One of the most important and heatedly debated trends affecting the economy is the nature of the relationship between what workers earn and how productive they are. Judging from a new Wall Street Journal summary of a new academic paper on the subject, the pay-productivity relationship is going to remain heatedly debated. In the process, the Journal report (the paper itself isn’t yet available on-line) indicates that in major respects, the study (co-authored by former Clinton Treasury Secretary and former top Obama economic adviser Larry Summers) may wind up making the subject more muddled than ever.
According to the Summers study (in the words of Wall Street Journal writer Greg Ip), the recent conventional wisdom about productivity since the 1970s rising much faster than pay is wrong. Instead, it found “a strong and persistent link between hourly productivity and a variety of wage measures since 1973.” And although the two sets of data have been diverging, Summers and his colleague claim that, “The problem…is that the positive influence of productivity on pay has been overwhelmed by other forces pushing the other way.”
That’s an entirely reasonable conclusion. After all, as I’ve frequently pointed, the idea that major trends and developments have only one or a small handful of causes is usually wrong. But I find the Summers case fishy for several reasons.
First, at least as Ip writes, the study’s authors don’t seem to be challenging the contention that productivity has been rising much faster than pay since 1973 at all. On a purely mathematical basis, they state that, during short periods, there’s been a consistent tendency for productivity to rise somewhat faster than pay, and that over the entire multi-decade period examined, the accumulation of these relatively modest gaps produced a large gap. That sounds like a distinction without a difference to me.
Second, Summers and colleague seem to assume that one of the productivity-enhancing forces at work in recent decades has been trade. But that belief seems pretty far-fetched given how trade policy in recent decades has pushed offshore so much American manufacturing – the economy’s productivity growth leader for the last three and one half decades – or turned the other cheek as foreign predatory practices have undercut domestic manufacturing production. Good luck to any economy thinking that it can neglect the decline of its most productive sector and maintain the pace of productivity growth.
Third, and conversely, Summers’ study assumes that forces other than trade (and technological advance) have been “eating away at the ability of workers to share fully in the rise in productivity.” The culprit they single out? “Weaker unions.”
Organized labor has undoubtedly been clobbered since 1973. But why don’t Summers and his co-author recognize that trade policy mistakes bear much of the blame? In particular, how likely are workers to bargain hard for higher wages if they realize that they can easily be replaced by a much cheaper (and equally productive) Mexican or Chinese counterpart? Moreover, wage pressure throughout the economy is bound to decrease as displaced manufacturing workers start competing for remaining services jobs.
One issue on which I do agree with Summers: the significant productivity growth slowdown that’s afflicted the economy in the post-1973 period, and especially since the last recession struck at the end of 2007, has dragged seriously on wage growth, and needs to be reversed. But unless the pay-productivity gap is closed as well, the only way for the political and business establishment to keep U.S. living standards at even minimally acceptable levels will be to keep injecting artificial stimulus into the economy, and boosting its already dangerous addiction to borrowing and spending bubbles.
In fact, there’s been a prominent economist who’s been arguing lately that that’s exactly the trap that the nation has been stuck for many years. He calls it “secular stagnation.” His name? Larry Summers.