Compensation and Productivity
Does compensation always catch up with productivity? CEA Chairman Edward Lazear thinks so. Blogger Calculated Risk doesn’t. Which one is right? Turns out it depends on how you measure compensation.
Lazear presents a chart showing real compensation apparently following productivity closely. Compensation gets just slightly ahead in the 70s and falls just slightly behind in the 90s, but the two series always seem to catch up with each other (except at the very end, but that’s another story). Calculated Risk presents a couple of other charts which show more divergence. In particular, when he uses 1947 as the base year, compensation appears to follow productivity until the early 1970s and then falls farther and farther behind.
Why are their results so different? It turns out they are using different deflators for compensation. Lazear apparently uses the product deflator for the nonfarm business sector to produce his real compensation series. Calculated Risk uses the “real hourly compensation” series from the Bureau of Labor Statistics, which is produced using a consumption deflator. (I can’t figure out exactly what series the BLS uses to deflate compensation. It may be some version of the CPI or a consumption deflator from the national accounts. In any case, it appears to follow consumer prices.) In other words, Lazear measures compensation in terms of what people are producing (the “product wage”), whereas Calculated Risk measures compensation in terms of what people can buy with their compensation (the “consumption wage”).
Why do these two deflators produce such different results? They actually produce similar results until about 1970, and then they diverge. Something new has been happening in the last 35 years. To put it in general terms, many of the things Americans produce (computers, for example) have been getting cheaper, but most of the things Americans buy (health care, for example) have been getting more expensive. Much of the productivity growth we have experienced has been in the production of investment goods. That kind of productivity growth benefits the people who (indirectly) buy those investment goods, but it doesn’t help today’s workers very much (unless they’re also investors).
Lazear presents a chart showing real compensation apparently following productivity closely. Compensation gets just slightly ahead in the 70s and falls just slightly behind in the 90s, but the two series always seem to catch up with each other (except at the very end, but that’s another story). Calculated Risk presents a couple of other charts which show more divergence. In particular, when he uses 1947 as the base year, compensation appears to follow productivity until the early 1970s and then falls farther and farther behind.
Why are their results so different? It turns out they are using different deflators for compensation. Lazear apparently uses the product deflator for the nonfarm business sector to produce his real compensation series. Calculated Risk uses the “real hourly compensation” series from the Bureau of Labor Statistics, which is produced using a consumption deflator. (I can’t figure out exactly what series the BLS uses to deflate compensation. It may be some version of the CPI or a consumption deflator from the national accounts. In any case, it appears to follow consumer prices.) In other words, Lazear measures compensation in terms of what people are producing (the “product wage”), whereas Calculated Risk measures compensation in terms of what people can buy with their compensation (the “consumption wage”).
Why do these two deflators produce such different results? They actually produce similar results until about 1970, and then they diverge. Something new has been happening in the last 35 years. To put it in general terms, many of the things Americans produce (computers, for example) have been getting cheaper, but most of the things Americans buy (health care, for example) have been getting more expensive. Much of the productivity growth we have experienced has been in the production of investment goods. That kind of productivity growth benefits the people who (indirectly) buy those investment goods, but it doesn’t help today’s workers very much (unless they’re also investors).
Labels: economics, income distribution, inflation, labor, macroeconomics, wages
posted by knzn at 7/18/2006 11:07:00 PM
13 Comments:
The productivity data includes a real compensation data series that Lazear is probably using. But according to the footnote in the productivity press release the real compensation series is based on the cpi.
But it is based on the cpi-- I do not know what is the difference, but somebody at BLS could probably tell you as they are very good at answering such questions-- and I wonder if much of the difference can be attributed to housing that has a much bigger weight in consumption then in production.
According to the note under Lazear’s chart: “These data cover all persons (including supervisory and proprietors) in the nonfarm business sector. The real product wage is hourly compensation divided by the price index for nonfarm output.” I assume he means the price index for nonfarm business output.
It’s interesting that the data include proprietors. I didn’t notice that before. I wonder how they calculate compensation for proprietors.
"Much of the productivity growth we have experienced has been in the production of investment goods."
I thought this view was debunked (initially Gordon said it was all in IT, but then changed his mind). That retail productivity was been soaring too; indeed, I think most gains have come from Walmart etc.
Also, does the consumption deflator just include domestic goods or international. That is, I hope it accounts for cheap goodies from China (which certainly have raised my purchasing power).
Also, knzn, buck up. Lets get real here. Would you get a greater utility from a given real wage today or thirty years ago. Really, the real wage per se is pretty meaningless. Thats just a means to another end, that is, welfare. What matters is the consumer surplus yielded from the real wage. I dont think anyone can deny that thats a lot higher today that in yesteryear. It always vexes me when your political allies claim that, today, people are worse off than thirty years ago; thats just ridiculous.
But, I agree with the fact that real wage growth has been slow and thats obviously not good. The problem is, the benefits have come in terms of health insurance etc and other fringe benefits. Given the value of economic choice, Id much rather have just higher real wage growth and to hell with these fringe benefits; dont distort compensation, ultimately let the employees decide.
Oh, knzn, I see my point relates to another post of yours.
If utility is not diminishing with rising wealth, though, this hardly bolsters the traditional case for redistribution. Maybe even marginal utility is higher for the top 1%, since they're now "addicted" to a high lifestyle and need to purchase new versions of old luxuries. This would suggest we ought to redestribute from the poor to the rich to promote social welfare. See?
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