]. Their results can be seen in the graph below. Here is a summary of their findings:

-The Blue and Purple lines show the relationship between average productivity and average worker compensation (respectively) in the United States over time. As you can see, up until 2001, there is a perfect correlation. After 2001, worker compensation has lagged a little but not by much. 

-The bottom orange line shows how median worker compensation adjusted for the PCE has changed over time. As you can see, since between 1980-2010, it has increased approximately 30%, indicating a 1% increase per year.




1 comment:

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