Economic Perspective: The Productivity-Compensation Gap

MARY WALDEN:

“Today’s program looks at the productivity-compensation gap. Mike, one of the big issues in the labor market over several decades is the apparent disconnect between labor productivity and labor compensation. Specifically, while theories suggest the two should rise at the same rate, productivity has been increasing much faster than compensation.”

“Some say this means workers are being shortchanged. Are they?”

MIKE WALDEN:

“Well to translate this some are saying what this means is that workers are working harder, they’re working better, they’re not being compensated for it. And if you look at the data, what you find is yes, indeed, if you take the conventional measures that shows up.”

“Now one explanation could simply be that the same number of workers aren’t producing an output, that businesses because they’re using more machinery and more technology, they’re using fewer workers. So it may look like workers are getting shortchanged, but that productivity is being created by fewer workers. And therefore the mystery is solved, it’s simply because the combination of machines and technology and workers has been changing.”

“Now another explanation has to do with the fact that you have to over time, when you’re looking at this combination of productivity and pay, you have to adjust the pay numbers for inflation. I think everyone would want us to do that. The dollar doesn’t go as far in the future as it did in the past so we have to adjust for inflation.”

“Now the question there however is that there’s lot of inflation measures. There are different inflation measures, and the curious thing is that when you use one kind of inflation measure you do find this puzzle, that productivity is going up but compensation is not.”

“But when you use a different inflation measure, in fact actually the one economists think is better, the difference goes away. Productivity is going up, but compensation is going up at about the same pace.”

“What’s the bottom line here? Well the bottom line is that yes, the labor market is changing. Workers are increasingly in competition with machinery and technology, but it doesn’t appear as if they’re getting shortchanged on the pay scale.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.