Wages, Productivity, and Inequality
Wages Fail to Keep Pace With Productivity Increases, Aggravating Income Inequality
Since the end of 2000, gross domestic product per person in the U.S. has expanded 8.4%, adjusted for inflation, but the average weekly wage has edged down 0.3%.
That contrast goes a long way in explaining why many Americans tell pollsters they don't believe the Bush administration when it trumpets the economy's strength. What is behind the divergence? And what will change it?
Some factors aren't in dispute. Since the end of the recession of 2001, a lot of the growth in GDP per person -- that is, productivity -- has gone to profits, not wages. This reflects workers' lack of bargaining power in the face of high unemployment and companies' use of cost-cutting technology. Since 2000, labor's share of GDP, or the total value of goods and services produced in the nation, has fallen to 57% from 58% while profits' share has risen to almost 9% from 6%. (The remainder goes to interest, rent and other items.)
The Bush administration's defenders, and many private economists, say wages are bound to catch up. "Everything we know about economics and historical experience is that when productivity goes up, real wages go up, too," says Phillip Swagel, a scholar at the conservative American Enterprise Institute who worked in the Bush White House. It took a couple of years for wages to catch up with accelerating productivity in the late 1990s, he says. "This time, it's taking three, maybe four or five."
Another factor holding down wages is that employer-paid health benefits, pensions and payroll taxes have risen almost 16% since 2000, making employers less generous with wages.
In addition, it appears that the highest-salaried workers -- executives, managers and professionals -- are widening their lead on the typical worker....
Many economists predict that with the U.S. unemployment rate below 5% now, workers will regain their leverage. Indeed, wages have picked up recently.
Still, wage inequality may continue to rise. Lawrence Katz, an economist at Harvard University who worked in the Clinton administration, says the wage gap has been growing for the past 25 years, particularly between the top and the middle. He believes the biggest factor is technology, which has complemented the skills of the well-educated while rendering redundant routine skills of many in the middle.
Question for Ec 10 students: According to the neoclassical theory of distribution, real wages depend on productivity. What is the relevant measure of wages for this theory--cash wages or total compensation (cash wages plus fringe benefits)? Which is the better measure of economic well-being? According to neoclassical theory, if the cost of fringe benefits rises, holding other things constant, what happens to compensation and cash wages?