Many Americans complain their incomes are not rising fast enough to offset inflation. The press and politicians echo this view and have declared it a major problem. In addition, some workers are distressed that compensation (wages and salaries plus benefits and bonuses) are not keeping up with the gains in labor productivity.
But is it true? To find the answer we have to go to the data. This is like wrestlers going to the mat. It’s a sweaty business of getting knocked around until you are dizzy, exhausted, banged up and unsure what happened.
Fortunately, the U.S. Bureau of Labor Statistics is there to answer our questions. Their latest data lets us compare the third quarter of 2014 with the same quarter a year earlier. We’ll look at non-farm business — that portion of the economy responsible for about 74 percent of Gross Domestic Product (GDP). To do that we exclude farming, government, nonprofit institutions and private households.
On this year-over-year basis, hourly labor compensation rose by 2.2 percent. After adjusting for inflation, real hourly labor compensation grew by only 0.4 percent. For a worker making $20 per hour, that’s a gain of eight cents or $3.20 for a 40-hour week.
Real output in the non-farm business sector rose by 3.1 percent in this period. The number of hours worked to produce that output increased by 2.1 percent. That means labor productivity (output divided by labor hours) increased 1 percent.
Some people, including many in the labor movement, argue that such an increase in labor productivity should be rewarded by a comparable increase in real wages. If you produce more you should earn more buying power.
This noble ideal does not mesh with reality. More than labor is involved in producing goods and services. For two centuries, we’ve increased uses for machinery. Owners of that equipment and the people who make it expect to see their share of rewards in those productivity gains. There are payments to be made to those who supply energy. Managerial innovation likewise enhances worker productivity (think of the assembly line) without increasing labor hours.
Most importantly, an hour of labor today is not necessarily equal to an hour of labor yesterday or 10 years ago. Today’s workers may know more about how to produce goods and services, to work with machinery, to be efficient when employing energy, (including bonuses) and to adapt to management changes.
The standard measure of labor productivity (real output divided by hours of labor input) is a number of decreasing usefulness. To link that number with real compensation is an error made too often. If increasing education raises output, without raising hours of work, then wages should rise as a payment for what economists call “human capital.”
We need to use different measures to answer that ancient question: “What is a just wage?”