The U.S. productivity farce

May 4, 2012

Economists don’t agree on much but they do tend to converge on one idea – productivity improvements are the key to long-term prosperity. Except that who benefits from productivity increases matters as much as the efficiency gains themselves, according to two reports from the liberal Economic Policy Institute in Washington.

The first finds that rising income inequality in the United States means that the benefits of better productivity are accruing mainly to the very wealthy. The EPI offers this startling nugget of data as basic food for thought: U.S. productivity grew 80.4 percent from 1973 to 2011, while average hourly compensation rose just 39.2 percent in the same period, and median compensation, which excludes outliers, gained a paltry 10.7 percent.

Writes Lawrence Mishel, EPI president and author of the reports:

Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth.

John Tasini, a labor activist who made an unsuccessful bid for the U.S. Senate in 2006, puts the disparity in perspective by calculating what the minimum wage would be if its rise had kept up with productivity growth, as it did before the mid-1970s.

The minimum wage today, if it reflected productivity gains over the last 30 years, should be between $19-$20 an hour. Raising the minimum wage, then, to $8.50 an hour seems like a big deal – except when you understand that it hides the vast robbery that has taken place of the past 30 years and it certainly will not make it possible for people to live with dignity and respect.

In his second report, the EPI’s Mishel links high levels of income inequality – and the resulting gap between productivity and average incomes – to the rapid growth of the financial sector, which has benefited from the implicit expectation of government support. He notes:

Executives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005.

From 1978 to 2011, CEO compensation increased more than 725 percent, a rise substantially greater than stock market growth and the painfully slow 5.7 percent growth in worker compensation over the same period.

So what does the 0.5 percent annualized drop in U.S. first quarter productivity reported on Thursday suggest about the future? Tom Porcelli, chief U.S. economist at RBC Capital Markets, says the stagnation in the numbers bodes poorly for an already sluggish employment recovery:

Productivity growth continued to trend close to 0% in 1Q and if past is prescient, this dynamic could prove ominous for job growth going forward. There have been nine instances since the early 1970s when productivity was trending similar to today – in other words, falling towards or below 0% on an annual run-rate basis.

Only in two of these instances was private employment growth one year hence actually faster – in the 1987/88 recovery and right before the mid-cycle slowdown in 1993/94 (though in this second case we did eventually see weaker employment growth following a double-dip in productivity growth in early 1995). In seven of the nine instances where employment growth slowed, it slowed by a non-trivial -4.0 percentage point (median) from the pace it was running at when productivity fell towards/through 0% year/year for the first time.

We are not saying that today’s productivity slowdown begets a decline in payroll growth of that scale, but if history is any guide it does suggest the employment backdrop remains quite challenged.

One comment

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As a grocery store cashier for Stop and Shop, I make a little over minimum wage. My salary is $8.30 an hour and for the amount of work that I do, I feel that I am underpaid. It is back braking work where you are on your feet for hours per shift. You are constantly asked to do more than your job requires. If you work a six hour shift, you ONLY get a 15 minute break. There have been times where I have worked over 7 hours and have ONLY gotten a 15 minute break. Our store does over a million in sales per week and I would love it if they were to up our salaries.

Mary MacElveen

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