Compensation Closely Tracks Productivity: And Both Are Weak

Data suggest that wage-based workers have been severely under-compensated when considering how productive they have been.

A careful analysis of this seems to reflect the opposite.

The claims are based on an apparently flawed interpretation of the data, which suggests inflation-adjusted wages have declined 0.7 percent since 1973, while inflation-adjusted productivity rose 100 percent.

Much of this difference is the result of an under-reporting of total compensation (35 percent), a higher level of inflation applied to this compensation (44 percent), and an over-reporting of employee productivity (21 percent), according to The Heritage Foundation.

Wages measure hourly earnings of production workers and non-supervisory personnel: it excludes salaried workers and fringe benefits, such as healthcare, pensions, bonuses, all commissions, exercise stock options, education and transportation stipends, and other unusual forms of payment.

The Bureau of Labor Statistics estimates that these benefits comprise nearly 30 percent of wage-based compensation. As a share of total compensation, the figure may be approximately 20 percent, according to the Heritage Foundation. In fact, since 2001, benefits grew roughly 60 percent, while wages and salaries increased about 37 percent, says the BLS. Greater compensation accounts for 35 percent of the apparent differential.

The consumer price index — the inflation rate applied to total compensation for the purchase of consumer products — is much higher than the implicit price deflator — the price level applied to employee productivity for goods and services sold to consumers, businesses and foreign entities.

This is due to consumer recall bias of high ticket purchases — such as housing, gas and utilities — hedonic quality improvements, substitution for goods and services of comparable quality, and more accurate business reporting of input and output expenditures. Different inflation rates applied to compensation and productivity are responsible for 44 percent of the differential.

Labor productivity has also been overstated, since depreciation has not been taken into account.

As technological development has progressed in recent decades, so has product obsolesce: this requires replacement with no addition to income or productivity. Net domestic product per hour worked — which subtracts depreciation from gross domestic product (GDP) per hour of labor — has only risen 58 percent in the last 40 years, 11 percentage points lower than the 69 percentage rise in GDP per hour worked.

Also, overstatements of import prices suggest lower input quantities, and this artificially inflates productivity.

This dynamic has been exacerbated in recent decades as imports as a share of GDP rose significantly, from an average of 10 percent in the 1980s and early 1990s to 17.5 percent today.

These factors account for 21 percent of the differential.

All told, since 1973, average annual total compensation rose 1.5 percent, while annual productivity increased 1.8 percent.

In agreement with these results are Harvard Professor Martin Feldstein, the former President of the National Bureau of Economic Research; Dean Baker, director of the Center for Economic Policy Research and staff member of the Federal Reserve Bank of St. Louis; and Georgetown Professor Stephen Rose.

During the 25 years from 1948 through 1973, labor productivity rose 3.5 percent each year.

However, since then productivity increased a paltry 1.5 percent annually for 36 of those 42 years, according to the San Francisco Federal Reserve, the Bureau of Economic Analysis and the Bureau of Labor Statistics. Spanning the seven outlier years, from 1996 to 2003, productivity grew at a 3.5 percent clip during the internet boom.

This is not a very good record of achievement.

Making matters worse, median compensation rose less than average productivity, since productivity has increased less for lower-skilled labor than those in high-skilled technologically driven professions.

Since 2000, the Pew Charitable Trust estimates inflation-adjusted wages and salaries have fallen 3.7 percent among workers in the lowest tenth of the earnings distribution and 3 percent for those in the lowest quarter, while those near the zenith have seen a 9.7 percent rise.

How do we increase both compensation and productivity?

Lower the cost of education by implementing new technologies for effective content delivery and instruction geared toward global demand in the marketplace. Total cost of attendance at selective universities for one individual — including tuition, fees, housing and food — now exceed median household income by as much as 20 percent. This cost structure is stifling access to opportunity and innovation.

Reduce healthcare expenditures by implementing a payment system based on positive quality assessments — such as outcome benefits — instead of one driven by the quantity of product and services delivered. Healthcare purchases as a share of GDP rose from 5 percent in 1960 to nearly 20 percent today — a fourfold rise. This too undermines future robust economic growth.

Implement my tax plan, which will lower the cost of employment and capital to generate higher business investment, stronger productivity and greater income growth for the many.

There is a better way.

© 2015 Newsmax Finance. All rights reserved.

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