Slow Productivity Growth, Not Just Income Redistribution, to Blame for Lagging Wages

For Immediate Release: April 10, 2007

Contact: Lynn Erskine, 202-293-5380 x115 

Washington, DC: The slowdown in productivity growth from 1973 to 2006 compared to the early post-war period is sharper than is generally recognized, according to a report by the Center for Economic and Policy Research (CEPR).

The paper, The Productivity to Paycheck Gap: What the Data Show, by economist and CEPR Co-Director Dean Baker, makes a series of adjustments to the most common measure of productivity growth (i.e., non-farm business sector) as well as to measures of wage growth, to determine the extent to which lagging wages can be blamed on weak productivity growth vs. income redistribution. 

Lagging wage growth since 1973 is most often discussed as the result of an upward redistribution of income from typical workers to profits and higher paid workers. However, the report shows that "usable" productivity — productivity growth that translates into higher wages and living standards — has been considerably slower since 1973 than in the period 1947-73.

The paper shows that:

• From 1973 to 2006, the rate of total economy productivity growth has been 0.3 percentage points less than the rate of productivity growth in the non-farm business sector. This is due to the fact that reported productivity growth in the government, household, and institutional sectors is considerably lower than the rate of productivity growth reported for the non-farm business sector.

• There has been a growing gap between gross output and net output in the years since 1973 as an increasing share of GDP goes to replace worn-out capital goods. Only net output can raise living standards, since the portion of output that goes to replacing depreciated capital equipment cannot directly affect living standards. A net measure of annual productivity growth is nearly 0.2 percentage points lower than a gross measure for the years from 1973-2006. By contrast, the two measures were nearly identical over the period from 1947 to 1973 as the share of output going to depreciation changed little over this period.

•  The consumption deflator used to measure real wages has shown a much higher rate of inflation than the output deflator used to measure productivity growth. This is due to the fact that the price of many consumer goods and services, like health care and education, have risen more rapidly than investment goods like computers.

•  If the U.S. economy could have sustained its 1948-73 rate of productivity growth it would be more than 80 percent larger today. This could have allowed for major increases in incomes and/or more leisure time.

"Policies that redistribute income upward, yet fail to increase growth — such as the removal of trade barriers, deregulation of major industries and weaker unions — have hurt the vast majority of U.S. workers," said Baker.