Was JFK Wrong? Does Rising Productivity No Longer Lead to Substantial Middle Class Income Gains?

December 16, 2014
Productivity growth is needed to ensure a robust economy that benefits the average American worker.

The runaway success of Thomas Piketty’s Capital in the Twenty-First Century has increased the discussion of growing income inequality and what, if anything, should be done to reduce it. In addition to the book, Piketty has worked with Emanuel Saez in producing a series of computations on changing American incomes. Their claims are stark and widely cited to the point where they have become the received wisdom: between 1979 and 2007 (the last year before the onset of the Great Recession), over 91 percent of income gains due to productivity growth since 1979 has been captured by the wealthiest 10 percent of the population. This left just 9 percent of the economy’s expanded output for the bottom 90 percent of the population who only managed a meager real income growth of 5 percent while GDP per person for all Americans, including the top 10 percent, was rising 74 percent.

Why does this matter? Because if it’s actually true that productivity no longer benefits most workers, then why should elected officials do the hard work of advancing pro-productivity policies like corporate tax reform, investment in science and technology, and the development of sector-based productivity strategies. Better to concentrate their efforts on policies to redistribute gains to the bottom 90 percent.

Piketty and Saez and other advocates of the message that productivity no longer benefits average American workers are wrong. Lower and middle class workers have gained and are likely to continue to gain going forward from increases in productivity.

If progressives want to help raise the incomes of average American workers, a robust economic growth strategy with a strong focus on the key drivers of productivity growth – technological innovation and digital transformation of the economy – will be critical. This does not mean that other strategies to ensure more equal distribution of that productivity (e.g. higher minimum wages, more progressive taxes, universal health care, and the like) are not needed to more closely match median and average income growth. But the lesson from this analysis is that progressives ignore productivity growth at their own peril, and more importantly, at the peril of average working Americans.