Thursday, June 19, 2008

Real Compensation HAS Risen With Productivity

It is a commonly held view that the American worker has not shared in the phenomenal economic growth since the late 1970s, and data like the chart below are often cited to show that median household income is falling farther and farther behind gains in productivity:

But the Heritage Foundation's James Sherk reminds us that "Wages are only part of what workers earn. Benefits, such as health coverage, 401(k) plans, and paid sick leave are an increasingly large part of workers' earnings.

Economic theory says that companies will raise workers' earnings when their productivity rises, but it does not say that those increased earnings will take the form of cash wages. The correct comparison is between productivity growth and workers' total compensation, including benefits, not just the cash wages portion of that compensation.

The chart below shows such a comparison. Over the past forty years compensation per hour and output per hour—that is, productivity—have moved almost in unison. Productivity rose 110% since 1968, and total compensation rose 103%.

Q.E.D.

Thanks to Travis Walker for the pointer.


12 Comments:

At 6/19/2008 10:49 AM, Blogger K T Cat said...

Great post! I hadn't seen this before.

 
At 6/19/2008 10:58 AM, Anonymous Anonymous said...

I wonder what the CEO compensation curve looks like...

 
At 6/19/2008 1:01 PM, Anonymous Anonymous said...

Enjoying the irony of having a post on productivity on a blog considering the amount of time this blog consumes.

It is still a good post.

 
At 6/19/2008 2:44 PM, Anonymous Anonymous said...

A good counterpoint is presented at the following link.

http://www.nytimes.com/2008/04/09/business/09leonhardt.html

 
At 6/19/2008 5:12 PM, Anonymous Tom Armstrong said...

I believe also that the wage data does not differentiate between full-time and part-time workers. If so, and if we have seen a higher proportion of workers shifting to more part-time work due to increasing prosperity in America, that would tend to pull the median wage down, although all wages could in fact be increasing.

That would seem to be a valid point if indeed full-time and part-time workers are both included in determining the median wage and at the same time more people are working part time.

 
At 6/20/2008 7:03 AM, Anonymous Anonymous said...

More neocon drivel from Dr Mindless.

Again fails to see the forest for the trees. Even if compensation has risen with production, inflation has wiped out any net benefit. Of course, with increased competition, financial benefits of productivity gains (more product coming to market at less cost) are offset with price declines as sellers pile in to get higher prices which ultimately reach equilibrium.

Total academic no real world business knowledge. Typical of Universities.

 
At 6/20/2008 8:04 AM, Anonymous Anonymous said...

I guess that would mean your dollar goes further on all those cheap consumer goods.

Oops...it looks like your argument just verified the neo-con drivel there!

 
At 6/20/2008 9:54 AM, Anonymous EJ said...

Um... before you go on senseless attacks without knowing what a neocon is in the first place you need to get your facts straight. Productivity by definition is already inflation adjusted. Plus the compensation data series that is plotted is also inflation adjusted by the same metric used in the productivity series to stay consistant. That is explained in the title of the second chart and goes into more debth if you read the linked article. The relationship shown is true, between productivity and compensation. They grow hand and hand, which anyone who has a basic understanding of how supplya nd demand effect labor markets could tell you. This relationship is verified by both classical economic theory and emperical evidence.

 
At 6/20/2008 11:39 AM, Anonymous Anonymous said...

Furthermore, I suspect that the composition of a "median household" has changed over time, probably to include fewer members. If it also includes fewer earners, then there are additional questions to ask about this graph

 
At 6/21/2008 4:11 PM, Anonymous Don Boudreaux said...

In 1967, the average household in the U.S. contained 3.14 persons; in 2006 it contained 2.57 persons. This fact means that the real income for each member of the average household grew from $11,735 in 1967 to $18,755 in 2006 - an increase of 60 percent.

 
At 6/29/2008 6:08 PM, Anonymous Anonymous said...

[quote]More neocon drivel from Dr Mindless.

Again fails to see the forest for the trees. Even if compensation has risen with production, inflation has wiped out any net benefit. Of course, with increased competition, financial benefits of productivity gains (more product coming to market at less cost) are offset with price declines as sellers pile in to get higher prices which ultimately reach equilibrium.

Total academic no real world business knowledge. Typical of Universities.[/quote]


So while you accuse others of no having no business knowledge, you make ignorant, whimsical claims that would make even a 1st year econ student cry.

We're talking about "REAL COMPENSATION". That's economist jargon for "having eliminated the effects of inflation".

I'm absolutely baffled by your claim that more competition will wipe out the benefits of lower prices... hurts my head. You literally pulled that out of your ass. Pick up a book.

 
At 10/27/2008 11:40 AM, Blogger Professor Smartass said...

If accurate, this is an argument for controlling the cost of health insurance, through single payer or price controls, not only so employers can pass on more of the fruits of their labor to workers, but so workers can actually get their money's worth from their benefits.

Too much of the cost of health insurance goes to profits, advertising, executive salaries, and of course those legions of people who put you on hold for three hours only to ultimately tell you your insurance won't pay for the treatment you need.

 

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