Presentation: Productivity and Pay: Is the link broken ... · These charts show the coefficient...

Productivity and Pay: Is the link broken?

Anna Stansbury and Lawrence Summers

November 2017

Preliminary

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Productivity and median compensation have diverged since 1973; the typical worker’s compensation has stagnated

Introduction Productivity and compensation Technological explanations? Implications

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Productivity and typical compensation5

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1940 1960 1980 2000 2020

Labor productivity Median compensation

Production/nonsupervisory average compensation

Data from BLS, BEA and Bivens and Mishel (2015)

Does this mean that raising productivity growth no longer raises average Americans’ incomes?

“although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority” Bivens and Mishel (2015)

“productivity gains haven't translated into broadly shared gains for the entire workforce” Bunker (2015)

“there’s no law that everybody’s going to benefit from technology... Ever since the Industrial Revolution, we’ve experienced a rising tide that has helped most people but... those trends have diverged” Brynjolfsson (2015)


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Two views of the productivity-compensation divergence: “linkage” and “delinkage”


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“Delinkage”Increases in productivity growth do not currently translate into additional growth in workers' compensation

“Linkage”Productivity growth does translate into pay, holding all other factors constant

- but a variety of other orthogonal factors have been putting downward pressure on median workers' compensation even as productivity growth has been acting to lift it.

Visually, productivity and compensation seem to move together – though compensation growth has been slower

Change in log productivity and compensation: 3 year moving avg.


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1940 1960 1980 2000 2020

Labor productivity Median compensation

Production/nonsupervisory average compensation

Data from BLS, BEA and Mishel and Bivens (2015)

An empirical test of the “linkage” and “delinkage” views

∆ log 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 = 𝛼 + 𝛽 ∆ log 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝛾 ∆𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝜀

Strong delinkage : 𝛽 = 0 Strong linkage : 𝛽 = 1

Test with:

• Moving average specification (bandwidth of 1-5 years)

• Distributed lag specification (up to 4 lags)


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Average compensation: 1948-2015Single year only

Two-year moving average

Three-year moving average

Four-year moving average

Five-year moving average

Time trend (3yma)

Decade dummies (3yma)

No unemployment control (3yma)

Nonfarm business sector (3yma)


Results of various specifications: avg. and P/NS compensation

These charts show the coefficient estimates from various specifications

Lines represent 95% confidence intervals.

Solid line: moving average specificationDashed line: distributed lag specification

Production/nonsupervisory compensation: 1948-2015

Single year only





Time trend (3yma)




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Time trend (3yma)





Results of various specifications: median compensation




Median compensation: 1973-2015

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Results of various specifications: sample split, P/NS comp.

These charts show the coefficient estimates from various specifications for regressions of average production and nonsupervisory compensation on productivity.


Single year only





Time trend (3yma)




Single year only





Time trend (3yma)




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Results: percentiles of the wage distribution

10th percentile

20th percentile

30th percentile

40th percentile

50th percentile

60th percentile

70th percentile

80th percentile

90th percentile

95th percentile

These charts show the coefficient estimates from the baseline 3-year moving average regressions of percentiles of the wage distribution on productivity.


Note: this is wage data not total compensation data.Comparison with the median compensation regressions suggest that these may be underestimates.

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Results: average compensation for advanced economies

Canada 1972-2015

France 1972-2015

West Germany 1972-1990

Germany 1993-2015

Italy 1985-2014

Japan 1995-2015

United States 1950-2015

These charts show the coefficient estimates from the baseline 3-year moving average regressions of average compensation on productivity in advanced economies.


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1970 1980 1990 2000 2010 2020Year

Net labor productivity Mean comp., NDP deflation

Mean comp., CPI deflation Median comp., CPI deflation

Data from BLS, BEA and Mishel and Bivens (2015)

The overall productivity-compensation gap is the result of three separate divergences


Divergence decomposition (Bivens and Mishel 2015)

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Labor share

Deflator wedge

Mean-median inequality

Technology-based theories have a natural implication: divergence is greater when productivity growth is faster


Assuming that greater technological progress implies faster productivity growth:

Labor share:

H1:𝛽 <0

Mean/median inequality:

H1:𝛽 >0

∆ log𝑚𝑒𝑎𝑛

𝑚𝑒𝑑𝑖𝑎𝑛𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 = 𝛼 + 𝛽 ∆ log 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝛾 ∆𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝜀

∆ log 𝑙𝑎𝑏𝑜𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝛼 + 𝛽 ∆ log 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝛾 ∆𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝜀

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Divergences increased less during productivity booms than productivity slowdowns


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1973-2015

Results: labor share and productivity





Single year only





Time trend (3yma)




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Results: mean/median compensation and productivity





Single year only





Time trend (3yma)




1973-2015

A quick counterfactual: productivity growth and widening inequality

• If the mean/median compensation ratio had been the same in 2015 as it was in 1973, median compensation would have been around 32% higher

• If the productivity/mean compensation ratio (labor share) had been the same in 2015 as it was in 1973, mean and median compensation would have been around 5% higher

• If the rate of productivity growth had been the same over 1973-2015 as it was over 1948-1973, our estimates of the relationship between productivity and compensation suggest that mean compensation would have been around 59-76% and median compensation 65-68% higher in 2015.


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Conclusions:

The substantial variations in productivity growth that have taken place during recent decades have translated into significant positive changes in the compensation of middle income workers.

This suggests that if productivity accelerates holding other factors constant, the likely impact will be increased pay growth for middle income workers.

At the same time, there is little co-movement between productivity growth and widening inequality – either for the labor share, or the mean/median ratio.

This tends to imply that technology is not the key driver of changes in the labor share, or in the mean/median compensation gap. It instead suggests the importance of factors not associated with the rate of productivity growth in explaining the pay-productivity divergence.


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