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No Benefit for Workers from Productivity Gain

May 4th, 2012
in econ_news

Econintersect:  A new study by the Economic Policy Institute (EPI) finds that most of the productivity gains of the past forty years have gone to profit for productivity-smallcapital and much less to increased income for labor.  The biggest divergence between the growth of productivity and a typical worker’s compensation has occurred in the period since 2000.  The study found that there was almost a 1:1 relationship between improved productivity and worker pay from 1948 to 1973.  Lawrence Mishel, president of EPI, says in a press release by that organization that the divergence of pay and productivity is largely responsible for the growth in income inequality in the U.S.  The report previews data from the 12th edition of “The State of Working America,” which will be released in August.

Follow up:

Here are some highlights from Mishel in the press release:

  • The share of income that is wage income for workers has decreased as, correspondingly, the share for unearned income (dividends, interest, profits) accruing to wealth holders has increased.
  • The compensation of the median worker has grown much more slowly than compensation for the highest-paid workers.
  • Workers have suffered worsening terms of trade, meaning the price growth of things workers buy has grown more quickly than the price growth of things workers produce.
  • The growing inequality of compensation was the most significant factor driving the gap between productivity and median compensation in the entire 1973-2011 period. However, from 2000 to 2011, when the gap grew the fastest, the shift of income from labor to capital played the largest role.

Two revealing graphics from the source reports, the first from Mishel and the second from Mishel and Gee:

Note: Click on any graph for a larger image.

productivity-Mishel-2012-April-fig-1

productivity-Mishel-2012-April-chart-31

One very interesting aspect of the second graph above is it shows that benefits as a share of total compensation were rising until 1983; since then the ratio of benefits to wages has been quite constant except for the higher wage distortion at the end of the dot.com bubble in the late 1990s.

The research reported here is related to observations in a working paper on challenges facing private investment by John Lounsbury posted in October, 2011. In that work there are two graphics that are important to relate to the Mishel work. The first shows real disposable income changes since 1961. There was a marked change in real disposable income in the second half of the 1970s decade.

real-disposable-income-growth-1962-2011

The end of the red line and the start of the green line are shown as 1979. That was an arbitrary choice. The change date could have been as early as 1973, which would correspond to the start date for the productivity / wage gain divergence noted by Mishel.

The second graph from Lounsbury shows the ratio of compensation for employees, paid (COE) divided by the value of the S&P 500 index. COE is taken as a proxy for return to labor and the stock index as a proxy for return to capital.

compensation-of-employees-vs-sp-500

This ratio shows a well-defined peak in 1982, nine years after the divergence shown in the Mishel analysis. This is not necessarily surprising since the two studies are using data representations that are not tightly related, especially for the two measurements used to represent return to capital.

So, whether it started in 1973 or in 1982, both studies provide clear demonstrations of the decline of return to labor relative to capital starting 30-40 years ago.

John Lounsbury

Sources:

Hat tip to Barry Ritholtz at The Big Picture









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