Americans frequently hear that workers work harder than ever,
but do not reap the fruits of their labor. A simple comparison of
productivity and wage growth seems to confirm this trend. However,
productivity and wage growth are not directly comparable. Looking
at everything workers earn-not just cash wages-and adjusting both
series with the same measure of inflation shows that productivity
and compensation have risen in tandem. In fact, workers' pay is
more directly tied to their performance than a generation ago.
Congress should not legislate to correct an imbalance between wage
and productivity growth because this difference does not exist.
Gap Between Wages and Productivity
Many analysts contend that there is a widening gap between what
workers produce and what workers earn. They point out that workers'
productivity has risen sharply over the past 40 years, but wages
have not risen nearly so quickly. This concern also appears
frequently in the news, especially with the current economic
troubles. A superficial look at the data appears to
validate these concerns. Chart 1 shows the growth of productivity
and median family incomes since 1968. While productivity has more
than doubled, median incomes have risen only 26 percent.
It appears that wages have not risen in step with productivity.
This appears to contradict economic theory, which says that
competition will force companies to raise workers' pay when
productivity increases. Many commentators suggest shareholders and
CEOs are appropriating the gains from workers' increased
productivity for themselves. Workers are baking a bigger pie, so to
speak, but eating smaller slices.
Apples to Oranges Comparison
This picture is misleading because comparing wage and
productivity growth is like comparing apples to oranges. The two
are not directly comparable for two reasons.
First, the government measures productivity and wage growth
differently. The Bureau of Labor Statistics uses a different method
to adjust productivity for inflation than it uses to adjust
wages. A simple comparison of these two series
reveals the differences between these two measures of inflation,
not the actual difference between wage and productivity growth.
Second, wages are only part of what workers earn. Benefits, such
as health coverage, 401(k) plans, and paid sick leave are an
increasingly large part of workers' earnings. Economic theory says
that companies will raise workers' earnings when their productivity
rises, but it does not say that those increased earnings will take
the form of cash wages. The correct comparison is between
productivity growth and workers' total compensation, including
benefits, not just the cash wages portion of that compensation.
No Gap Between Compensation and
To make an apples to apples comparison of productivity and
workers' pay, one needs to look at total compensation, and use the
same measure of inflation to adjust both series. Chart 2 shows such
a comparison. Over the past forty years compensation per hour and
output per hour-that is, productivity-have moved almost in unison.
Productivity rose 110 percent since 1968, and total compensation
rose 103 percent.
The gap between wages and productivity exists only because some
analysts compare figures that are not directly comparable. Making
the correct comparison eliminates that gap. As workers become more
productive, competition for these increasingly productive workers
forces businesses to pay their employees more.
Workers' Share of Income Constant
More evidence that the gap between earnings and productivity is
illusory comes from looking at employees' share of national income.
If workers have become more productive and businesses have not paid
workers for their increased productivity, then workers' share of
national income would fall. Someone else-such as business owners or
shareholders-would be reaping the financial gains from workers'
heightened productivity. This has not happened. Chart 3 shows
employee compensation as a percent of national income over the past
Over the past 40 years the compensation that companies pay their
employees has held constant at slightly over 70 percent of national
income, never deviating more than a few percentage points from that
number. In the first quarter of 1968 employee compensation was 69.9
percent of national income. In the last quarter of 2007 it was 70.6
percent. Business owners are not denying workers the fruits of
Wages More Strongly Tied to Productivity
In fact, the opposite has happened. Businesses have dramatically
increased their use of performance-based pay, such as commissions,
piece-rate pay, and performance bonuses, over the past generation.
Workers are much less likely to be paid just an annual salary or
hourly wage than in the past. Between 1976 and 1998 the proportion
of jobs using some method of performance pay rose from 30 percent
to 45 percent. Today half of all salaried workers receive
performance pay. The increase in performance-based pay explains
almost all the increase in inequality among the top fifth of income
earners. Workers' pay today is more directly tied to their
productivity than ever before.
There is no gap between productivity and compensation. Simple
comparisons of productivity and wage growth are misleading because
the two data sets are not directly comparable. The government uses
different measures of inflation to adjust wages and productivity
for inflation and wage measurements do not include benefits.
Looking at total compensation, not just cash wages, and using the
same measure of inflation shows that both compensation and
productivity have doubled over the past 40 years. The share of
national income that goes to workers' compensation has also stayed
constant. Employers are not hoarding the gains from workers
increased productivity. Workers' pay is actually more closely tied
to their productivity now than in the past. Congress should not
legislate on the mistaken belief that workers' earnings are lagging
James Sherk is
Bradley Fellow in Labor Policy in the Center for Data Analysis at
The Heritage Foundation.
Jared Bernstein and Lawrence Mishel, "Economy's Gains Fail to Reach
Most Workers' Paychecks," Economic Policy Institute Briefing
Paper #195, September 3, 2007, at http://www.epi.org/content.cfm/bp195 (May
Consumer Price Index is used to adjust wages for inflation, and the
Implicit Price Deflator is used to adjust productivity growth for
Thomas Lemieux, W. Bentley MacLeod, and Daniel Parent, "Performance
Pay and Wage Inequality," NBER Working Paper No. 13128, May 2007,
p. 17, at http://papers.nber.org/papers/w13128 (NBER