Paying for Productivity

(Laura Tyson: a former chair of the US President's Council of Economic Advisers, is a

professor at the Haas School of Business at the University of California, Berkeley, and a
senior adviser at The Rock Creek Group).

BERKELEY One of the United States defining and disheartening economic

trends over the last 40 years has been real-wage stagnation for most workers.
According to a recent US Census report, the median full-time male worker earned
$50,033 in 2013, barely distinguishable from the comparable (inflation-adjusted)
figure of $49,678 in 1973.
Because most households earn the bulk of their income from their labor, the
absence of real-wage growth is a major factor behind the stagnation of family
incomes. The average family income of the bottom 90% of households has been flat
since about 1980. Real family income for the median household in 2013 was 8%
below its 2007 level and nearly 9% below its 1999 peak.
Stagnating middle-class wages and family incomes are a major factor behind the US
economys slow recovery from the 2007-2009 recession, and pose a serious threat
to long-term growth and competitiveness. Household consumption accounts for
more than two-thirds of aggregate demand, and consumption growth depends on
income growth for the bottom 90%.
The heyday of US economic growth in the two decades after World War II was also
a golden era for the middle class. The long boom of the 1990s, when the US
enjoyed sustained full employment, was one of few periods in the last 40 years
when incomes climbed at every quintile of the income distribution.
Many influential economists are now worried that the US faces anemic growth and
secular stagnation, owing to a persistent gap between aggregate demand and full
employment. Stagnant middle-class incomes imply weak aggregate demand, which
in turn means slack labor markets and stagnant wages for most workers. In the
absence of aggressive monetary and fiscal policies to support aggregate demand at
full-employment levels, the result is a vicious slow-growth cycle.

Two competitiveness gurus, Michael Porter and Jan Rivkin of Harvard Business
School, recently warned that stagnant middle-class incomes undermine US
companies in several ways. Businesses cannot thrive for long while their
communities languish, they cautioned. Unless corporations step up to the plate,
American business will suffer from an inadequate workforce, a population of
depleted consumers, and large blocs of anti-business voters.
Porter and Rivkin are not calling on businesses simply to pay their workers more.
Instead, they are urging businesses to engage in a strategic, collaborative push to
improve education and training to raise the skill levels of their workers.
That is a laudable goal. But, as Porter and Rivkin find in their survey of business
leaders, companies often discourage investment in skills by their reluctance to hire
full-time workers. Nearly half of the respondents indicated that, when possible, they
prefer to invest in technology or outsource to third parties and hire part-time workers,
none of whom receive much additional training or have a stake in their companys
long-term success.
There is also a disturbing implication in the Porter-Rivkin survey that workers
themselves, along with Americas schools, are to blame for wage stagnation: If only
workers were not so poor in math and science, so ill-equipped for the modern world,
and so unproductive, they would earn higher incomes.
The reality is different. US productivity has been growing at a respectable pace for
two decades. The problem is that productivity gains have not translated into
commensurate wage increases for the typical worker or income growth for the
typical family.
According to standard economic theory, real wages should track productivity. As
Lawrence Mishel of the Economic Policy Institute has documented, this was the
case from 1948 until about 1973. Since then, real wages for the typical worker have
flat-lined, while productivity has continued to climb. Mishel calculates that
productivity increased 80.4% from 1948 to 2011, while median real wages rose only
39% almost none of the wage growth occurred during the last four decades.

True, highly skilled workers, especially those with sought-after technology skills and
postgraduate degrees, have fared much better. But that prosperity has reached only
a small elite.
From 1979 to 2012, the real median wage increased by only 5%. But real wages
climbed 154% for the top 1% of wage earners and 39% for the top 5%, while real
wages stagnated for the bottom 20th percentile of workers and fell for the bottom
tenth. Indeed, inequality in labor compensation has been the largest driver of
yawning income inequality, except at the very top of the income distribution, where
capital income has been more important.
Meanwhile, corporate profits have soared. The GDP share of after-tax corporate
profits is at a record high, whereas labor compensation has plunged to its lowest share
since 1950.

Strong productivity growth is an important policy goal. But it is not enough to

increase most workers wages or most families incomes. Reconnecting productivity
gains and wage gains requires both policy actions, such as an increase in the
minimum wage with a link to productivity growth, and changes in corporate humanresources practices, such as broader reliance on profit-sharing programs.
Such programs have intuitive appeal. Employees who have a direct stake in a
companys profitability are likely to be more motivated and engaged, and turnover is
likely to be lower. This intuition is confirmed by empirical research.
Some 20 years ago, Alan Blinder of Princeton University corralled a number of
economists, including me, to examine existing studies on the link between profitsharing and productivity. The overwhelming majority of the studies found a strong
positive effect. Shared Capitalism at Work, a recent book edited by Douglas Kruse,
Richard Freeman, and Joseph Blasi, confirms this conclusion with more recent
evidence.
Various forms of profit-sharing including grants of options and restricted stock,
annual profit-based bonuses, and employee stockownership plans have been
growing as a share of labor compensation since the 1960s. But most workers are
not covered by such plans, and the biggest beneficiaries have been CEOs and top
managers, a significant fraction of whose pay is tied to productivity, as reflected in

profits and stock performance. Such incentive pay schemes have driven the outsize
increases in compensation for the top 1% of the wage and salary distribution.
Americas long-run living standards and economic competitiveness depend not just
on productivity growth, but also on how that growth is shared. More equitable
sharing of profits with Americas workers and their families would do much to
address the worrisome stagnation of wages and middle-class incomes in recent
decades.
Source: http://www.project-syndicate.org/