No “Great Decoupling”

by Don Boudreaux on March 6, 2014

in Competition, Myths and Fallacies, The Hollow Middle

In tomorrow’s Wall Street Journal, Liya Palagashvili (one of GMU’s finest econ students) and I challenge the claim that the past 40 years have witnessed both a “great decoupling” of worker pay from productivity and a decline in the economic fortunes of ordinary Americans.  A slice:

Mr. [Martin] Feldstein and a number of other careful economists—including Richard Anderson of the St. Louis Federal Reserve Bank and Edward Lazear of the Stanford University Graduate School of Business—have compared worker pay (including the value of fringe benefits) with productivity using a consistent adjustment for inflation. They move in tandem. And in a study last year, João Paulo Pessoa and John Van Reenen of the London School of Economics compared worker compensation and productivity in both the United States and the United Kingdom from 1972-2010. There was no decoupling in either country.

The empirical reality in both countries is consistent with economic reasoning. Firms cannot afford a misalignment of their workers’ pay and productivity increases—the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Competitive markets also deliver the goods, so to speak, to workers in their role as consumers. Higher productivity means the prices of consumer goods and services decline as output increases. As this happens, workers’ spending power—their real income—is enhanced.

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