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What’s wedged between productivity, living standards?

Opinion pieces and speeches by EPI staff and associates.


What’s wedged between productivity, living standards?

By  Jared Bernstein

In a speech last month, President Bush asserted that “as the workforce is more productive, higher wages follow; that’s just a fact of life.”

Well, working Americans are learning that the facts of economic life are changing. In 2005, as in several previous years, the workforce was a lot more productive but its real wages — what its paychecks can buy — flat-lined or fell.

Despite the fact that 2005 marked the fourth year of an economic expansion that began in late 2001, the median worker’s wage fell 1.3 percent; for low-wage workers the decline was greater: 1.9 percent.

Even among the college-educated, the average wage was stagnant. It was only earners at the tippy top of the wage scale who saw some marginal gains: The 95th percentile increased 0.6 percent.

The critical point is that these losses occurred in a year when the overall economy was up solidly; productivity grew 2.7 percent; and unemployment averaged 5.1 percent, low by historical standards. You’d expect numbers like that to give a boost to living standards throughout the pay scale, not just at the top (profits have soared over this business cycle).

What happened? One explanation is that rising health costs squeezed workers’ paychecks. That is, employers just shifted money from the wage to the benefits side of the compensation package. But the evidence doesn’t support the claim.

First, just under half (47 percent) of the workforce doesn’t get health coverage through the job, so this argument doesn’t apply to these people. Second, employers’ health-care costs rose more slowly in 2005 than in any other year since 1999, in part because rising costs have led to less coverage. Finally, it wasn’t only wage growth that slowed last year; overall compensation growth (wages plus benefits) also slowed, and by the end of the year it, too, lagged inflation.

Speaking of inflation, with last year’s spike in energy costs, we needed faster wage growth to beat faster price growth. By some measures, wage growth did accelerate a bit, but not by much, and certainly less than you might have expected, given the supposedly taut conditions in the job market.

In fact, job growth has been unimpressive by historical standards, and so we’ve not been able to build the type of pressure in the job market that created a solid link between wage growth and productivity in the latter 1990s. True, we added 2 million jobs over the course of last year, but during the same amount of time in the prior recovery, payrolls grew by 3.5 million jobs.

Compared with all prior recoveries that lasted at least as long as this one, employment grew half as fast last year.

In terms of explaining these unsettling outcomes, sub-par job growth just reinforces the need to address the central question of the American economy today: What factors are getting between the growth in the overall economy and the living standards of working families?

Why does the economists’ mantra — that average living standards will rise with productivity growth — no longer hold true?

The answer is inequality: the ever-increasing gaps in opportunity, bargaining leverage, and access to the fruits of growths by most of those responsible for their creation. Rising productivity creates the potential for broadly shared prosperity, and in earlier periods, unions, full-employment job markets, and balanced trade ensured that the potential was realized.

In the absence of these distributional mechanisms, the growth of inequality has been inexorable, and the productivity-wage link has been severed. What’s more, there appears to be a bipartisan consensus that pushing back against these forces through progressive taxation, greater labor protections, universal health coverage, higher minimum wages, and a host of other corrective policies is incompatible with global competition.

There’s no reason to believe that these damaging inequalities are the price of success in today’s economy, and no compelling evidence that equalization measures such as those above would stay the invisible hand. On the contrary, if we don’t take steps to reconnect productivity growth and living standards, eventually the vast majority will feel little reason to support an economic system that’s failing to return a fair share of the growth they themselves are creating.

Jared Bernstein  is a senior economist at the Economic Policy Institute in Washington, D.C.