Busting the Myth That Earnings Lag Productivity

One of the most common arguments in favor of “progressive” economic programs, including a higher minimum wage, higher taxes on capital and labor, broader labor market regulation, and expanded overtime pay, is that workers have become more productive but have not received a corresponding rise in wages.

For instance, Senator Elizabeth Warren (D-MA) claims the minimum wage would be $22 an hour if it had risen at the same rate as productivity since 1960. She says this because from 1973 through 2012, productivity increased by 100 percent, but average inflation-adjusted hourly wages fell by 7 percent. However, the argument that workers are not receiving the fruits of their labor is based on misleading analysis, an apples to oranges data comparison.

Average hourly wage data only measure hourly earners, omitting salaried employees. These data also leave out benefits that employees receive, such as health insurance, pensions, vacations, and sick leave. The value of these benefits has risen substantially over the past half-century. Accounting for them leads to a 30 percent rise in total compensation since 1973, compared to a 7 percent decrease when only hourly wage data are analyzed, calculated economist James Sherk of the Heritage Foundation.

In addition, Warren’s calculations use the Consumer Price Index to adjust for inflation. This index has been well-documented to overstate the level of inflation, and many government agencies have stopped using it. Using the more accurate Implicit Price Deflator for Non-Farm Business, used by the Congressional Budget Office and the Bureau of Economic Analysis, together with the combination of salaried workers and total compensation, brings the increase in earnings up to a 77 percent increase since 1973.

These data changes leave a 23 percent gap between productivity and total compensation growth since 1973. But this gap is inflated because the BLS measure of productivity is overstated. When a company imports a cheap input, such as rubber to make running shoes, it becomes more productive. The increased productivity is credited to workers by the BLS, when really management’s decision to import the production input was responsible. Further, the BLS measure of productivity does not account for faster depreciation rates. Modern technology has a particularly high depreciation rate. Would someone really want to use a computer from the early 2000s, even if it was still functional?

With a few adjustments to make the data more accurate, productivity and total compensation growth track each other closely. But it is not surprising that flawed conclusions and recommendations result from inappropriate data.

Interested in real economic insights? Want to stay ahead of the competition?  Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.