Evaluating the free market by comparing it to the alternatives (We don't need more regulations, We don't need more price controls, No Socialism in the courtroom, Hey, White House, leave us all alone)
For a taste of what is at stake in this dispute, consider first a figure from the annual Economic Report of the President published by the White House Council of Economic Advisers Annual in 2022:
As Winship points out, versions of this figure, showing how worker
compensation has not kept up with productivity, are a hardy standby in
reports that seek to show unfairness in the US economy.
But when you look at the labelling of the figure, you notice that
“productivity” is “net total economic productivity,” which refers to the
entire economy, with the “net” meaning that depreciation of capital has
been subtracted out.” The “nonsupervisory compensation” raises
questions of what workers are being included here.
When Winship does his preferred calculations, one of the graphs looks like this:
Notice that productivity and pay now line up closely. Notice also
that the variables are defined a little differently. Now “productivity”
is in the “nonfarm business sector,” meaning that government,
nonprofits, and agriculture are left out. All “paid employees” in this
part of the economy are counted, which leaves out the self-employed, and
may not be the same as “nonsupervisory workers” in the previous graph.
Or here’s an alternative measure from Winship.
Again, pay and productivity are lining up. In this case,
“productivity” is measured in the “nonfinancial corporate sector,” which
is a subset of the “nonfarm business sector” that also leaves out
finance.
I should emphasize that all of the underlying data here is from
official US government sources like the Bureau of Economic Analysis and
the Bureau of Labor Statistics. Thus, a fundamental underlying lesson
here is that what may seem to be small differences on the labels of
figures actually represent rather different concepts. Here’s are a few
of the issues that Winship points out:
The category of “nonsupervisory” workers from the first figure leaves
out about 20% of private sector employees, as well as excluding
government and a growing share of self-employed workers. Thus, comparing
this group to “total economic productivity” might mislead.
Part of the gross domestic product that measures the entire economy
is called “gross housing value added.” For renters, this is measured as
what they pay in rent. For owned homes, the government statisticians
figure out “imputed” rent–that is, the rent a homeowner would have paid
themselves for living in their own house. As Winship writes:
One reason that economy-wide productivity has increased faster than
compensation is that gross housing value added has increased more than
the parts of GDP that involve goods and services primarily produced by
workers.19 But this divergence does not actually indicate that workers
are not being paid in accordance with their value to employers. The
housing sector of the economy should be left out of analyses comparing
productivity and pay, which is one reason many researchers look at the
nonfarm business sector.
Winship argues that if one compares apples-to-apples, “Over 75 or 100
years, aggregate worker pay has closely tracked increases in
productivity. Pay differences across industries, across firms within
industries, and within firms all seem to correspond with productivity
differences.”
However, he also argues that productivity differences have occurred
unequally across the US economy–between industries, between firms in a
given industry, and even within individual firms–and so even if average
wages track average productivity, the distribution of both productivity
and wages has become more unequal. He writes (footnotes omitted):
We lack individual-level measures of productivity, but much of the
evidence we have points to growing productivity inequality across
individual workers. First, productivity inequality has increased across
industries. For instance, industries with workers who have higher
educational attainment have higher productivity. Industries with a
higher level of education in 1989 saw stronger productivity growth
through 2017.
Productivity inequality has also increased across firms. Moreover,
both wage inequality and productivity inequality have risen primarily
across firms in the same industry, as opposed to within firms or across
industries. Research finds that firms with workers who are more
productive pay them higher wages—with everyone from the lowest-paid to
the highest-paid employees benefiting. Moreover, increases in a firm’s
productivity lead to increases in its employees’ pay.
Growth in productivity inequality across firms resembles growth in
their wage inequality. One study analyzing firms in the US from 1977 to
2007 found that both productivity inequality and wage inequality between
firms rose, with productivity inequality rising more. These increases
occurred within each of eight industries as well. … Not only has
productivity inequality grown across industries and firms, but it likely
has increased within firms too. A recent paper finds that firms with
higher productivity have a larger wage gap between their highest- and
lowest-paid workers. Even more strikingly, increases in firm
productivity raise the pay of all the firm’s employees, but not equally.
The highest-earning workers in a firm with productivity growth receive a
bigger earnings boost than do the lowest-earning workers. These
findings suggest that more productive firms are more productive
disproportionately because of the highest earners—that their
productivity is greater than that of lower-paid workers.
I have written several times over the years about the growing
divergence in productivity across industries and firms, even firms
within the same industry (for example, see here, here, and here.
It seems to be an international phenomenon. Over time, those firms
lagging in productivity will adapt or shrink, but the process can take
some time."
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