Tuesday, 26 January 2010

Productivity and wages

In an earlier posting I wrote that Trevor Mallard had been blogging his support for an increase in the minimum wage. Mallard wrote
Business NZ would squeal. But most employers know that lifting wage rates encourages investement in capital equipment and training to make their labour force more productive. It is all part of the movement to a high skill, high wage economy.
I also noted that, yes, there is a relationship between productivity and wages but it runs the opposite way to what Trevor claims. Over time if you make people more productive, wages will increase.

Following up this, the information below comes from a paper by Martin Feldstein (George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research) 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 roughly move together over time. For the US at least.

1 comment:

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