Productivity and Compensation

I promise from now on to be more regular in posting.

The Bureau of Labor Statistics (part of the U.S. Department of Labor) is a great source of raw data.  The online Monthly Labor Review takes a look at their data in more aggregate form, to highlight trends, etc.

I found the article in the January 2011 issue, "The compensation-productivity gap: a visual essay," to be particularly interesting.  True to its role of being a governmental body that tries not to be political or provocative, the BLS article merely presents the data without offering an interpretation.  But let's look at the data presented.

The article presents data on changes in labor productivity and labor compensation.  As the article notes:

"Productivity growth provides the basis for rising living standards; real hourly compensation is a measure of workers’ purchasing power. Increases in labor productivity—the most commonly used productivity measure—reflect investments in capital equipment and information technology, and the hiring of more highly skilled workers. Employers’ ability to raise wages and other compensation is tied to increases in labor productivity. Since the 1970s, growth in inflation-adjusted, or real, hourly compensation has lagged behind labor productivity growth."

The first chart shows this trend:

From the end of World War II until the mid-70s, compensation tended to track along with increases in productivity.  That is, employees shared in the benefits that businesses realized from increased productivity.  The gap began in the 1970s, and has widened ever since.

Chart 2 of the article breaks out these trends by selected periods:

This chart shows that average productivity growth was fairly high between 1947 and 1973, and compensation more or less kept up with productivity.  Productivity growth was much lower in the period 1973 to 1979, and compensation growth was also considerably lower than in the prior period.  Productivity growth, however, started coming back, increasing in every decade, until by the last decade productivity grew at nearly the same rate as it had grown in the period 1947-1973.

But in the period 1979-1990 compensation growth plummeted at the same time that productivity growth started its comeback.  The period 1990 to 2000 saw compensation increase much more strongly, although not at the same rate that productivity growth increased.  The period 2000 to 2009 saw productivity growth increase at the same time that compensation growth reversed course, and employees once again saw fewer benefits from their increased productivity.

While the periods are imprecise overlaps, the period 1979 to 1990 was predominantly during the Reagan/Bush Republican Administrations, while the period 1990 to 2000 was predominantly during the Clinton Democratic Administration. The period 2000 to 2009 was predominantly during the Bush Republican Administration.  Is it a coincidence that compensation growth was substantially lower during Republican Administrations?

I don't think so.  Policies matter, and while administrations cannot turn around an economy on a dime, they can affect economic trends.  Republican administrations are unabashedly administrations of "Business," and they can and do promote policies that benefit business, even if it is at the expense of business's employees, who also happen to be business's customers.

In short, do not be fooled into buying the claim that whatever is good for business is good for America.  The interests may or may not coincide.  Policies that promote strong labor laws and enforcement, on the other hand, do not penalize one particular business over another if they all need to follow the same rules.  At the same time, policies that promote increased labor compensation (or at least do not suppress it) will benefit business's customers, and benefit business as well.  A win/win.