COMPENSATION AND LABOR PRODUCTIVITY

The relation between wages and worker productivity is a key determinant of the standard of living of the employed population.

According to research by economist Martin Feldstein, the share of national income going to employees is at about the same level as it was in 1970. But the use of an incorrect inflation adjustment has resulted in skewed findings showing a large and increasing gap between productivity and wages:

• The doubling of productivity since 1970 represented a 1.9 percent annual rate of increase, while real compensation per hour rose at 1.7 percent per year.
• Between 2000 and 2007, productivity rose at a more rapid 2.9 percent per year and compensation rose nearly as fast, at 2.5 percent per year.
• Total labor compensation has been remarkably stable since the 1970s, at 66 percent of national income in 1970 to 65 percent in 2007.

Feldstein concludes that two principal measurement mistakes have led some analysts to erroneously conclude that labor income growth has not kept up with productivity growth. The largest is a focus on wages rather than total compensation; because of the [often mandated] rise in non-cash benefits, wages have not risen as rapidly as total compensation.

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