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Stagnant wages vs. rising compensation

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The so-called Employee Free Choice Act (George Orwell call your office) would end secret ballots in union voting making it easier for unions to organize. A bunch of economists signed an ad in today’s Washington Post [2] in favor of the Act. I hope to write more on this, but for now, I’ll focus on the opening paragraph of the ad:

Although its collapse has dominated recent media coverage, the financial sector is not the only segment of the U.S. economy running into serious trouble. The institutions that govern the labor market have also failed, producing the unusual and unhealthy situation in which hourly compensation for American workers has stagnated even as their productivity soared.

This alleged disconnect between wages and productivity and the stagnation of wages is sufficient proof to some that labor markets are broken and an increase in unionization is necessary to protect workers from exploitation.

Here is one noted economist’s response to a similar claim made by Michael Lind a while back citing the same disconnect. Can you guess who it is? No googling. (HT: David Bieler):

One of America’s new intellectual stars is a young writer named Michael Lind, whose contrarian essays on politics have given him a reputation as a brilliant enfant terrible. In 1994 Lind published an article in Harper’s about international trade, which contained the following remarkable passage:

“Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs — an abundance of the sort created by the globalization of the labor pool for US-based corporations.” (Lind 1994: )

What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.

More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor’s share of national income — and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.

The answer is here. [3]