Productivity and Real Wages: Is There a Puzzle?

Abstract

IN RECENT PUBLIC DISCUSSION of labor income in the United States, considerable concern has been voiced that real wages are not keeping up with productivity growth (or are declining), that sharply rising fringe benefit costs are undermining gains in take-home pay, and that workers in other countries are enjoying better pay increases than U.S. workers. Two frequently cited measures published by the Bureau of Labor Statistics (BLS), which are shown in figure 1, highlight some of these concerns. The first measure-the growth in real hourly compensation in the nonfarm business sector-has slowed to 0.4 percent a year from 2.4 percent a year over the 1960-73 period. Meanwhile, hourly output per worker has grown at 0.9 percent a year-noticeably faster than hourly compensation, although down considerably from its 1960-73 annual growth rate of 2.5 percent. In an economy where real wage growth has paralleled the rise in productivity over the long run, this apparent divergence implies that the benefits of increased productivity have not been distributed in the expected way over the past two decades. The second BLS measure-real hourly earnings of nonsupervisory employees-excludes employer payments for pension, health care, employment taxes, and other nonwage costs that are counted in real hourly