Compensation HAS risen with productivity gains

[Toro]

This runs against conventional wisdom, so I'd like your thoughts.

Many pundits, politicians and economists claim that wages have fallen behind productivity gains over the last generation. This "decoupling" explains allegedly stagnant (or in some versions of the story, declining) middle-class incomes and is held out as a crisis of the market economy.

This story, though, is built on an illusion. There is no great decoupling of worker pay from productivity. Nor have workers' incomes stagnated over the past four decades.

The illusion is the result of two mistakes that are routinely made when pay is compared with productivity. First, the value of fringe benefits—such as health insurance and pension contributions—is often excluded from calculations of worker pay. Because fringe benefits today make up a larger share of the typical employee's pay than they did 40 years ago (about 19% today compared with 10% back then), excluding them fosters the illusion that the workers' slice of the (bigger) pie is shrinking.

The second mistake is to use the Consumer Price Index (CPI) to adjust workers' pay for inflation while using a different measure—for example the GDP deflator, which converts the current prices of all domestically produced final goods and services into constant dollars—to adjust the value of economic output for inflation. But as Harvard's Martin Feldstein noted in a National Bureau of Economic Research paper in 2008, it is misleading to use different deflators. ...

Consider, for instance, that between 1970-2006 the CPI rose at an average annual rate of 4.3%, while the GDP deflator rose only 3.8%. Economists believe that such a difference arises because the CPI is especially prone to overestimate inflation. Therefore, much of the increase in the real purchasing power of workers' pay is mistakenly labeled by the CPI as mere inflation.

Mr. Feldstein and a number of other careful economists—including Richard Anderson of the St. Louis Federal Reserve Bank and Edward Lazear of the Stanford University Graduate School of Business—have compared worker pay (including the value of fringe benefits) with productivity using a consistent adjustment for inflation. They move in tandem. And in a study last year, João Paulo Pessoa and John Van Reenen of the London School of Economics compared worker compensation and productivity in both the United States and the United Kingdom from 1972-2010. There was no decoupling in either country. ...

Donald Boudreaux and Liya Palagashvili: The Myth of the Great Wages 'Decoupling' - WSJ.com

[MENTION=21524]oldfart[/MENTION]
[MENTION=41066]Kimura[/MENTION]

 

[Bombur]

It is annoying when an article references work but then doesn't link to it.

I have a hard time taking anyone from George Mason at face value.

 

[DGS49]

It's easy to be dismissive of people with whom you disagree. But the factors considered are public information and easily verifiable. It is obviously a case of not wanting to hear things that go against your world view. "Don't bother me with facts!"

As for the OP, there is no reason why wages should mirror gains in productivity, when those gains have nothing to do with the value added by the wage earners. If I, as a capitalist, invest in an expensive machine that, say, partially automates a painting process on my assembly line, why should the painter get a raise? His job is actually easier now, and he has done nothing to add to his own productivity.

If, on the other hand, the worker makes himself more productive through better knowledge and skills, more power to him. Give him a raise.

But statistically there is no reason why, overall, productivity should mirror wages.

An anecdote, if you please: When I was in college I worked a couple summers at a toy factory, where we made plastic "hobby-horses." The plastic horses were put on an assembly line where they were trimmed, painted, coated with protective flim, and the accessories mounted. There were maybe 15-20 stations on the assembly line.

The busy season was Summer, and most of the line workers only worked 4-5 months a year.

There was a manual control on the motor that powered the assembly line - unknown to most of the workers. When they first started in the Spring, the line moved fairly slowly, as the workers got used to their work. Every week the foreman would, after work on Fridays, crank up the speed just a little bit, so that by the end of the production season in September, the line was moving twice as fast as at the start. And most of the workers never noticed the difference.

Everyone working on the line got 10c over MW. And they were glad to have those jobs. No union. I have never worked anywhere else in my life where the workers has as good a time at work as at that company. Or maybe my memory is just bad.

 

[Bombur]

It's easy to be dismissive of people with whom you disagree. But the factors considered are public information and easily verifiable. It is obviously a case of not wanting to hear things that go against your world view. "Don't bother me with facts!"

The guy referenced multiple studies but didn't establish what studies he was talking about. That is just annoying because I would prefer to look at the actual studies and not an op-ed about them from someone from GMU (a place that is biased).

 

[william the wie]

Anything on decoupling the other way? The shift of jobs from China back to the US started to trickling in in January with the Foxxcom deal and is expected to increase massively in 2015 and is likely to cause a labor shortage. Also energy costs are starting to trickle down so real wages are likely to spark sharply up.

 

[Kimura]

[MENTION=2926]Toro[/MENTION]

I'm in Shenzen, this is a fascinating article, you caught me by surprise. Literally. I just remoted in. Seriously, your're posting an article from a Murdoch rag? I'm giving douchy PPTs for like three days on mezzanine finance to chinks that don't care and it's an open bar.

I'll compile some FRED data, you know me. There's MULTIPLE red flags just reading this shit. The authors shouldn't have been given a soapbox.

 

[Toro]

Great! I'm looking forward to seeing it.

 

[Rshermr]

Great! I'm looking forward to seeing it.

The literature out there is heavily weighted toward the findings of increased income distribution inequality during recent years. And relative to the great recession, that was particularly true. The wealthy got a really large piece of the pie, while the lower 95 yo 99% got little to none of that pie.

The impact on the recession was great. That increasing income redistribution inequality makes recovery a whole lot more difficult:

"The paper by Barry Z. Cynamon and Steven M. Fazzari, economists working with the Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis, says that stagnant income for the “bottom 95 percent” of wage earners makes it impossible for them to consume as they did in the years before the downturn.
Consumer spending, which drives 70 percent of the U.S. economy, dropped sharply during the recession. And while it has picked back up in the years since for the top 5 percent of wage earners — which the Census Bureau defines as households making more than $166,000 a year — “there is no evidence of a recovery whatsoever for the bottom 95 percent,” Fazzari said."
Income inequality hurts economic growth, researchers say - The Washington Post

Taking quotes from Libertarian "economists" writing for the wsj, from George Mason, totally lacks integrity. Simply wastes people's time.

 

[TakeAStepBack]

Great! I'm looking forward to seeing it.

I doubt, as history has shown, you'll receive that.