Has ‘Productivity Inequality’ Grown Faster than Wage Inequality?

POLITICS & POLICY

It is common to hear that workers’ productivity no longer determines their wages. “Workers are delivering more, and they’re getting a lot less,” former vice president Biden recently argued. Income inequality supposedly demonstrates that the economy’s rewards are flowing, undeservedly, to those at the top.

But does inequality necessarily mean that workers aren’t getting what they deserve based on their contributions to employers’ bottom lines? It may be that “productivity inequality” — the difference in productivity between different groups of workers — has increased faster than wage inequality over the past three decades. I discuss this in my latest Bloomberg column, drawing on a new paper by Stanford economist Edward P. Lazear.

It is infeasible to measure the productivity of individual workers. So Lazear examines productivity at the industry level, and compares industries that employ highly skilled workers with those that employ lesser-skilled ones.

Using data on the U.S. from 1989 through 2017, Lazear finds that productivity in industries dominated by higher-skilled workers increased by (roughly) 34 percent in that period. The wages of those workers grew by 26 percent. For industries requiring lesser skills, productivity increased by 20 percent, while wages grew by 24 percent.

In other words, pay increased faster than productivity in industries with lesser-skilled workers, and slower than productivity in industries with higher-skilled workers. Another striking implication of this finding is that “productivity inequality” — the gap in productivity between workers — may have grown faster than wage inequality over this period. While wage differences have increased over time, differences in productivity between groups of workers have increased even more.

I conclude that market forces, not power dynamics between workers and their employers, are the principal driver of inequality.

Check out my column for my full argument. Your comments, as always, are very welcome.

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