AEI economist Michael Strain has a new paper showing that, contrary to common belief, the link between productivity and wages is still very strong. Very much worth reading, the paper contains interesting discussions of how we should think about wages, which workers should or shouldn’t be included when measuring the relationship between productivity and pay, whether for “pay” we should use wages or total compensation, and so on.
Here is what he concludes:
When properly measured, with variable definitions based on the most appropriate understanding of the relevant underlying economic concepts, trends in compensation and productivity have been very similar over the past several decades. Of course, it is also the case that two variables can evolve similarly over time without necessarily being related. But this chart, combined with the statistical evidence in the [Anne] Stansbury and [Lawrence] Summers paper and economic theory, provides compelling evidence that productivity and compensation are strongly related.
Strain doesn’t claim that there is nothing to see. Productivity has indeed not grown as fast as we would have liked, and wage growth hasn’t been equal across all workers. However, productivity still plays a significant role in setting wages.
People on both the right and the left who claim that wages have been stagnating and that therefore we must use the government to remedy the situation, either by raising the minimum wage or by subsidizing wages, often ignore an important point made in Strain’s paper. One of the measurement issues that Strain identifies is that if you want to measure the true relationship between pay and productivity, you should use total compensation rather than wages.
Strain writes:
When determining whether higher productivity is translating into higher pay for workers, it is important to look at more than just real cash wages. For the “typical” worker—both the median worker and the average production and non-supervisory worker—and for all workers, non-wage compensation, including health benefits, is a large portion of total compensation. Indeed, non-wage compensation has risen as a share of total compensation from around 14% in the 1970s to around 19% today (Bureau of Economic Analysis, n.d.a.; Bureau of Economic Analysis, n.d.b.). In addition to benefits, performance pay such as bonuses should be included in compensation. Arguably, stock options should be included as well, as those constitute a significant component of total compensation for some of the economy’s highest-compensated workers.
I agree. Today, fringe benefits — health care in particular — represent an increasingly large share of a worker’s total compensation, and their increase as a portion of total compensation is an important reason why wages haven’t grown as fast as productivity. Add bonuses to that and you can explain a lot of the alleged productivity–pay gap.
This reality has some important implications for those who believe that the federal government should mandate that companies provide more paid leave and other forms of fringe benefits. The more fringe benefits are forcibly added to a worker’s total compensation, the slower will be the growth in that worker’s wage.
The irony, of course, is that the same people who complain about the too-slow growth rate of wages are often the same ones who want the federal government to mandate paid leave or otherwise arrange for an artificial increase in its provision.
Again, Strain’s paper is here, and it is an interesting read.