Obama’s Pay and Productivity Misconception
He suggests wages have fallen way behind productivity, but they haven’t.

Workers at a Ford auto plant in Wayne, Mich.


The total hourly compensation of the entire workforce has risen 30 percent since the early 1970s, a far cry from the slight decline in payroll-survey-reported wages.

Second, the Bureau of Labor Statistics adjusts compensation for inflation using the consumer price index (CPI). It adjusts productivity with the implicit price deflator (IPD). These indexes use different formulas that calculate different rates of inflation. This methodological difference has nothing to do with underlying growth rates. Adjusting compensation for inflation with the IPD shows it has risen 77 percent since 1973 — much closer to the 100 percent increase in productivity.

Finally, the BLS overstates productivity growth in several ways. Economists have discovered, for instance, that the agency misestimates the prices of foreign goods that domestic businesses use in production. This makes them appear to produce more output at less cost — also known as higher productivity.

Further, compensation rises with workers’ net productivity — what remains after subtracting depreciation. As businesses use more computers and software in production, depreciation rates have increased. However, the BLS only measures gross productivity. This makes it appear that useable productivity has risen more than it actually did. (In the words of the liberal economist Dean Baker, “no one can eat depreciation.”)

Measured correctly, employee compensation has risen in step with the value workers create. Gaps between productivity and compensation sometimes emerge in times of high unemployment — such as America is now experiencing — but over the long term workers’ pay closely matches the value of what they produce. Federal Reserve researchers and Harvard professor Martin Feldstein have also come to this conclusion.

Nonetheless, over the past generation, pay has not risen very quickly among some groups of workers, while technological changes have made highly skilled workers much more productive. Today a few engineers can operate computers that run vast assembly lines, so their wages have risen commensurately. Technology has not augmented the productivity of less-skilled workers in the same way: It takes as many workers to change sheets in a nursing home today as 40 years ago. Economists call this “skill-biased technological change.”

The solution is to help less-skilled workers become more productive. If they do, market forces will drive their compensation up. Online education — by reducing the cost of acquiring skills — could become an economic game changer in this regard. George Tech University has announced it will start offering online master’s degrees for just $7,000, and other schools are offering high-quality courses online for free.

President Obama is wrong: Workers’ pay remains closely connected to their productivity. The challenge for policymakers is removing barriers that make it harder for workers to become more productive.

— James Sherk is a senior policy analyst in labor economics at the Heritage Foundation. 


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