Tuesday, September 21, 2010

Increasing productivity and stagnant wages

I'm giving a course on economic inequality this term and that prompted me to read a paper, "Rising Profit Shares, Falling Wage Shares" by Ellen Russell and Mathieu Dufour published in 2007 by the Canadian Centre for Policy Alternatives as part of their 'Growing Gap' project. They document the stagnation of average wages since around 1980 while output per worker, however you care to measure it, has continued to rise.
  As they write (p.7):
most economic models would predict that real wages rise as productivity rises. But it is evident that rising productivity is not generating a commensurate rise in real wages. A stagnation of workers’ real average wages despite their rising productivity is a powerful indictment of the promise that a growing economy — and increased productivity — will produce benefits widely shared by the majority of Canadian workers. It simply isn’t happening.
If average wages had kept up with average productivity increases since 1991, they calculate that by 2005, the average worker would be earning $200 more per week than was actually the case. (See their Chart 4.) Instead, the fruits of the increase in average productivity have taken the form of a growing share of corporate profits in total output.
  This disconnect between productivity and wages reminds me of the estimates by Dan Trefler (University of Toronto) of the effects of the Canada-U.S. Free Trade Agreement. There were notable improvements in productivity, but only small improvements in real wages. As he put it (p.885),
 These earnings and wage effects are large in a statistical sense, but small in an economic sense. For example, a 3-percent rise in earnings spread over eight years will buy you more than a cup of coffee, but not at Starbucks.
     What do the texts have to say about productivity and wages? You can check your own favourite text (if 'favourite' is the word I'm looking for). But here is are a couple of sentences from the most recent edition of Chris Ragan and Richard Lipsey's Economics (12th Canadian Edition, p.484) which appear just after a review of the data on Canadian labour productivity from 1976-2008:
The higher productivity for today's workers explains why their real wages (the purchasing power of their earnings) are so much higher than for workers in the past. The close connection between productivity growth and rising material living standards explains the importance that is now placed on understanding the determinants of productivity growth.
Perhaps in the next edition, Chris Ragan will add a new figure comparing real GDP per worker or per hour worked (the data now shown in the text) and average real wages. But then that would entail rewriting the sentences I just quoted.

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