Thursday, 20 November 2008

Productivity and wages

Recently there has been discussion on a number of blog about productivity, here at Anti-Dismal I wrote this and this, at tvhe there was this, at Kiwiblog there was this, at The Inquiring Mind there was this and at The Standard there were, unfortunately, this and this. One issue that has risen in this discussion is the relationship between productivity and wages. I quoted Paul Krugman as saying
Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)
Following up this, the information below comes from a paper by Martin Feldstein, Professor of Economics, Harvard University and President and CEO of the National Bureau of Economic Research [he has since retied from the NBER post], given to the American Economic Association on January 5, 2008. The paper is entitled "Did Wages Reflect Growth in Productivity?" Feldstein writes,
The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity.

More specifically, the doubling of productivity represented a 1.9 percent annual rate of increase. Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same nonfarm business sector output price index.

In the period since 2000, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).
and later he says
The relation between wages and productivity is important because it is a key determinant of the standard of living of the employed population as well as of the distribution of income between labor and capital. If wages rise at the same pace as productivity, labor’s share of national income remains essentially unchanged. This paper presents specific evidence that this has happened: the share of national income going to employees is at approximately the same level now as it was in 1970.
So when measured correctly, productivity and wage do roughtly move together over time. For the US at least.

Stephen Gordon at the Worthwhile Canadian Initiative blog provides this graph of productivity and wages in Canada.

In Canada, real wages are tracking productivity fairly closely.

1 comment:

matt b said...

Wages and productivity also move in lock step in Canada:

http://economistsview.typepad.com/economistsview/images/prod2916.gif

and across countries, see Martin Wolf “Why Globalization Works,” (2004) figure 10.1 p. 176.