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Snapshot for August 18, 2004

Worker compensation lagging behind productivity gains

One of the few bright spots in the current economy is fast productivity growth, which has increased 11.1% since the fourth quarter of 2001.  Since economists consider productivity (i.e., output per hour worked) to be a key economic determinant of living standards, this fast pace would normally have positive implications for working families.  Yet, as the figure below reveals, workers’ compensation has consistently lagged productivity growth over this period.

Since the start of the recovery, inflation-adjusted compensation has only increased 3.4%, less than one-third the growth rate of productivity.  Real wages and salaries are falling even further behind.  Since the recovery began, wages have been stagnant, and have fallen in absolute terms in the past two quarters.

To the degree that higher benefit costs are driven by the higher cost of health care, the increased dollars being spent on employee benefits do not result in improved benefits.  Additionally, employers have been required to make larger contributions into defined benefit pension plans than they did during the stock market boom. While this translates into higher compensation costs, it does not improve living standards for workers. And for those who do not receive benefits from their employers (a significant number of workers, as less than 50% of workers at the bottom half of the wage distribution receive health benefits and only 20% of all workers have defined benefit pension plans), total compensation is likely falling even more sharply behind productivity.

This picture of compensation growth lagging productivity is closely linked to the remaining slack in our labor market.  With employment still down 1.2 million jobs since the recession began, and unemployment essentially unchanged since the recovery began in late 2001, many workers lack the bargaining power to claim their fair share of the growing economy; thus, most of the benefits of growth have flowed to profits, not compensation.  In this climate, the assumption that productivity growth will translate into rising living standards across the income spectrum cannot be sustained.

Today’s Snapshot was written by EPI economist  Elise Gould.