Mind the Productivity Gap to Reduce Inequality

It isn’t only an American problem, but the U.S. has lessons to learn from other wealthy countries.

By Edward P. Lazear. Excerpts:

"How are American workers doing? Neither the middle class nor the poor have fared well in recent decades—but don’t blame tax cuts, a too-low minimum wage or the greed of the 1%. In rich countries around the world, the top half of the income distribution has been pulling away from the bottom half. Productivity growth among high-wage workers, driven by technological change, is the reason.

When measuring wage dispersion, economists frequently look at the 90/50 ratio—the wage of the worker at the 90th percentile divided by the wage of the worker at the median. In 2017 the 90th-percentile worker earned around $108,000, while the median worker earned around $45,000 a year—a ratio of 2.4. That’s an increase from 2.2 since 1997. Over the same period, the 50/10 ratio—the median wage divided by the wage at the 10th percentile—stayed flat, at 2.1."

"Half the country makes only a little more than 20 years ago.

In other rich countries the story is similar. In the U.K. and Germany over approximately the same two-decade period, the top half of earners gained relative to the bottom half. The same was true on average for 16 countries that belong to the Organization for Economic Cooperation and Development between 1997 and 2015.

Workers’ living standards depend on wage levels, not wage ratios, so it can be misleading to compare ratios. In Germany and the U.K., for instance, the 90/50 ratio is lower than in the U.S. But the median American worker earns 6% more than the median German worker and 17% more than the median British worker. Among the 18 OECD countries for which recent data are available, the U.S. ranks third in median earnings, despite having the third-highest 90/50 ratio."

"changes in trade and technology have raised the productivity of highly trained, highly educated workers relative to the less skilled. Wages tend to move with productivity, so that if differences in worker productivity grow, wage differences will also grow."

"Workers in the 90th percentile aren’t financiers. Instead, they are primarily college-educated managers and administrators, software and hardware developers, nurses, salespersons and supervisors. Median workers are typically those with high-school diplomas."

"Average productivity in the U.S. is high, but there are many Americans whose productivity is low because the U.S. educational system doesn’t develop real labor skills for those who don’t go on to college."