The American productivity myth — and the real
truth about real wages
C.K. Liu with editorial help from Jina Moore
This article appeared in NewDeal20.org
on Wednesday, 08/12/2009
Feel like you’re
working harder than you used to? It’s not in your head.
Bureau of Labor Statistics reported
a more than 6 percent increase in worker productivity (in business;
over 5 percent in manufacturing). In theory, more productivity means
more wealth and a healthier economy, right?
Henry C.K. Liu says, “Think again…”
The “productivity boom” idea is not new. But in the
US, it as much a
mirage as the money that drove the apparent boom. There was no
productivity boom in the US in the last two decades of the 20th
century; there was an import boom that came with productivity fallouts.
What’s more, this boom was driven not by the spectacular growth of the
American economy; it was driven by debt borrowed from the low-wage
countries producing this wealth. The acceleration of productivity was
accomplished by someone else doing the producing without getting proper
credit for it. It was called a “bubble” for a reason.
Meanwhile, US wages dropped. Outsourcing has not
been the only
factor driving US wages down: Even as average worker productivity
within the US has surged, average hourly earnings have stagnated, while
the nation’s economic elites have prospered with astronomical levels of
incomes. The high-tech, information technology and financial services
sectors operated on the model of low salaries and high stock options.
Even for investors, the trend had been to favor equity appreciation
over dividend income. Yet this flies in the face of a basic economic
principle: Income is all, and economic growth without income is a
So whose incomes did grow? It’s a familiar
story: In 2002, Capital
One Financial CEO Richard Fairbank exercised 3.6 million options for
gains of nearly $250 million, on which he pay tax on the lower capital
gain rate rather the income tax rate. His personal take exceeded the
annual corporate profits of more than half of
the Fortune 1000
companies, including Goodyear Tire and Rubber, Reebok and Pier One.
Median pay among chief executives running most of the nation’s 100
largest companies soared 25 percent to $17.9 million in 2005.
The average gain by typical U.S. workers in the
same period? A
piddling 3.1 percent. A Federal Reserve survey shows that between 2001
and 2004, the median income of US workers with college degrees barely
budged, rising from $72,300 to $73,000, after adjusting for inflation.
Even former Treasury Secretary Robert Rubin (who spent 26 years at
Goldman Sachs) noted
during his time in government, “Prosperity has neither trickled down
nor rippled outward. Between 1973 and 2003, real GDP per capita in the
United States increased 73 percent, while real median hourly
compensation rose only 13 percent.”
US corporate earnings reached all-time highs
because wages have been
stagnant. Corporations were flooded with cash — but they refused to
pass it on to their workers. Instead, corporations adopted share
buybacks scheme with the surplus cash to raise the market value of the
The new populists want an alternative, one
that register growths by
the income received by the middle class. They argue that the national
income has increasingly flowed disproportionately into corporate profit
and to the rich. They call for a review of US-led globalization and for
new terms of trade that do not put the cost of economic expansion
entirely on the chronic poor, the newly poor and the powerless both
domestically and globally. They call for government regulation in the
terms of trade to distribute the benefits more equitably.
They will also need to add an item to that agenda:
a call for
honesty and transparency in the tools the American government uses to
measure national wealth.
America’s hedonic pleasures
Wages are measured in relation to price indices,
but price indices
are not as straightforward as they may seem. “Hedonic” pricing methods,
used to translate quality improvements in products into price declines
even if the actual prices are climbing, are effectively artificially
inflating individual and national wealth.
An example: Automobiles that now sell for $30,000
used to sell for
$10,000, but the inflation rate of automobiles is registered as
declining because cars are technically more sophisticated. The consumer
is supposed to be getting more “car” per dollar; nevermind that $10,000
won’t buy anyone a car any more. Rents for apartments are registered as
declining even when rent payments rise, because renters get
air-conditioning, marble bathrooms granite kitchens and high rise
The takeaway? Prices can rise — with no
inflation. Hedonic pricing
keeps wage earners from enjoying any hedonic pleasure with their
stagnant wages, because in reality wages are falling faster than prices
of goods. So that iPhone may look like a deal, but only if you don’t do
the math and figure out how many work hours it now takes to pay for one.
As this measuring technique is being extended to a
growing number of
goods, it has become an important factor in reducing the US inflation
rate, and intrinsically raises nominal GDP growth while the real GDP
may actually decline. But its overall effect on monitoring the economy
is kept secret from the public. The hedonic price adjustments for
computer hardware and software alone went a long way to explain US
growth and productivity “miracles” of the past decade.
Hedonic price indexing, by keeping the official
significantly lower than reality, not only played a key role in fueling
the stock market boom, but also magnified the budget surplus during the
Bill Clinton years and understated the George W Bush deficit. Such
indexing reduces social security payments and welfare benefits across
the board and undercuts inflation-related wage adjustments. And yet
essentially, lower hedonic prices in computers and electronic gadgets
are paid for by less money for food and housing of the elderly, the
unemployed and the indigent as well as the average worker.
Take that to a town hall meeting.
Institute Braintruster Henry C.K. Liu is an independent commentator on
culture, economics and politics.