Fact of the Week: The Much-Publicized Gap Between Productivity Growth and Wage Growth Shrinks in Nearly Nine Out of 10 Industries When it is Calculated Correctly

John Wu June 19, 2017
June 19, 2017

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Productivity growth is the only way to increase wealth in the economy, and it has long been directly associated with wage increases for workers—that is, until the last several decades, when many academics and policymakers have started raising alarms that productivity is outpacing wages. But it turns out this apparent decoupling, known among economists as the productivity-compensation gap, is being vastly exaggerated because of a methodological error: The alarmists have been making the mistake of using the consumer price index (CPI) to gauge workers’ wage growth over time. The problem with this is that employers don’t compensate workers based on the cost of consumer goods; they compensate workers based on the value of the goods and services they produce—and when you look at the data in that light, you find that wages and productivity have been moving mostly in tandem.

A new “Beyond the Numbers” analysis from the U.S. Bureau of Labor Statistics illustrates this in detail. The authors examine productivity and compensation data for 183 industries over a 28-year period from 1987 to 2015. When they use the CPI as the so-called “deflator” to gauge wage increases, they find that productivity has been outpacing compensation in 83 percent of industries. But when they take a second look using an output price deflator—thereby comparing workers’ wages to the value of goods and services they produce—the productivity-compensation gap shrinks in 87 percent of industries that previously showed a gap. This reveals a much different story, in which productivity and wages are very much in line across most of the economy.