Economists and politicians alike have alleged, particularly in more recent years, that since 1973 there has been an effective separation between pay and productivity.
This talking point has been embraced by crony policymakers, anti-banking hard money advocates and socialists. However, no matter how much universal endorsement a talking point gets, it will never serve to justify it.
The supposed pay and productivity gap is, in reality, a prime example of faulty statistics and sets a bad precedent for acceptable methodology. Quite contrary to the claim that from 1979-2020 while productivity has grown by over 60%, hourly pay has only increased by 17.5%, the reality is that total compensation has grown on track with productivity.
Senator Elizabeth Warren has also previously stated that if the minimum wage had kept up with productivity, it would be at $22.00 an hour. This conclusion is drawn from improper data, shown below:
A more complete vision is given by the Economic Policy Institute but remains insufficient. They account for total compensation by including wages and benefits, they come up with a closer estimate:
This further discludes ‘irregular’ payment methods such as performance-based pay. Workers, for example, who are self-employed have their rising productivity included in the data, but their rising pay is disregarded. This accounts for nearly 12% of the gap. However, the main flaw is again adjusting for inflation through the CPI, which accounts for about 39% of the gap. The CPI not only is incompatible with the IPD measurements, but also tends to overestimate inflation by failing to account for consumer responses to changing prices, or a “substitution effect.” The CPI also severely overestimates how much of consumers’ income is spent on utilities. This is because it relies on the Consumer Expenditure Survey, which contains recall bias.
Once these faulty comparisons and biases are fixed, the gap is significantly smaller, and hardly noticeable at all. This is shown below;
the graph below, we can see that capital consumption allowances have greatly increased since 1988:
James Shrek also shows the increasing depreciation on capital since 1973:
Price inflation in various types of goods, such as investment goods will also conceal depreciation and make it appear as a smaller share of the economy. Using the IDP to adjust for real NDP and GDP, another chunk of the difference is made up.
Thus, after accounting for as many relevant factors as possible, there exists little to no gap between total compensation and productivity as shown below:
Craig Duddy is a self-taught economics student and enjoys writing about economics and politics.
This article was originally published on FEE.org. Read the original article.