Have Wages Kept Up With Productivity Growth?

In his new book "The Big Squeeze: Tough Times for the American Worker" (excerpted here), NYT's labor reporter Steven Greenhouse writes of a seemingly new relationship between wages and productivity in the current economic cycle:

"Even though corporate profits have doubled since recession gave way to economic expansion in November 2001, and even though employee productivity has risen more than 15 percent since then, the average wage for the typical American worker has inched up just 1 percent (after inflation). With the subprime mortgage crisis threatening to pull the economy into recession, some economists say this may be the first time in American history that the typical working household goes through an economic expansion without any increase in income whatsoever."

In past cycles, wages and productivity have managed to rise at the same pace, give or take a couple of years, but that's not been the case this time around. The view that's emerged then is that a greater share of the economic pie is going to businesses.

Harvard's Martin Feldstein begs to differ, however, arguing that most analysts are comparing apples and oranges when looking at productivity and wage growth.

The argument is technical (nice summaries here and here), but it boils down to how wages are adjusted for inflation. Feldstein says that wages should be deflated using the prices of what people produce, not what they consume: The gap between productivity and wages declines from 1.2 percent to 0.4 percent between 2000 and 2006 when adjusting for inflation using product prices as opposed to consumer prices.

This doesn't completely wipe away the discrepancy, but Feldstein makes the case that the remaining gap could be "a natural result of the rapid rise in capacity utilization (from about 75 percent in 2001-02 to nearly 82 percent in 2006-07) or of the capital deepening that occurred during these years."

Another compounding factor is that health care and other fringe benefits make up a greater portion of total compensation now than in 1970. Back then, wage and salary payments made up 89.4 percent of compensation, but that figure declined to 80.9 percent by 2006 making charts likethe one on this page somewhat misleading.

Still, if even this argument is theoretically correct, it's likely not "organically" correct, and why you don't hear too many politicians step up to defend it -- even in the Wall Street Journal. Somehow, it doesn't feel pleasing to know that more and more of your income is being taken up by health care inflation or that the proper comparison of productivity and compensation growth disregards what people do with that compensation: buy things like gas and food. And this might perhaps be why "fewer Americans now than at any time in the past half century believe they're moving forward in life."

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