In his economic address Wednesday, President Obama lamented, “since 1979, when I graduated from high school, our productivity is up by more than 90 percent, but the income of the typical family has increased by less than 8 percent.” In other words, the link between pay and productivity has been shattered. This would be appalling if it were true — but it is not.
This argument has nonetheless become conventional wisdom in many circles. The belief that workers’ pay no longer rises with their productivity helps explain why liberals’ policy focus has turned so sharply to redistributive policies. The president and others essentially argue that the American dream has died and the modern economy does not reward employees for their hard work.
Fortunately, they are wrong. I put out a comprehensive report on this issue for the Heritage Foundation over the summer that examined changes in pay and productivity since 1973. The data shows average compensation — which includes both wages and benefits — has risen in tandem with productivity over the past generation. This makes sense — market forces compel employers to raise pay along with productivity gains. If an employer pays workers less than their productivity, its workforce will take better job offers from competitors. A business that pays more than its workers produce usually goes out of business. Competition forces businesses to pay workers according to the value they create.
But the widespread belief they do not is understandable. Wage and productivity figures appear to diverge. Since 1973 average hourly productivity has doubled, while average real hourly wages measured by the payroll survey have fallen 7 percent. Anyone glancing at these figures would conclude pay no longer rises with productivity.
With economic statistics the devil often lies in the details. The wage and productivity data come from different surveys using different methods and covering different groups of workers: statistical apples and oranges. The facile comparison has several problems.
For one, it does not look at everything workers earn. Looking only at wages ignores the non-cash benefits that have become an increasingly large share of workers’ total compensation. Economists expect total compensation to rise with productivity. Nothing says that additional compensation will come entirely in cash.
Worse, the payroll survey records the pay of just a portion of the workforce. The Bureau of Labor Statistics (BLS) tells businesses to report the pay of their “production and nonsupervisory” employees. Most businesses have no idea what this means and report the wages of their hourly employees instead — only 60 percent of the workforce.