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Fri Feb 3 11:57:35 PST 2006

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DIVIDING THE PIE
Feb 2nd 2006  

To whom have America's productivity gains gone?

CONVENTIONAL wisdom has it that there is something odd about America's
current economic cycle. Productivity growth, notwithstanding a sharp
slowing at the end of 2005, has been stellar. But workers have not
shared in this prosperity: wages have been squeezed, while firms make
record profits. Whether the cause lies with cheap Chinese workers,
soaring medical costs or weakening unions, the common perception is
that today's productivity boom, unlike earlier ones, has done Joe
Sixpack little good.

This dissonance between wage and productivity growth drives a good deal
of political argument in Washington, DC. Republicans point to
productivity gains to claim that the economy is strong. Democrats, in
turn, focus on weak wage growth in arguing that America is on the wrong
track. 

Both sides are wrong, because comparing wage and productivity growth is
less simple than it sounds. As Ian Dew-Becker and Robert Gordon, two
economists at Northwestern University, point out in a new paper*[1],
much of the apparent dissonance is purely statistical. The two most
widely cited measures of wage and productivity growth in America--the
growth of real hourly wages and of productivity in the non-farm
business sector, both published by the Bureau of Labour
Statistics--ought never to be compared, though they often are. They
cover different bits of the economy; the hourly wage numbers do not
include the value of non-wage benefits, such as health care; and the
two measures are often translated into real terms using different
deflators. 

Mr Gordon is a prominent, and controversial, dissector of productivity
growth. (He is best known for arguing in the late 1990s that, properly
measured, America had not really seen a productivity revolution outside
the computer sector. He has since changed his tune.) In this paper, he
and Mr Dew-Becker point out that once you measure compensation growth
and productivity growth on a similar basis, compensation has trailed
productivity only by a little since 2001. Put another way, labour's
share of national income has fallen, but this has not fully unwound a
substantial rise in the late 1990s. Indeed, the authors claim that it
was higher in early 2005 than in 1997. So it is stretching the truth to
say that America's workers overall have not gained from the recent
productivity boom.

That does not mean, however, that all or even most workers have seen
the fruits of faster productivity growth. Which workers benefit depends
not just on labour's overall share, but also on changes in the
distribution of wage income. And it is well known that inequality has
risen in America in recent decades as incomes at the top, in
particular, have soared. By just how much is clear from a data series
constructed by Emmanuel Saez, of the University of California,
Berkeley, and Thomas Piketty, of the Ecole Normale Superieure in Paris.
These economists calculated a long-run distribution of income in
America from information on tax returns.

GUESS WHO GOT THE CREAM
Their latest study&#8224;[2] shows that the top 1% of Americans now
receive about 15% of all income, up from about 8% in the 1960s and
1970s. Virtually all that rise came from marked increases in labour
income. The share going to the top 1% is back to where it was a century
ago. But whereas the elite's income then came largely from capital,
today's rich gain their money from work. 

Messrs Dew-Becker and Gordon use these tax-based data and map the
shifts in income distribution on to changes in productivity growth
between 1966 and 2001. They find that the bottom 90% of workers saw
real wages rise, on average, by less than (economy-wide) productivity.
Only the best-paid 10% enjoyed real increases in compensation in excess
of average productivity growth. And within this group, the spoils were
concentrated at the very top: over one-third of this decile's gains
went to the top 1% of earners. 

What is more, Messrs Dew-Becker and Gordon find that during the
productivity spurt at the end of the period studied this long-term
trend continued. The share of labour income going to the top 10% of
workers increased slightly, compared with the entire period. That going
to the best-paid 1% increased substantially. The skewed distribution of
productivity gains is thus less a new phenomenon than a secular trend. 

These results might not surprise anyone who has looked closely at the
evolution of American income inequality. And there are some flaws in
them: Messrs Dew-Becker and Gordon simply assume that non-wage
benefits, which do not appear in the tax-based data, make up a similar
share of all workers' income. This surely raises top people's estimated
share of the pie. But the results are striking nonetheless and raise a
further question: what lies behind this secular rise in top incomes?

Here the productivity guru is less helpful. Most labour economists
think the biggest cause of increasing wage inequality has been a rise
in returns to education and skills, thanks largely to technological
change. Mr Gordon and his colleague disagree, arguing instead that
increased payments to superstars, such as baseball players, and
out-of-control pay rises for chief executives, are more plausible
reasons for the rise in inequality. There may be something to this: the
wage packets of today's sports stars and executives make the eyes
water. But the authors' explanation of this is thin; and there are too
few of these people to account for the trend they identify. Still,
their work should bring clarity to an often confused debate. That
debate will rage on.

* "Where Did the Productivity Growth Go? Inflation Dynamics and the
Distribution of Income.[3]" NBER Working Paper no. 11842, December 2005

&#8224; "The Evolution of Top Incomes: A Historical and International
Perspective.[4]" NBER Working Paper no. 11955, January 2006

-----
[1] http://www.economist.com/#footnote1
[2] http://www.economist.com/#footnote1

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