Productivity and Pay
This is a very nice piece from Dean Baker of the CEPR on the delinking of real worker pay from labour productivity growth in the US.
I’ve argued for years, with much of the left, that average worker pay has lagged productivity growth mainly because of the increased bargaining power of capital vis a vis labour due to “globalization”, attacks on unions etc etc. That story is true, and capital’s share has risen sharply in Canada as across all OECD countries, but things are also a good deal more complicated.
I crunched the Canadian numbers a few years ago and found more or less what Dean documents for the US:
For a start, productivity growth (real output per hour) is exaggerated, in that capital depreciation rates have increased in the computer/infotech age. Growth of net output per hour or “usable” productivity growth thus lags growth of gross output per hour. (When I last checked this was broadly true of Canada as well.)
Second, real wages (adjusted for consumer price inflation) lag the growth of real output per hour, since consumer prices have been rising faster than economy-wide prices in recent years. Again computers play a major role since their real price, and thus the real price of investment goods, have been declining. (I think in the case of Canada there is also an important potential discrepancy between consumer prices and the GDP deflator since resources loom high in GDP but are largely absent from personal consumption.)
Third, hourly wage growth has lagged total labour compensation growth, since compensation has become more tilted to benefits (especially health benefits.) (This I’ve checked recently, and is also true of Canada though probably to a lesser extent than in the US. EI and CPP premium increases a few years back also squeezed the money wage portion of labour compensation.)
Dean’s overall conclusion is well-taken – yes, labour’s share has been squeezed by returns to capital, but this does not explain a large chunk of the gap between pay and productivity growth.
Finally, as Dean reminds us, the widely-noted trend in average real pay relative to productivity does not capture a key trend of concern – the shift of labour compensation to the very high end of the wage distribution.
I encourage anyone with the time and inclination to reproduce Dean’s study for Canada