The Center for Free Enterprise's latest Economic Insight is out. In this case, Karla Hernández discusses the workers’ pay and productivity gap puzzle.
Since the 1970s, one of the most popular and misunderstood topics has been the gap between workers' pay and productivity. This disparity has sparked considerable debate among economists, policymakers, and the public, leading to various theories and explanations about its implications for the economy. A common narrative suggests that while workers' productivity has continued to rise, their inflation-adjusted pay has not. In 2022, President Biden’s Council of Economic Advisers noted, “The divergence between the two trends suggests that there may be forces suppressing the pay of workers relative to their productivity,” reinforcing this notion. However, the reality of workers' pay and productivity is much more complicated.
Labor productivity measures economic performance by comparing the amount of output with the amount of labor used to produce that output. For example, if you work extra hours for a week to complete a project, the government does not consider you more productive because the increased output is due to additional work hours, not greater efficiency. This distinction highlights the complexity of measuring labor productivity and contributes to the problematic nature of current analyses of workers' pay and productivity growth. As highlighted by Peter Coy (New York Times), there are significant discrepancies in researchers' definitions and calculations of pay and productivity, leading to varying economic interpretations.
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