Distribution of Productivity Gains and the Structure of Society

Written by Sig Silber

Since the early 1970s in the U.S. there has been a growing divide between productivity gains and compensation gains for labor as a technology revolution has occurred, globalization of production has introduced labor from low-cost countries and the implementation of inexpensive automation has occurred. Personal income growth has slowed dramatically (and even stagnated) for significant periods of time. Productivity and profits, on the other hand, have continued along the same trend line, even accelerating since the mid-1990s.

We have all seen Exhibits such as the below:

Source: http://www.epi.org/publication/ib330-productivity-vs-compensation/

Note: Hourly compensation is of production/non-supervisory workers in the private sector and productivity is for the total economy.

Source Note: Author’s analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series.

Questions

When I see such a chart I think of many questions to which I would like to have answers including:

A. Is the visual appearance meaningful or artifact? There are always issues when you superimpose two data series on top of each other. And the start date makes a difference.

B. If the graphic is valid, what is the cause of the apparent discontinuity starting around 1970? That of course is a very interesting question and the author of that article makes some suggestions and I can think of other possible reasons as well including the growth of conglomerates and possibly even the closing of the gold window. But I am not trying to analyze the causes in this article.

C. What if any are the impacts on our economy and political system? Obviously this is a very complex topic and not as easily answered as one might think. Some of the impacts one thinks might be a result of this apparent failure to translate productivity increases into rising compensation levels throughout the income spectrum would be:

• Reduced aggregate demand leading to slower growth.
• Lower employment
• Slower recovery from recessions
• Political instability.

At this point I am only raising the question: are any of these the result of the divergence between productivity growth and compensation growth.

We know that if productivity grows at about 2 percent per year and if population grows at about 1 percent per year, we should expect about 3% per year growth in GDP. It probably has been about half that perhaps a bit more the past three years. So it is a natural question the extent to which a high percentage of incomes not growing with increases in productivity might be constraining economic growth and exacerbating some of the obvious conflicts that complicate our ability to govern the Nation.

D. What if anything should or could be done about this divergence? Today I would like to talk about this using a stakeholder framework. Who are the stakeholders and what might be their perspectives?

Stakeholders in the Economy

Workers

Clearly one major stakeholder group suggested by the graphic would be workers. Their position might include two themes. As workers and citizens of the U.S. should they not benefit from productivity gains? And can businesses succeed without workers? Is not the worker now responsible for having a more complex system function properly and in some cases protecting the new technology? As an aside, this question possibly could require a more careful definition of productivity increases. Is the output per worker increasing with all other factors being held constant or is the output per worker increasing due to changes in other factors such as but not limited to improved or increased capital per worker?

Owners / Capital

The owners of the business of course would reply that they are putting up the investment, taking the risk, and using good judgment as to what technology will lead to increased productivity. Are they not entitled to be rewarded for entrepreneurial endeavors?

Consumers

And of course the consumer certainly desires to have productivity gains result in either lower prices or more utility per dollar of expenditure. Does that argument have any merit?

Taxpayers

The taxpayer comes into the equation in many ways but one important way relates to an apparent correlation between welfare payments and low compensation levels. If the benefits of increased productivity are not translated into higher compensation levels but instead to greater profits or lower prices and the taxpayer is forced to subsidize some of the lower-paid workers, does the taxpayer have a legitimate beef?

Note: This raises the question of political ideology. Conservatives tend to be concerned about tax revenues being used to subsidize the employment of workers who are not participating in the gains from technology (whether or not the benefits of this subsidy accrue to the employer or consumers) and Liberals should be concerned about the impact of the psyche of people having to accept public assistance when actually employed and providing full services to employers. Although the purchasing power of the recipient is the same whether it be wages, employer provided benefits or public welfare, I would assume that the employees would be happier if they were receiving higher levels of compensation. Thus it would appear that this is an issue that may cut across the ideological divide but in slightly different ways.

Government

And finally but this is not a necessarily complete list, government may maintain that productivity increases is not something that is accomplished in all cases by individual businesses or even the private sector collectively. Some would maintain that the government has societal stake in the economy. Does government have a right to share in the bounty of increased productivity?

There are many questions; few answers.

Conclusion

I cannot resist making one suggestion as to how to improve the situation. It is a general rule for receiving more for what you are selling and that is product differentiation. Individual workers need to be able to differentiate their contribution to a business and not be viewed as a fungible commodity. I see this being increasingly important as technology continues to increase productivity. There is a responsibility here for business to create meaningful jobs and for our educational system to produce workers who not only are able to differentiate themselves but know how to convey the benefits of their unique skills to employers.

This may be the challenge that will determine the stability of our economic system going forward. Gains in output per hour of employment are likely to continue to occur and the dynamics causing what appears to be a very extreme distribution of the gains from technology should in the absence of other information be assumed to have the same impact on income distribution going forward. If this increase in productivity also tends to reduce the labor participation rate, then we should expect labor markets where undifferentiated labor predominates to lead to situations where labor has little bargaining power. Thus an increasing Gini Coefficient is likely to be a characteristic of our economy which one assumes will be increasingly problematical. Plus the solutions that readily come to mind may themselves be unpalatable.

The most obvious and direct (and probably in the long run) best solution is to create more complex and thus better jobs and adopt policies that allow the economy to grow more robustly. What might be seen as short run fix is to raise the minimum wage. This probably would both reduce income inequality among the employed but stimulate increased capital substitution for labor thus increasing unemployment in previously low-wage sectors as an initial impact. But perhaps this would increase aggregate demand and hopefully create other jobs elsewhere in the economy. It is not clear how this would net out. Would it be a cure or would the cure be worse than the disease? It would certainly change the nature of our economic system. Whatever the course, perhaps both Democrats and Republicans have to take responsibility for less than optimal strategies being pursued.

Thus that which seems to some to be simply an oddity in the data may increasingly be seen as a serious problem. The productivity – compensation wedge may be one that could drive a wedge into the entire structure of society.

• Is this wedge one that must be addressed to avoid ending a political economic era.
• Are the distributions of economic gains a challenge on which we will falter?
• Or can all stakeholders somehow share in the gains from productivity?