It’s become conventional wisdom in some circles that sometime in the 1970s, the link between pay and productivity broke. Workers’ productivity kept rising, but their inflation-adjusted pay did not. “The divergence between the two trends suggests that there may be forces suppressing the pay of workers relative to their productivity,” President Biden’s Council of Economic Advisers wrote in 2022.
The reality is more complicated. There is a problem in the labor market — a big one — but it’s not about employers winning against workers. It’s more about some workers winning big while most don’t. In short, it’s a problem of inequality, not subjugation by management.
I’m building this newsletter on the following two charts, which appear to contradict each another. The first, from the center-left Economic Policy Institute, shows a huge gap opening between pay growth and productivity growth. The second, from the center-right American Enterprise Institute, shows no such gap.
Both charts are correct in the sense that they are accurately plotting real data. The main source of the discrepancy is that they define pay and productivity differently, in ways that create very different impressions of economic reality. That, anyway, is what I figured out after speaking with scholars from both organizations: Josh Bivens, the chief economist at the Economic Policy Institute, and Scott Winship, a senior fellow at the American Enterprise Institute, who has a new report, “Understanding Trends in Worker Pay Over the Past Fifty Years.”
(Economists reading this will know that this is a long-running debate that I’m just scratching the surface of. James Sherk, formerly a research fellow of the Heritage Foundation, among others, has challenged the Economic Policy Institute argument, and Economic Policy Institute economists have responded. Winship has some new things to say in his report.)
Labor productivity, the heart of the issue, is the output per hour of work. If you work late to finish a project one week, you’re not more productive by the government’s definition, because your higher output was achieved through more hours of work. But deciding what to count as output and what to count as labor input gets tricky. There are also many ways to measure pay.
The Economic Policy Institute gets its alarming results since the 1970s in part by charting the pay only of private-sector production and nonsupervisory workers. That’s not everyone. Pay rose faster if you include supervisors and the self-employed. For people at the top, pay rose as fast or faster than economywide productivity. The problem hasn’t been the pay of workers overall, but the pay of production and nonsupervisory workers.
Also, the Economic Policy Institute includes a form of “output” — namely housing services — that involves very little labor. Housing services have grown faster than the parts of the economy that do depend on more labor input, making productivity growth seem stronger by the Economic Policy Institute measure.
The American Enterprise Institute chart minimizes the problem of comparing apples and oranges by focusing on the same sector — nonfarm businesses, excluding farms, government, housing services and other stuff — for both the pay and the productivity data.
What is clear is that median pay has not kept up with economywide productivity growth since the 1970s. That comes through even in one of Winship’s other charts (not shown). The median person — the one who earns more than half the population and less than the other half — has been left behind because pay raises have been concentrated at the top.
Winship attempts to show in his report that this imbalance isn’t necessarily unfair because the pay of people at each tier is pretty closely connected to their productivity. “Research finds that firms with workers who are more productive pay them higher wages — with everyone from the lowest-paid to the highest-paid employees benefiting,” he writes. In other words, people at the top are getting paid more because, he argues, they’re contributing more. People at the median or below haven’t earned comparable raises because they haven’t lifted their productivity as much. I find this mostly convincing, although I doubt it explains the enormous pay packages of C-suite types.
This doesn’t mean there’s no problem, he says, but it better focuses what the problem is. “Rather than say that economic growth benefits only people at the top, the conversation should be shifting to, ‘How do we get more people to have the skills and experience so they can earn more?’” Winship told me. That’s partly on employers, who need to give workers better tools and more training.
The problem of sluggish pay at the median affects both men and women, but men had it worse until recently, according to Winship. “Women have seen much stronger compensation growth than men — an increase of 84 percent versus 30 percent,” his paper says. Decades ago, he argues, men were overpaid relative to their productivity on the theory that they were their families’ breadwinners. Their relatively poor pay growth since then corrected for that, and now men and women’s pay-for-productivity are rising similarly, he argues. The shift from a manufacturing to a service economy has also hurt men’s pay relative to women’s.
“The evidence here suggests that, rather than take seriously claims that the American economy is broken, policymakers should look for ways to raise economywide productivity and the productivity of working- and middle-class earners specifically,” Winship’s paper argues.
Bivens responded by email when I asked him for his reaction. He wrote, “We’d readily concede” that the gap between pay and productivity is “much, much smaller” when looking at averages, which by definition include the people at the top. He added: “But that’s kind of our whole point — rising inequality within wage income means that the average of this wage income will rise far faster than wage incomes for the vast majority.”
He claimed that Winship has not proved that the higher pay going to people at the top is closely connected to their higher productivity.
He wrote that he stands by including housing services in his measure of output because “housing services matter a lot for how well the economy is or isn’t delivering rising living standards to families.” In any case, he said, they don’t have a big impact on the results.
Bivens wrote that he agrees with Winship that “we really, really could use much faster productivity growth.” He wrote that de-unionization, stagnation of the federal minimum wage, “toleration of excess unemployment in the name of fighting inflation” and other measures that squeeze labor have been bad for both fairness and economic growth. “And the growth bit could use a bit more attention from everybody, including the left,” he concluded.
The Readers Write
As a manager who just had to go through the hiring process, I noticed that recent college grads have been given bad advice from their elders. One told me his dad told him that since it was an entry-level position, he could come casually dressed. Another said she was told to ask me no more than two questions. She also shared that her mom told her she should ask for and expect feedback on how she did. Human Resources forbids providing that feedback as it comes with potential legal ramifications.
Darrell Grant
Maryland Heights, Mo.
Sometimes not finding the work you think you want is a blessing. It teaches you to work harder, learn new skills and manage your time and money. There are life lessons to be gained while searching for the job you think you want. Sometimes you learn you are good at doing something different from what you planned.
Mary Jane McCarthy
Falmouth, Mass.
We’ve been saying “learn to code” and treating that as a permanent fix for job market struggles. In a world where labor markets are always in flux, there’s no such thing as a safe haven. The best we can do is train flexible graduates who can adapt to endlessly shifting conditions.
Fredrik deBoer
West Haven, Conn.
I come from Italy. I graduated in law in the middle of the pandemic in March 2020. I still have not found a job aligning with my goals and aspirations, notwithstanding my efforts. Maybe when doors close, a gate will open, but I’m knocking so much my fists are starting to hurt. Sometimes I simply cannot understand where I’m going wrong. Today I was very sad. When I read your articles I felt less alone.
Valeria Costantino
Catania, Italy
Quote of the Day
“Humans have a more complex motivational structure and more capability to solve social dilemmas than posited in earlier rational-choice theory. Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century. Extensive empirical research leads me to argue that instead, a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans. We need to ask how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of more effective, equitable and sustainable outcomes at multiple scales.”
— Elinor Ostrom, Nobel Memorial Prize in Economic Sciences lecture (Dec. 8, 2009)