The Wages of Productive Labor
As employees become more productive, they should earn more. Although this may strike some as a values statement, for most economists, it’s a description of the way the world is supposed to work. “Everything we know about economics and historical experience is that when productivity goes up, real wages go up, too,” said Phillip Swagel, a resident scholar at the American Enterprise Institute, a conservative think tank (Ip, 2006).
This makes recent U.S. history perplexing. Despite living in an era of extended economic growth when productivity rates have been rising for years, most workers have not seen their inflation-adjusted wages increase. Data from the U.S. Bureau of Labor Statistics (BLS) shows that annual nonfarm business productivity rose 2.3% in 2005, 3% in 2004, 3.7% in 2003, and 4.1% in 2002. Yet, U.S. workers’ median hourly wage has dropped by 2% since 2003, reports the New York Times.
U.S. gross domestic product (GDP) has also been growing more quickly than wages. As a percentage of U.S. GDP, wages and salaries were 45% in early 2006, down from close to 50% in early 2001 (Greenhouse & Leonhardt, 2006). GDP per person has jumped by 8.4%, after inflation, since the end of 2000, whereas the weekly wages were down by 0.3% (Ip, 2006).
There’s no clear answer as to why this is occurring, although employer-paid benefit costs are often cited as a factor. Medical benefits, pensions and payroll taxes have risen nearly 16% since the start of the decade (Ip, 2006). The cost of healthcare benefits, in particular, continues to rise faster than inflation. But Jared Epstein of the liberal Economic Policy Institute notes, “While benefits costs are of course rising, they are doing so considerably more slowly than in recent years, in part due to diminished employer-provided healthcare coverage” (Preciphs, 2006). Workers benefit costs have risen only 3.4% in the last year.
Other possible drivers of the trend tend to boil down to the idea that most U.S. workers don’t have as much bargaining power as they once did. The decline of union membership is one widely cited factor. In 2005, just 12.5% of wage and salary workers were union members, down from 20.5% in 1983, according to the BLS. Meanwhile, the purchasing power of the U.S. minimum wage is as low as it’s been in half a century.
Globalization is also viewed as a major factor, with today’s employers having more options about where to look for labor. "For all intents and purposes, the world's labor force doubled in the 1980s and 1990s, the era when the populations of China, India and the former Soviet Union were integrated into the global market economy (Freeman, 2005)." This increased supply of labor has, according to The Economist, “reduced the relative price of labour and raised the returns to capital.” It has also reduced the ratio of capital to labor. Richard Freeman (2005), director of labor studies at the National Bureau of Economic Research, notes, “Having twice as many workers and nearly the same amount of capital places great pressure on labor markets throughout the world.... In advanced countries, real wages and/or employment are likely to grow more slowly than in years past.”
The productivity/wages disconnect is sparking a number of questions and concerns. Business profits have risen even as median wages have stagnated. Since the start of the decade, labor’s share of GDP has declined slightly as profits’ portion of GDP has grown from 6% to nearly 9% (Ip, 2006). Again, this is difficult to explain. Perhaps companies are not yet feeling the labor market pressures to share the rewards of higher productivity with their employees. Or, in an age of terrorism and other uncertainties, maybe many are trying to keep profit margins higher in order to boost their resilience if catastrophe strikes. Or perhaps it’s an attempt to go the extra mile in pleasing stockholders.
Whatever the cause or causes, there’s a danger of killing the proverbial golden goose if the connection between productivity and wage gains appears permanently cut. From a macroeconomic perspective, it will be difficult for U.S. businesses to boost sales over the long term in an economy without rising income levels. There’s also the danger that productivity – which works to keep labor costs down – could go into a dive if workers feel that the pay-for-performance equation is more fantasy than fact.
Then there’s the potential for a backlash against the process of globalization at the public and political levels. Americans are already skeptical that government is doing what it should on this front. When asked to grade the U.S. in terms of its ability to protect U.S. jobs from moving overseas, only 18% of 1,004 surveyed Americans gave the nation better than a grade of C. And just 37% said that the U.S. is doing a good job of making international trade agreements that benefit the nation (Yankelovich, 2005). Stagnant wages may only harden and intensify such attitudes.
Then again, few are arguing that the link between productivity and wages has been permanently severed. The American Enterprise Institute’s Swagel suggests that it’s just going to take longer to see the advances in wage levels this time around. If he and others are right, workers will eventually, if belatedly, be better compensated for rising productivity. Until then, however, stagnant wages may well gain increased attention among economists, the media and workers themselves.
For a Wall Street Journal article on how wages are failing to keep pace with productivity, click here.
For an Economist article on how productivity is lifting relatively fewer boats in the economy, click here.
For a New York Times article on wages and productivity, click here. This may require establishing a free membership.
For BLS data on productivity in recent years, click here.
For an article on the virtual doubling of the global workforce, click here.
Documents used in the preparation of this TrendWatcher include the following:
Freeman, R. “What Really Ails Europe (and America): The Doubling of the Global Workforce.” The Globalist, June 3, 2005.
Greenhouse, Steven and David Leonhardt. “Real Wages Fail to Match a Rise in Productivity.” New York Times, August 28, 2006.
Ip, Greg. “Wages Fail to Keep Pace with Productivity Increases, Aggravating Income Inequality.” Wall Street Journal. ProQuest. March 27, 2006, p. A2.
Preciphs, Joi. “Politics & Economics: Paychecks Didn’t Rise as Fast as Inflation in 2005.” Wall Street Journal. ProQuest. February 1, 2006, p. A8.
“Special Report: The Rich, the Poor and the Growing Gap Between Them – Inequality in America.” The Economist. ProQuest. June 17, 2006.
U.S. Bureau of Labor Statistics. “Major Sector Productivity and Costs Index.” Retrieved August 31, 2006.
U.S. Bureau of Labor Statistics. “Union Members Summary.” Press release. January 20, 2006.
Yankelovich, D. “Poll Positions.” Foreign Affairs, EBSCO, September/October 2005.
This makes recent U.S. history perplexing. Despite living in an era of extended economic growth when productivity rates have been rising for years, most workers have not seen their inflation-adjusted wages increase. Data from the U.S. Bureau of Labor Statistics (BLS) shows that annual nonfarm business productivity rose 2.3% in 2005, 3% in 2004, 3.7% in 2003, and 4.1% in 2002. Yet, U.S. workers’ median hourly wage has dropped by 2% since 2003, reports the New York Times.
U.S. gross domestic product (GDP) has also been growing more quickly than wages. As a percentage of U.S. GDP, wages and salaries were 45% in early 2006, down from close to 50% in early 2001 (Greenhouse & Leonhardt, 2006). GDP per person has jumped by 8.4%, after inflation, since the end of 2000, whereas the weekly wages were down by 0.3% (Ip, 2006).
There’s no clear answer as to why this is occurring, although employer-paid benefit costs are often cited as a factor. Medical benefits, pensions and payroll taxes have risen nearly 16% since the start of the decade (Ip, 2006). The cost of healthcare benefits, in particular, continues to rise faster than inflation. But Jared Epstein of the liberal Economic Policy Institute notes, “While benefits costs are of course rising, they are doing so considerably more slowly than in recent years, in part due to diminished employer-provided healthcare coverage” (Preciphs, 2006). Workers benefit costs have risen only 3.4% in the last year.
Other possible drivers of the trend tend to boil down to the idea that most U.S. workers don’t have as much bargaining power as they once did. The decline of union membership is one widely cited factor. In 2005, just 12.5% of wage and salary workers were union members, down from 20.5% in 1983, according to the BLS. Meanwhile, the purchasing power of the U.S. minimum wage is as low as it’s been in half a century.
Globalization is also viewed as a major factor, with today’s employers having more options about where to look for labor. "For all intents and purposes, the world's labor force doubled in the 1980s and 1990s, the era when the populations of China, India and the former Soviet Union were integrated into the global market economy (Freeman, 2005)." This increased supply of labor has, according to The Economist, “reduced the relative price of labour and raised the returns to capital.” It has also reduced the ratio of capital to labor. Richard Freeman (2005), director of labor studies at the National Bureau of Economic Research, notes, “Having twice as many workers and nearly the same amount of capital places great pressure on labor markets throughout the world.... In advanced countries, real wages and/or employment are likely to grow more slowly than in years past.”
The productivity/wages disconnect is sparking a number of questions and concerns. Business profits have risen even as median wages have stagnated. Since the start of the decade, labor’s share of GDP has declined slightly as profits’ portion of GDP has grown from 6% to nearly 9% (Ip, 2006). Again, this is difficult to explain. Perhaps companies are not yet feeling the labor market pressures to share the rewards of higher productivity with their employees. Or, in an age of terrorism and other uncertainties, maybe many are trying to keep profit margins higher in order to boost their resilience if catastrophe strikes. Or perhaps it’s an attempt to go the extra mile in pleasing stockholders.
Whatever the cause or causes, there’s a danger of killing the proverbial golden goose if the connection between productivity and wage gains appears permanently cut. From a macroeconomic perspective, it will be difficult for U.S. businesses to boost sales over the long term in an economy without rising income levels. There’s also the danger that productivity – which works to keep labor costs down – could go into a dive if workers feel that the pay-for-performance equation is more fantasy than fact.
Then there’s the potential for a backlash against the process of globalization at the public and political levels. Americans are already skeptical that government is doing what it should on this front. When asked to grade the U.S. in terms of its ability to protect U.S. jobs from moving overseas, only 18% of 1,004 surveyed Americans gave the nation better than a grade of C. And just 37% said that the U.S. is doing a good job of making international trade agreements that benefit the nation (Yankelovich, 2005). Stagnant wages may only harden and intensify such attitudes.
Then again, few are arguing that the link between productivity and wages has been permanently severed. The American Enterprise Institute’s Swagel suggests that it’s just going to take longer to see the advances in wage levels this time around. If he and others are right, workers will eventually, if belatedly, be better compensated for rising productivity. Until then, however, stagnant wages may well gain increased attention among economists, the media and workers themselves.
For a Wall Street Journal article on how wages are failing to keep pace with productivity, click here.
For an Economist article on how productivity is lifting relatively fewer boats in the economy, click here.
For a New York Times article on wages and productivity, click here. This may require establishing a free membership.
For BLS data on productivity in recent years, click here.
For an article on the virtual doubling of the global workforce, click here.
Documents used in the preparation of this TrendWatcher include the following:
Freeman, R. “What Really Ails Europe (and America): The Doubling of the Global Workforce.” The Globalist, June 3, 2005.
Greenhouse, Steven and David Leonhardt. “Real Wages Fail to Match a Rise in Productivity.” New York Times, August 28, 2006.
Ip, Greg. “Wages Fail to Keep Pace with Productivity Increases, Aggravating Income Inequality.” Wall Street Journal. ProQuest. March 27, 2006, p. A2.
Preciphs, Joi. “Politics & Economics: Paychecks Didn’t Rise as Fast as Inflation in 2005.” Wall Street Journal. ProQuest. February 1, 2006, p. A8.
“Special Report: The Rich, the Poor and the Growing Gap Between Them – Inequality in America.” The Economist. ProQuest. June 17, 2006.
U.S. Bureau of Labor Statistics. “Major Sector Productivity and Costs Index.” Retrieved August 31, 2006.
U.S. Bureau of Labor Statistics. “Union Members Summary.” Press release. January 20, 2006.
Yankelovich, D. “Poll Positions.” Foreign Affairs, EBSCO, September/October 2005.