The Corner

Economy & Business

Contrary to White House Claim, Compensation Has Been in Line with Productivity

The White House has been among those touting the “productivity-pay gap“ claim i.e., that workers’ productivity rose at a high rate over the last four decades but real earnings growth failed to keep pace and instead creeped along at a nearly flat rate. In other words, it claims that there is rampant unfairness in the marketplace where most employers are forcing their employees to work long hours, at a much higher productivity level, without adjusting their pay to compensate them appropriately. These arguments continue to fuel the debate on contested labor policies such as the overtime-pay rule and minimum-wage increases.

However, real pay and productivity data put together by the Heritage Foundation’s James Sherk show that worker compensation is actually closely tied to worker productivity.

Sherk was generous enough to share the data from his forthcoming study “Workers’ Compensation: Growing along with Productivity.” The data come from the Bureau of Economic Analysis (NIPA tables) and the Bureau of Labor Statistics. What’s interesting is that Sherk shows that those stating that there is a large gap between productivity and wage growth (the green line vs. red line) have committed the following errors:

‐Compared the pay of only some workers to the productivity of all employees;

‐Counted productivity growth of the self-employed, but excluded their pay growth;

‐Measured inflation differently to calculate pay growth and productivity growth.

As Sherk states, “methodological choices [in calculating the relationship between productivity and earnings] create an apparent gap between productivity and compensation in the nonfarm business sector.” Employee compensation has in fact risen in step with productivity since 1973, both on average and across industries. As you can see on the chart, since 1973, the average private-sector employee’s productivity has increased by 81 percent (red line), while the average compensation has increased by 78 percent (yellow line).

What this means is that besides the idiotic consequences of the “fair wage” policy proposed by the Department of Labor at the direction of the White House, which expands the scope of coverage of employees eligible for overtime pay, the justification for the policy doesn’t hold water.

Over at the Mercatus Center, Don Boudreaux and Liya Palagashvili have a new and important study about the overtime-pay rule that explains its negative consequences. They also summarized their findings in a Wall Street Journal article. I wrote about it here and here. Sherk has written about it here and here.

What’s worrisome is that not only is the White House not concerned about hurting workers more than they have already been by this relatively slow recovery — but it is in a hurry to do so: I am hearing that the Labor Department is trying to rush the rule through and get the job done in May.


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