Surprising Consensus on the Productivity Problem

Among American Compass’s core operating principles are commitments to both “personal civility” and “welcoming converts.” So it is in the spirit of charity and with open arms that I turn here to a new paper from Scott Winship at the American Enterprise Institute, which presents itself as harshly critical of our work before making the same argument itself: Rising inequality is a problem, it turns out. The typical worker has been left behind by the economic growth of recent decades, in part due to deindustrialization. Men in particular have experienced wage stagnation.

At issue in the paper, Understanding Trends in Worker Pay Over the Past 50 Years, is the relationship between worker pay and productivity. In a well-functioning capitalist economy, investment and innovation would drive rising productivity, which would translate to rising worker pay, which would spread prosperity widely across society. Unfortunately, in recent decades, economy-wide productivity gains (and thus GDP growth) have not translated into rising wages at the median, thus increasing inequality and leaving the typical American worker behind. This is especially true of male workers, as explained in our 2023 Cost-of-Thriving Index.

Apples to Oranges and Back Again

The main issue raised by Winship is that analyses by American Compass, as well as the Economic Policy Institute (EPI) and the Brookings Institution’s Hamilton Project, “spoil the comparison between productivity and pay by comparing apples to oranges in one or more ways.” At American Compass, for instance, we use a productivity measure for the entire nonfarm business sector but denote trend in pay only for private production and nonsupervisory workers. EPI uses an even broader productivity measure while focusing on the same subset of workers.

Why these “production and nonsupervisory workers?” As economist Michael Strain observes in his 2019 paper, The Link Between Pay and Productivity Is Strong, “one must decide whose wages are of interest” (emphasis in original). “A natural answer here,” he continues, “is the typical worker. To study whether the typical worker’s pay is strongly related to productivity, the median wage of all workers is a good measure to use. … Another measure of the typical worker’s pay that’s often used is the average wage for production and non-supervisory employees.” Incidentally, Strain is the director of economic policy studies at AEI.

Nevertheless, Winship is determined to provide a “corrective” analysis. He raises issues with the inclusion of nonsupervisory non-profit employees, the self-employed and their income, imputed rents, depreciation, and inflation, though it is not necessarily clear how these affect the answer or even in which direction. His major correction is to compare growth in productivity to growth in average compensation across all workers. That is, rather than use a median or “typical” worker, his compensation data includes high earners as well. Unsurprisingly, when he includes the much larger gains for top earners, compensation growth appears to track productivity growth closely.

If the paper ended here, demonstrating at great length an aggregate productivity-pay link that does not appear to have been in dispute, it would have been unremarkable in every respect. The plot twist comes when Winship proceeds to a section titled, “Productivity and the Pay of the Median Worker.” No, you’re not missing anything. Yes, this is the apples-to-oranges analysis that the paper’s first part sought to correct because “the impression given by these figures is one of an economy that has left workers behind for at least 50 years.” Indeed, the measure that the paper now adopts is “a modified version of the series on which American Compass and the Economic Policy Institute based their analyses.”

Extra care is taken to show that this measure is a good estimate of median pay. “An accumulating mountain of evidence,” Winship intones, “suggests that the productivity of the median worker has risen by less than overall productivity.” How this is different from “the impression… of an economy that has left workers behind for at least 50 years,” he does not say. As Semafor’s Washington editor, Jordan Weissmann, observed with a fun gif on Twitter, “I’m pretty sure the reaction from Oren Cass or EPI would be something like ‘Oh my God! He admit it!‘”

Indeed, the paper then proceeds to articulate a set of explanations that describes capitalism working quite poorly. Is the following from American Compass or AEI?

Industries with a higher level of education in 1989 saw stronger productivity growth through 2017. … A recent paper finds that firms with higher productivity have a larger wage gap between their highest- and lowest-paid workers. Even more strikingly, increases in firm productivity raise the pay of all the firm’s employees, but not equally. The highest-earning workers in a firm with productivity growth receive a bigger earnings boost than do the lowest-earning workers. … Rising productivity in the economy may be driven by greater inequality in productivity and productivity growth and, hence, lead to relatively sluggish growth in median pay. …

There is another way in which productivity growth became less equal, which relates to the shift to a lower-productivity service economy and the way that shift differentially affected men and women. … Part of why men have done worse comes down to their earlier overrepresentation in high-productivity sectors of the economy, such as manufacturing, which employed a smaller share of the workforce over time. … Productivity is generally lower in the service sector, since there are fewer opportunities to improve efficiency using machines, computers, and equipment. Think of haircutting or performing in a play. Moreover, over the long run, productivity grows at a slower rate in the service sector for the same reason. … Over time, men increasingly ended up in lower-productivity, lower-paying service jobs.

Winship concludes with an extensive discussion of “unanchored midcentury pay,” underscoring that productivity does not exclusively dictate worker compensation. Factors like social norms and worker power play important roles. His focus on “competition from female labor” is particularly striking because, while surely relevant, it concedes the reality that flooding a labor market with new workers can indeed suppress wages, abstract productivity measures notwithstanding. The immigration lobbyists would like a word.

The next challenge at AEI will be to update their policy analysis accordingly. If the pattern of economic growth in recent decades has driven inequality and left the typical male worker behind, what should policymakers do differently? For now, that’s a bridge too far—the paper concludes with the logically perplexing recommendation that “rather than take seriously claims that the American economy is broken, policymakers should look for ways to raise economy-wide productivity and the productivity of working- and middle-class earners specifically.” How? Stay tuned.

In some respects, admitting the problem while still advocating the status quo is the most embarrassing place to be. But we should remember it represents progress. Even though Winship’s grasp on the contours of the debate and his own position therein remains unclear, he deserves credit for his willingness to follow the data where it leads.