The "Wages and Productivity" Hoax

It becomes clearer to me with each passing day that Americans hate their fabulous economy because reporters uncritically spout depressing economic nonsense on a regular basis. The current depressing story is that the American economy is growing smartly, but regular people are being left out. I weighed in on this matter earlier here and here, but there is a new angle being trumpeted in the media that needs to be addressed before it gets completely out of control (too late!). The new angle is that wages (which are stagnant) are no longer connected to productivity (which continues to rise), and reporters are only too happy to explicitly point out that you ought to be very depressed about that (and then they remind you of how unhappy people are with Bush's economy).

What no reporter seems to realize is that the economic trends they hysterically lament today are historically typical, except for the aberrant dot-com bubble era that ran from 1997 to 2001. Without realizing that fact, reporters write stories like this:

The Mystery of Low Wage Growth

By Michael Mandel

Perhaps the oddest and most depressing fact about the U.S. economy these days is the lack of real wage growth. The unemployment rate has been below 5% since December, and productivity growth is still looking strong. Yet wages and salaries, adjusted for inflation, are down for virtually every broad occupational category.

Gee, I'm starting to feel depressed already. The "odd" disconnect between wages and productivity is obviously some sort of bizarre economic anomaly, right? After all, the New York Times says so:

Real Wages Fail to Match a Rise in Productivity

By STEVEN GREENHOUSE and DAVID LEONHARDT

With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.

That situation is adding to fears among Republicans that the economy will hurt vulnerable incumbents in this year’s midterm elections even though overall growth has been healthy for much of the last five years.

The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

The article helpfully adds that "...polls show that Americans disapprove of President Bush's handling of the economy by wide margins and that anxiety about the future is growing."

The BBC weighs in as well with a new article that advances the very same (and very depressing) theme:

The end of the American dream?
Analysis
By Steve Schifferes
Economics reporter, BBC News website

The US economy has been generating strong economic growth over the past few years as it has come out of recession.

After growing at more than 3% a year in 2004 and 2005, the pace picked up to a blistering 5.6% annual rate in the first quarter of this year - although the pace has since then slipped back to 2.9%.

So far, though, little of that growth has translated into the hands of the average worker, according to new research from the Economic Policy Institute (EPI).
...
During the five years from 2000 to 2005, the US economy grew in size from $9.8 trillion to $11.2 trillion, an increase in real terms of 14%.

Productivity - the measure of the output of the economy per worker employed - grew even more strongly, by 16.6%.
...
Average hourly real wages for both college and high school graduates actually fell between 2000 and 2005, and fewer of the jobs they found carried benefits such as health care or company pensions.

The poor performance of the US economy in delivering fuller wage packets may be one reason why the public gives the Bush administration's such a low rating on economic policy.

The story includes a helpful little figure to show you that even though worker productivity is increasing, wages for people with college degrees are suddenly stagnant:


If productivity is going up, shouldn't wages be going up as well? Common sense tells you that it should be that way. But common sense is sometimes wrong. In truth, no such connection between wages and productivity has been evident for more than 30 years.

According to this encyclopedia entry, wage growth was robust from 1860 to 1960, but then foreign competition put a damper on things. This article sounds a similar theme and makes this cogent point: Productivity and wages rose in tandem until the 1970s, when foreign competitors began to challenge U.S. manufacturers. That is, starting in the 1970s, the "wage and productivity" story changed as a result of globalization.

To place the current hysteria about the relationship between wages and productivity into perspective, let's look at the 25-year period from 1973 to 1997 (which nobody ever does). This is after foreign competition began to affect wages in America but before the dot com bubble of 1997-2001. In fact, using New-York-Times-like and BBC-like reasoning, I will now prove to you how the American economy was oddly and depressingly (not to mention mysteriously) unfair during that long period of time, in just exactly the way it has been during the Bush years. Ready? Here goes:

During that time, the size of the economy doubled:


In addition, worker productivity skyrocketed:


But did workers share the wealth? Sadly, they did not. Wages were stagnant, except for the most well-to-do. Wages for the poorest among us actually decreased:


Does this figure surprise you? It should. The "stagnant wage" phenomenon is not new, it is not a huge puzzle, and it's not a reason to suddenly hate our fabulous economy. Do you really believe that from 1973 to 1997 only the wealthy became better off because only their hourly wages increased? That's what you have to believe if you reason like the New York Times and the BBC.

As you can see (speaking like a New York Times reporter for a moment), the American dream ended a very long time ago. We just decided to get really depressed about it now that Bush is in office. Reporters who are fretting over the apparent disconnect between productivity and wages simply failed to do their homework. That disconnect has been there for quite some time now, and they should be the ones pointing that out to you.

In the above chart, look at that virtually flat wage line for the college educated. It stays right around $20/hour (in constant 2003 dollars) for the entire 25-year period. In the earlier graph from the BBC, though, it seems that productivity and wages went up in parallel during the Clinton years for the college educated. So, aren't wages and productivity tightly connected after all, at least when we have a Democrat in office? Actually, that's just a brief statistical aberration associated only with the dot-com bubble years. Everyone agrees that the bubble years (starting about 1997 and ending about 2001 or 2002) were not economically normal years. So, instead of focusing in on those years for comparison purposes (as the BBC helpfully did), let's zoom out a bit and look at the same graph over a longer period of time:


These values are normalized to 100 for year 1995, as in the BBC graph above. As you can plainly see, productivity has almost doubled since 1973, but college wages have ticked up only a notch, and even that uptick occurred mainly during the dot-com madness.

The upshot is that ever since the American economy has been influenced by globalization, the phenomenon that reporters are fretting about today (namely, the "odd" and "depressing" and "mysterious" disconnect between wages and productivity) has been in effect. But they don't seem to have the slightest clue about that. After all, their job is not to present you with the facts; it is to make you depressed about Bush's handling of the economy. And recent polls show that they are very good at their job.