Saturday, February 26, 2011

Widening income-productivity growth gap and inequality

I have blogged earlier about the concerns posed by widening inequality across the world. Conventional wisdom on widening inequality has attributed it to the explosive growth in incomes at the top of the distribution. It is argued that there has been a sharp increase in the returns on higher education, manifested in the spectacular incomes of financial sector workers and corporate executives. They claim that while incomes elsewhere have increased, it is just that those at the top of the pyramid have increased much faster.

This argument overlooks another important trend at the other end of the income spectrum. It now emerges, from the latest figures released by the BLS in the US, that changes in workers real hourly compensation has been lagging labor productivity growth. This effectively means that in relative terms, workers are getting squeezed from both side. On the one side, incomes of those at the top are exploding. On the other hand, their own incomes are not even keeping pace with productivity growth.

The graphic above, of growth of productivity and real hourly compensation in the nonfarm business sector, is striking for atleast couple of reasons. One, the gap between labor productivity and real wages of workers has been widening since the eighties. Two, even as productivity growth has been sharply rising over the past three decades, wage growth has remained small. In fact, even as productivity growth rate increased from nineties to the first decade of this millennium, the wage growth rate declined.

An excellent essay by BLS provides more interesting insights into the reasons for the widening compensation–productivity gap. This gap is a function of two trends - the growth rate of prices and the labor's share in output. If the price deflator rises faster than the income growth, then the purchasing power falls and the compensation-productivity gap grows. The same outcome occurs if the share of the total output accounted for by workers compensation falls.

As indicated earlier, the compensation-productivity gap has widened sharply since the eighties in the manufacturing sector, in a sharp break from the trend earlier.

The consumer prices have grown much faster than implicit price deflator of manufacturing output since early eighties.

Finally, labor's income share of manufacturing sector output has been in constant decline since the seventies.

Update 1 (7/3/2011)

From mid-2009 through the end of 2010, output per hour at US non-farm businesses rose 5.2% as companies found ways to squeeze more from their existing workers. But the lion’s share of that gain went to shareholders in the form of record profits, rather than to workers in the form of raises. Hourly wages, adjusted for inflation, rose only 0.3%, according to the Labor Department. In other words, companies shared only 6% of productivity gains with their workers. That compares to 58% since records began in 1947. Only in the recovery from the deep recession of the early 1980s, when inflation-adjusted hourly wages fell 0.4%, did workers do worse than they have in this recovery.

Update 2 (14/1/2013)

Nice graphic that captures how the productivity gains have been captured by capital at the cost of labor.

Emmanuel Saez has found that the top 1% of households captured 65% of all the American income growth in the 2002-07 period. Another study has found that 1/3rd of the overall increase in income going to the richest 1% has resulted from the surge in corporate profits.

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