Wages and productivity

There has been a longrunning US debate/puzzle around the relationship (or apparent lack of it) between productivity growth and growth in wages/compensation. It was revisited earlier this week in a (very long) post on the excellent Slate Star Codex blog.  The author introduces his post with this chart, pretty familiar to anyone aware of this issue.

wages US

I’ve always found the issue interesting, but been content to do little more than read the occasional summary article.  Arguments often seem to turn on rather arcane measurement issues and I just don’t know the very detailed US data that well.

But as I read through the long post, I noticed something that probably hadn’t struck me previously.  The productivity measures used in this chart (and others like it) are those for the non-farm business sector.   That is the series that gets the most focus in the US, which makes some sense in that it is (a) regularly published by US official agencies, and (b) if you are interested in the performance of the business sector (and not wanting to be thrown around by climatic effects) it is probably natural to focus on.

By contrast, I tend to focus on measures of GDP per hour worked.   That is mostly because (a) it is what is available on a fairly consistent basis for a wide range of countries, and (b) because it is what is readily able to be calculated quarterly for New Zealand, using published data.  And my interests tend to be the economy as a whole.

In the US context it can make quite a lot of difference which series one focuses on.   In this chart, I’ve shown the two series, starting from 1970 (which is when the OECD real GDP per hour worked data starts from).

US productivity.png

It shouldn’t be much of a surprise that whole economy productivity growth is slower than that for the non-farm business sector: incentives (lack of them) and opportunities (types of activities governments do) both tend to work that way.

And then, of course, I noticed that charts like the first one tend to use real variables, which opens up all manner of issues about the “correct” deflator, including issues as to whether the CPI was well-measured in years gone by (there were some fairly significant biases).    But quite recently, I’d compared nominal wage growth in New Zealand to growth in nominal GDP per hour worked, which abstracted from deflator issues (even if it might raise other questions), so I thought I’d do the same for the United States.

I took the compensation per hour series for the US non-farm business sector (official US series) and nominal GDP per hour worked (from the OECD), indexed them all to 1970, and divided one series by the other.  This is the the result.

us compensation

On this measure, US wage growth has lagged a bit behind the growth in the overall economy “ability to pay”.  But it is a hugely smaller gap than is suggested by something like the (widely-used) first chart in this post.

Is nominal GDP per hour worked a reasonable benchmark?  I reckon it is.  Growth in nominal GDP per hour worked captures both real productivity effects and changes in the terms of trade (which have been adverse for the US over this fifty year period).    As ever, there isn’t likely to be some mechanical relationship between labour earnings and GDP per hour worked.  Market pressures shift over time, and so does (for example) the relative importance of capital in generating what growth there is.   Labour shares of the total economy’s output always have, and probably always will, fluctuate over time.   But it seems at least as good a benchmark against which to analyse developments as most others on offer.

Since most of my readers are from New Zealand, two final charts as a reminder of how things are here.

First, a chart comparing real GDP per hour worked with the measured sector labour productivity data.   We don’t have such long runs of data, so this is just since 1996.

NZ productivity measured and total

Unsurprisingly, whole economy productivity growth lags that in the measured sector (that excludes much of goverment activity).

And here is a chart I’ve shown previously showing how wages (the analytical unadjusted LCI series) have grown relative to nominal GDP per hour worked.

wages and GDP

Whatever the story in the US, wage rates in New Zealand have been increasing faster than nominal GDP per hour worked (loosely, “the ability of the economy to pay”).

That might seem quite good for New Zealand employees.  But it is worth bearing in mind that since 1995, we’ve had about 28 per cent growth in labour productivity (real GDP per hour worked) and the US has had about 44 per cent growth in economywide labour productivity.  The windfall of a higher terms of trade has helped us, but if your economy isn’t generating much real productivity growth it isn’t a good outlook for anyone much (workers or owners) in the longer term.

 

 

10 thoughts on “Wages and productivity

  1. About about 28 per cent growth in labour productivity over a quarter century. Specific jobs will be far higher – farms are thriving on a fraction of the workforce and farming is NZ’s main business. Computer programmers are massively more productive as ever better interactive software is developed.
    So we need to think about the jobs where productivity is static or declining. It is tempting to think of civil servants but even they have technology that is assists their productivity: email, websites, etc. [Although Auckland’s amalgamated city is not more productive than what it replaced.] Even labouring has technology that assists: small diggers, nail guns, etc. So I’m left with the jobs that did not exist in the past or have increased in numbers. For example the massive increase in fast food – only the best compete with an old fashioned chippy for productivity. Are todays modern nurses measured as more productive? Certainly more of us survive cancer and heart attacks but is that measured as productivity or just putting off the inevitable?

    I remain unsure that productivity can be measured however I’m willing to admit that whatever the faults of NZ’s productivity measurements the same methodology is used by other countries and NZ compares badly. So we do need our govt to think, talk and act to make NZ more productive.

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    • Even though Tesla runs a highly robotic factory with the highest productivity achievable in a car manufacturer, it still struggles to meet profitability goals. The latest saga is to shut down the bulk of their retail outlets and jut do on-line sales to save 6% of a vehicles cost.

      Tesla CEO Elon Musk explained during a conference call with the press that eliminating the retail sales portion of its business would represent a significant cost savings, allowing the long-awaited $35,000 Model 3 to come to market.

      https://www.cnet.com/roadshow/news/tesla-close-stores-online-sales-model-3/

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  2. One reason wages/NGDP has been better in NZ than in US might be because monetary policy has been less bad. Unemployment generally 4-6%. Another reason is that we weren’t directly impacted by Chinese mercantilism post WTO accession in 2000 – we had already largely deindustrialised by that time.

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    • Maybe at the margins, but I suspect it has more to do with the same pressures that have given us a persistently overvalued real exchange rate.

      And, on the other hand, being home to hugely successful tech companies might reasonably skew overall returns towards capital, at least for a time.

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  3. The US has had a problem with not only their hugely successful Tech Companies but also the many multi-nationals that have stored $4+ Trillion in profits in off-shore tax-havens and the Tech companies storing their untaxed loot in Holland via Ireland. Trillions. Does the US statistics include all that?

    NZ has been left far behind in that race

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  4. Michael
    Am I correct to understand that in NZ (since 1996):
    Real wages per hour worked are +15%
    Business sector labour productivity is +35%
    GDP per hour is +27%
    Aren’t workers the loser here? I’ve clearly missed something given that you assert than NZ real wages have outpaced GDP/hours ?
    Has business labour productivity been > than GDP/hour because non commercial sectors (government) productivity has undershot?
    Tim

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    • Tim,

      It isn’t that real wages per hour worked here have risen by 15 per cent, but that nominal wages have risen 15 per cent relative to nominal GDP per hour worked (the latter captures both productivity and terms of trade gains). NZ workers have done very well relative to the overal economy – just a shame our productivity growth has been so poor that it hasn’t amounted to as big improvement in real living stds as one might otherwise have hoped.

      On your final question, yes implicitly so (those bits of govt productivity aren’t directly estimated by SNZ, but are implicit from the difference between economywide productivity and the measured sector numbers.

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      • Documents obtained by Newshub under the Official Information Act, show that since the government launched its foreign recruitment drive last year more than 9,000 foreign teachers have applied to come here.
        Over 1,000 are ready to be interviewed and hired, but only 240 have landed jobs

        https://www.msn.com/en-nz/news/national/foreign-teachers-coaxed-into-nz-by-government-arent-up-to-the-job/ar-BBUeqvJ?ocid=spartanntp

        This is one way to improve productivity. Drop classes and subjects off the curriculum, get higher pay and don’t hire foreign migrant teachers. It is clear the teachers union have got the principles tied around their little finger.

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      • About 50 construction workers said they each paid Peter or Wenshan Li about $45,000 for a work visa in this country but they never got the work or pay they were promised.
        Mr Li denied he had received any payment from the workers and claimed he was recruiting them for a labour hire company, National Personnel Limited (NPL).

        https://www.msn.com/en-nz/news/national/peter-li-claims-no-wrongdoing-in-recruiting-chinese-workers/ar-BBUegYv?ocid=spartanntp

        This is another way to get higher productivity per hours worked.

        Collect $45k from each worker. Pay hiring company $40k, and keep $5k for commission.

        Workers don’t work but $45k per worker in foreign sourced funds still gets spent on lawyers, Labour and immigration gets plenty of work investigating, judges get to decide, police and journalist gets to report and we get to blog about it. Overall a net increase in productivity per hours worked. And since they don’t have work visas, funds still come in from overseas to satisfy their day to day needs. Overall a much higher spend rate than the average tourist.

        Liked by 1 person

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