Thursday, December 14, 2017

Since when? The Productivity–Pay Gap

Noah Smith at Bloomberg: Workers Get Nothing When They Produce More? Wrong. Noah shows this graph:

Graph #1: Employee Compensation is Falling Behind Already by 1962
Noah's article is about the way people interpret the graph. As he puts it, some people see compensation falling behind output and ask:

If productivity improvements don’t actually get translated into wages, what’s the point of making the economy more efficient?

They say the graph shows there is no sense in boosting productivity. Noah disagrees, as you can tell from the title of his article. He cites a study that looks at short-term changes and sees "a correlation between productivity and wages -- when productivity rises, wages also tend to rise." But over the longer term, compensation falls behind productivity because of "forces pushing in the other direction" he says.

That's interesting. It leads to questions: What forces? And: Why? And: What can be done about this? It opens doors.

Before we come up with a solution to the problem of lagging compensation, we have to know the cause of the problem. We don't yet know the cause. We don't even know when the problem started, so how can we know the cause?

If you don't know when the problem started, how can you possibly know the cause? And if you don't know the cause, how can you possibly know the solution?

How can you have any pudding if you don't eat yer meat?

When did the problem start? Noah doesn't say:

Since the end of World War II, productivity, in terms of economic output per hour, has grown by a factor of five, while compensation has only tripled. Since 1980 the divergence has been especially stark ...

More stark divergence may indicate a new phase, but does not mark the start of the problem. In any case, on Noah's graph I don't see a more stark divergence beginning around 1980. I see a kink in both lines shortly after 1972, and a kink in both lines around 1997. Nothing around 1980, other than a brief dip in productivity. Not even a wiggle in compensation. Look at the graph.

It looks to me that, for Noah's data at least, productivity and compensation ran neck-and-neck from 1947 to just before 1962. Call it 1960. A gap opens after 1960. This is where the problem begins. Not 1980.

There is a kink around 1973, and then compensation slows more than productivity. Maybe the second stage of the problem begins in 1973.

There is another kink around 1997, after which productivity accelerates upward and compensation does not. This would be the third stage.

If you hover a mouse over Graph #1 you will see the trends I'm looking at.

Around 1980 or 1982 there is nothing but a wiggle in productivity which is surely the result of the double-dip recession that occurred at that time. No wiggle is visible in the compensation data for those years.

Perhaps Noah sees stark divergence since 1980 because he has heard people speak of it a million times. Or perhaps he is thinking of this graph from Robert Reich:

Graph #2. Source: the Preservation Institute Blog.
Ritholtz at The Big Picture shows this graph as part of a larger image
and links to an article by Robert Reich at the New York Times.
Reich puts a white stripe down the graph at 1980. The white stripe is a conclusion imposed on the data, a conclusion that intrudes upon unbiased evaluation. The data on Robert Reich's graph is not the same as that shown on Noah Smith's graph, yet both graphs show productivity and compensation running together from 1947 to about 1960, and productivity gaining on compensation since that time.

You could say that Robert Reich put the white stripe at the point where compensation peaks and starts to fall. This would explain why the white stripe appears at 1980. But by 1980, compensation had been falling behind productivity for 20 years, as you can plainly see on Reich's graph.

Noah's data is not the same as Robert Reich's. Noah's graph shows a change around 1973, and a change around 1997. It shows nothing but a recession-related wiggle in productivity around 1980. And yet Noah's "stark divergence" begins in 1980, at the same moment that Robert Reich's white stripe appears. Why?

Our views are influenced by the views of others. Perhaps Noah sees stark divergence since 1980 because he has heard people say it a million times, or has seen it on Reich's graph.

At the Preservation Institute where I found Reich's graph, the evaluation of the graph is based more on the white stripe than on the data:

From 1947 to 1979, the compensation of non-supervisory workers increased by almost as much as productivity.

From 1980 to the present, compensation stagnated as productivity continued to grow - partly because of deliberate economic policies that were adopted by the Reagan administration ...

Indeed, pointing the finger at Reagan may be the real reason for locating that white stripe at 1980. But even if that is not the case, Reich's white stripe evaluates the data for us, before we can evaluate it for ourselves. No thank you, Mr. Reich.

I don't see a "more stark divergence" after 1980. But don't think that I am defending Ronald Reagan. Reagan's policies did nothing to close the gap between compensation and productivity. Reagan did his share to keep the gap growing. But Reagan did not do more than his share. Not according to Noah's graph.

Now comes the part where I duplicate the original graph so I can examine the data.

I wasn't sure what data series Noah used in his graph, but he does say Source: Federal Reserve Bank of St. Louis so I'm thinkin FRED. FRED doesn't have a lot of data series that match "Real output per hour" or "Real compensation per hour" and go all the way back to 1947. I only find data for the "business sector" and the "nonfarm business sector". So I could throw darts at this, blindfolded, and not be very far off.

I duplicated Noah's graph once for "business" and once for "nonfarm business". Both were close, but neither exactly matched what Noah showed. Maybe there was a recent revision? No matter. I'll go with "business sector" and index the values on the first quarter of 1947. That'll be close enough.

Here's what I got:

Graph #3: My Attempt to Duplicate Noah's Graph -- A Pretty Good Match
My lines both start at 100, like Noah's. One line ends at 300 and the other at 500, as Noah shows. And I got colors comparable to his. So far, so good. The gap on my graph starts just after 1960 and shows trend changes around 1973 and 1997, just like Noah's graph. But the wedge opens up more slowly on my graph. Between 1960 and 1970 I show a narrow gap between the two lines; Noah's gap looks wider. Or maybe it's just my eyes. Whatever, I'm going with this data.

Data in hand, I want to look at the gap between productivity and compensation. A simple way to do that is to subtract compensation from productivity. If productivity is higher than compensation -- which it is -- then the graph will show how much higher the productivity number is. It will show the difference, the gap.

Here's what I get:

Graph #4: The Size of the Productivity-Compensation Gap
"Since 1980," Noah says, "the divergence has been especially stark". I don't see it. The gap is obviously bigger in the later years. But there is no "kink" in the blue line around 1980, and no acceleration thereafter. The line just goes up, the same after 1980 as before.

Just after the year 2000, yeah, there does seem to be a kink there. And the line goes up faster after that, for a while. But it's 20 years too late. You can't blame Reagan. There is no kink and no acceleration around 1980 on this graph. There is no sudden change in the growth of the gap. What was Noah thinkin?

Nor is there a dramatic increase since 1973, contrary to what EPI claims. The line is obviously higher after 1973 than before, but there is no sudden change in the upward trend. The pace is constant since 1961.

Hey, when you're looking at the gap between two jiggy lines, it is difficult to see exactly the size of the gap. But when you subtract the one line from the other, as on Graph #4, there is nothing left to look at but the gap. And then it is easy to see the size and shape of the gap.

The gap opens around 1961, or possibly earlier. The gap shows consistent increase. There is no sudden acceleration after 1973. There is no sudden acceleration after 1980. There is just consistent increase. I moved the data into Excel and put a trend line on it:

Graph #5: A Trend Line Added to the Data from Graph #4
If anything, the line looks a little low in the 1980s and '90s, relative to trend.

No sudden surge around 1980. No sudden surge around 1973. Only a continuous and stable increase in the gap since 1961.

What are the forces pushing compensation down while productivity rises? The Reagan revolution may be part of the problem. The economic slowdown after 1973 may be part of it. But the problem didn't begin in the 1970s or '80s. It began in the 1960s, or before. To discover the troublesome forces, we have to look to that earlier time.


Oilfield Trash said...


I am going to approach the growing gap from these angles

1. Robotics and Automation starting in the early 1960
2. Women enter the work force in mass in the early 1960
3. Consumer credit expansion starting in the early 1960

I think (do not know for sure) that each of these keep the gap growing at some rate.

The Arthurian said...

Yeah, Oilfield, that's good. I didn't sit down and think about causes, but if I did I would have come up with nothing but credit expansion (or growing financial cost), because that is where my mind is.

I can see it, though: Robots and Automation decrease the demand for labor, pushing wages down. And women entering the workforce expand the supply of labor, pushing wages down.

Still, I have trouble with the idea of policy that would prevent or suppress the technology behind robots and automation. And I have trouble with the idea of policy that would prevent or suppress the entry of women into the workforce. But I have no trouble with the idea of policy that would prevent the excessive growth of finance.

Maybe the pay differential, women make less money than men, that would be part of it, too. I almost missed that explanation.

Oilfield Trash said...


It is a interesting issues on the credit angle, you could increase the workers share of GDP (higher min wages and or a Government Job Guarantee program), which could allow for the reduction of stock of credit and the drag the debt service put on the economy. However one must also have other policies which control the amount of credit individuals can leverage into.

Typically my experience is the more people make the higher debt they will try to service.

Unfortunately the Pol Science part of my brain is screaming in the current political environment these ideas are a nonstarter.

The Arthurian said...

"... you could increase the workers share of GDP ... which could allow for the reduction of stock of credit and the drag the debt service put on the economy."

Yeah, OT, that is EXACTLY right. If money is green and credit is red, we need to make sure the economy actually gets more green... Not more full of a very red mix.

"However one must also have other policies which control the amount of credit individuals can leverage into."

Policy since forever has been trying to make more credit more available, plus doing things to encourage people to borrow it. I think this is the reason for your experience watching people increase their debt. People need more income, and less encouragement to borrow. And more encouragement to repay.

If people can be convinced of these ideas, their leaders will follow.

The Arthurian said...

If it is true, as I have read at least three times over the past few years, that policy, monetary policy since 1980, has been to suppress wages whenever inflation threatens, if that is true, then what we need now is to stop doing that. If we will let wages rise more naturally, we do not need higher minimum wages and government job guarantees to make it happen.

Instead of suppressing wages, policy should stop encouraging the use of credit and start encouraging the repayment of debt.

PS, paying down debt is a way to fight inflation. So that makes up for stopping the suppression of wages. All the pieces of this puzzle fit.

The Arthurian said...

O.T.: "It is a interesting issues on the credit angle, you could increase the workers share of GDP ... which could allow for the reduction of stock of credit and the drag the debt service put on the economy.'

J.M. Keynes: "Thus with a rigid wage policy the stability of prices will be bound up in the short period with the avoidance of fluctuations in employment. In the long period, on the other hand, we are still left with the choice between a policy of allowing prices to fall slowly with the progress of technique and equipment whilst keeping wages stable, or of allowing wages to rise slowly whilst keeping prices stable. On the whole my preference is for the latter alternative, on account of the fact that it is easier with an expectation of higher wages in future to keep the actual level of employment within a given range of full employment than with an expectation of lower wages in future, and on account also of the social advantages of gradually diminishing the burden of debt ..."

It seemed relevant.