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Sunday, July 03, 2005

The Divergence of Wage Growth and Productivity Growth in Recent Years

What is causing the change in the relationship between productivity growth and wage growth in recent years?  Is this a temporary change, or has there been a permanent shift in the relationship?  Importantly, is the change driven by economic fundamentals or is it due to changes in the tax structure, regulation, immigration policy, trade policy, and rules regarding unionization?  Research is ongoing in these areas, but unfortunately it is too soon to answer some of these questions.  Not enough time has passed since the changes became evident to make definitive statements in many areas.  However, Robert Gordon at Northwestern University gives us an explanation of the driving force behind some of the changes, “Capital's share, he says, has increasingly found its way to upper-income families as stock options, dividends, special bonuses and the like.”  He also notes "We had much less income inequality in the first couple of decades after World War II because of strong unions, restricted trade and a decline in immigration," ... "Then all three reversed, which means that the income from productivity falls to the bottom line and for the time being stays there."  These quotes are from this article in The New York Times examining these and other issues:

Were the Good Old Days That Good?, By Louis Uchitelle, NY Times:  …  most Americans in the first three decades after World War II, took a rising standard of living for granted. … can it be that living standards are actually slipping in America?  No economist, demographer or historian would make that case. Living standards, after all, almost never go backward … But … the trajectory is no longer the steadily upward line ... Instead, the line appears to be climbing erratically. …

"When you talk about living standards, you have to focus on people in the middle," said Robert Gordon, an economist at Northwestern University. "A lot of the goodies … have gone to the people at the top at the expense of the broad mass of Americans in the middle."  Kevin Hassett, director of economic policy studies at the American Enterprise Institute, argues that … mainly the earned income tax credit [is] raising living standards for low-income families by more than many people realize. ... "… you have to look at their consumption, not their income, to gauge standard of living. And consumption has significantly outperformed income."

While income and consumption are the chief measures of a nation's standard of living, other … indicators … are not doing so well. Life expectancy … while still rising, has fallen behind that in France, Germany and Japan. Home ownership is at a record high for the population as a whole, but it has dropped since the 1970's for some groups - working families with children ... 25 percent of the nation's families also worry all or most of time that they won't be able to pay their bills. ...  And in many cases, public services are not holding their own. "Thirty years ago a lot of public goods were free, and now they are fee-based," said Michael Hout, a sociologist at the University of California, Berkeley. "Even the Grand Canyon charges, and many public schools are engaged in fund-raising. So public goods that contribute to living standards are more dependent today on family income."

The good news for the nation is that productivity … is rising. When it goes up, … [i]n theory, some of that revenue feeds back into the income of the workers, financing improvements in their standard of living.  ... From the late 1940's through 1973, productivity grew at an annual rate of nearly 3 percent, and incomes rose almost as briskly. Then came a horrific slowdown: productivity fell back to an annual growth rate of less than 1.5 percent from the mid-1970's to the mid-90's, and median income hardly rose at all.  The revival that started in 1995 brought productivity growth back to its old rate of increase, and for five years incomes also rose smartly. What happened next is tough for economists to explain. The productivity growth rate has stayed strong - rising at an average annual rate of just under 3 percent since 1995 ... But starting in 2000, median income, adjusted for inflation, has grown more slowly every year - and this year the increase is almost imperceptible.  "There is no question that a huge gap has opened up between productivity and living standards," said Jared Bernstein, a senior labor economist at the Economic Policy Institute.  Not since World War II have productivity and income diverged so sharply …

Productivity, as it rises, throws off more and more income, which is then distributed to capital in the form of profits, and to labor in higher wages, more paid hours and benefits.  Labor's share, which has historically represented 60 to 65 percent of the total, has fallen in the last five years to the low end of that range. But for Mr. Gordon at Northwestern, that is only part of the story. … living standards cannot be truly rising if the improvement is so unevenly distributed; in addition, they say, earning a living has become increasingly stressful.  Job security … has deteriorated. ...  People approaching the age of 65 face a different uncertainty: smaller retirement incomes than their parents enjoyed. That is happening as the nation shifts from a system of fixed monthly pensions to 401(k)-type accounts ... In the process, retirement income is falling from 93 percent of preretirement pay for today's retirees to 80 percent, on average, for the next generation, according to an Urban Institute projection. … Some retirees cannot afford the pension hit, and they continue to work.  … Choosing not to work is no longer an option for many families who need two incomes to pay what they consider basic expenses. Two of those expenses - health care and education - have risen faster than incomes … for education, the rising cost is mostly in the purchase of expensive homes in upscale areas known to have good public schools. … "The variation is extraordinary across school districts and even across schools in the same district," said Richard Murnane, an economist at Harvard's Graduate School of Education, "so when you ask about how good the schools are, the measure of central tendency is less interesting than the variation around the average."

Health problems also undermine living standards. Life expectancy at birth is one symptom. ... Height, too, is no longer an American hallmark. … Obesity is now a distinguishing feature. … "Once you are sick, we are doing a better job in treatment," Dr. Thorpe said. "The pace of technological development has probably accelerated since 1980 more than in previous generations. That's the good news. The bad news is that we have larger shares of the population who are sick."  For Dr. Thorpe, the much better treatment is clearly a big improvement in standard of living - offset, however, by the big increase in the incidence of illness. … “You can't have a rising standard of living," he said, "if you have people getting less healthy." ...

    Posted by on Sunday, July 3, 2005 at 02:07 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (7)

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