Compensation and Productivity in Historical Context

by Reihan Salam

One of the more intriguing arguments in Scott Winship’s recent essay on the costs of inequality in the new National Affairs is on the relationship between productivity growth and compensation:

Analysts such as Jared Bernstein (of the Center on Budget and Policy Priorities) often claim that worker pay has not kept up with productivity, citing this as evidence that gains at the top were effectively stolen from the middle. While it is true that wage increases have lagged behind productivity growth in recent decades, my ongoing research suggests a simple explanation: Compensation outpaced productivity growth during the mid-20th century (in the peak years of unionism), and recent decades have seen a correction in which productivity levels have had to catch up to pay. On balance, the numbers still favor workers: If President William McKinley had been told in 1900 how much higher productivity would be in 2013 and had used that information to guess how much higher hourly compensation would be, his prediction would have been too low. [Emphasis added]

U.S. firms faced less vigorous international competition during the mid-20th century, and some scholars, like John Kenneth Galbraith, claimed that the dominant sectors of the economy were oligopolistic. This implies that the largest employers of this era had somewhat more scope to acquiesce to aggressive wage demands than their early-21st century counterparts, but of course there are many other factors at play.

In an interview with Dylan Matthews of Wonkbook, Robert Z. Lawrence, an economist at the Harvard Kennedy School and co-author, with Lawrence Edwards, of Rising Tide: Is Growth in Emerging Economies Good for the United States?, makes the following related observation:

[W]hen you’re looking at the measure of output-per-worker, you’re looking at what workers produce. When you’re looking at real wages, you’re looking at what workers consume. There’s a difference. One big difference is in computers and equipment. When productivity growth is fast in equipment, it’s not a big share of what workers buy. Or take housing. Workers don’t produce all of the housing, though there’s construction. So about a third of the whole difference is the difference between what workers produce and what they consume.

The other part of it had to do with the difference between compensation, which includes benefits and wages, which is generally your take-home pay. You’re looking at what people get in their pockets. When your benefits are part of your compensation, there’s some part of that story as well. A third part is that we’ve been adding more and more educated workers to the workforce. So if you have more college-educated people working, their wages will rise to reflect their higher intellectual capital but there’s no reason why the high school people should get a higher wage. [Emphasis added]

Lawrence’s observation concerning the the gap between what workers produce and what workers consume speaks to the importance of cost-of-living issues that tend to be neglected in the national policy conversation, like (a perennial theme in these parts) the impact of local land use regulations on housing prices.  

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.