November 26, 2014
Are Corporations Really Hogging Workers’ Wages?
Posted on Apr 9, 2014
Editor’s note: Three weeks ago, at the recommendation of leading post-Keynesian thinker Michael Hudson, I contacted Pace University economist Andrew Kliman with a question. I was preparing to write an article based on a figure published in the July 2011 issue of Mother Jones and I wanted verification by an expert. “Productivity has surged, but income and wages have stagnated for most Americans,” the article reported. “If the median household income had kept pace with the economy since 1970, it would now be nearly $92,000, not $50,000.”
Believing that it powerfully summed up the economic theft committed against American workers over the last four decades, I repeated this claim in print and conversation for two and a half years. But I can’t say it any longer with the same confidence. When I showed it to Kliman, he said I had been misinformed.
“The original source is probably the Economic Policy Institute (EPI), which is one of the sources of ‘Productivity/income’ info listed at the bottom of the story,” he wrote to me in an email. “They do a lot of publicizing of the supposed growing gap between productivity growth and wage/compensation growth. I find their stuff on this very misleading.” He went on to say he had crunched the EPI’s numbers and discovered that the pay Mother Jones claimed was being kept from workers couldn’t possibly be given to them. If it was tried, he said, there would be nothing left for the corporations—that is, the shareholders, owners and others who receive income but play no role in production.
His confidence slowed me down. From policymakers and credentialed experts to committed activists on the left, nearly everyone and their mothers seem to believe corporations have been fleecing workers out of an increasing share of their earnings and keeping it for themselves. The “productivity/compensation gap,” as it has come to be called, is a key tenet of left-wing orthodoxy when it comes to explaining what happened to Americans over the past 40 years.
As a nontechnical person, I tried to get Kliman to explain his conclusions to me in language I could understand. I realized before long that it would be simplest if he tried to put his ideas into article form; by helping him render them in terms mortals could grasp, I would be able to comprehend what he was saying. And others—including those who are better qualified to review and evaluate his work—would have a chance to do the same.
Square, Site wide
A second article by Kliman, concerning precisely how income among employees came to be skewed in the manner it is today, and in which there will be intense discussion about the official definitions of “wages,” “profits” and “income” is planned to appear on Truthdig in the future.
Correction: An earlier version of this introduction described Dr. Hudson as a neo-Keynesian and referred to employees as “workers” in the final paragraph.
What if some of the most respected economists in the world told you that as an employee, your pay is 40 percent lower than it would be if it had increased in recent decades at the same rate as your productivity? If you are a typical American worker, that is how large the gap in your pay became by 2011, according to the Economic Policy Institute, one of the most trusted liberal think tanks in the nation.
In its 2012 study, “The State of Working America,” the EPI reported that between 1973 and 2011, the goods and services produced per hour of work (which economists call productivity) in the American economy “grew strongly, especially after 1995, while the typical worker’s compensation was relatively stagnant.” Productivity increased by more than 80 percent in the interim, even after adjusting for inflation, but the hourly compensation of those who held production and nonsupervisory positions increased by less than 11 percent. The EPI contended that this “divergence of pay and productivity has meant that many workers were not benefiting from productivity growth—the economy could afford higher pay but was not providing it.”
The “productivity/compensation gap,” as journalists and academics call it, has become a flashpoint in the debate over income inequality. Equipped with statistics like those produced by the EPI, trusting activists and members of the press point to the supposed gap as proof that corporate profits have been rising at the expense of employees’ compensation—not just since the Great Recession, but throughout the last four decades. (For an example of such a claim, see the piece written by Doug Henwood, editor of the Left Business Observer, in the opinion pages of March 30’s New York Times.)
Careful analysis shows that before the recession, average hourly compensation of employees at large did keep pace with productivity—unless “compensation” and “productivity” are measured in a highly misleading way. The following graph, based on the same government statistics of employee compensation cited by Henwood and others, looks at the share of net domestic product that U.S. employees received from 1970 until the start of the Great Recession. There was essentially no upward or downward trend in their share, either in the corporate sector or in the business sector as a whole. This means that employees’ production per hour increased at essentially the same pace as their compensation per hour, not more rapidly.
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