Recently many analysts have realized that “Hillary Clinton’s favorite chart” paints a misleading picture of the economy. That chart shows workers’ hourly compensation barely rising since the early 1970s, while workers’ hourly productivity has doubled.
The union-backed Economic Policy Institute created and popularized this chart. EPI argues it shows “workers are no longer benefitting from their rising productivity.” Consequently they argue the government needs to directly redistribute wealth since businesses no longer give workers the fair fruits of their labor.
Recently writers such as Bloomberg’s Clive Crook, liberal Vox’s Matthew Yglesias, and Harvard’s Robert Lawrence have pointed out why: the chart compares the pay of hourly workers (about three-fifths of the workforce) to the productivity of the entire economy, and compounds the error by then using different measures of inflation to adjust each data set. This creates substantial differences that have nothing to do with whether companies compensate employees fairly. There is no reason to expect the pay of hourly workers to track economy-wide productivity, especially under different measures of inflation. (The Heritage Foundation and Manhattan Institute have also made these points).
The chart below shows how average pay and productivity move for all workers in the private sector, using the same measure of inflation for each. The gap disappears entirely, at least until the Great Recession and weak recovery of the past six years. Making an apples-to-apples comparison shows that companies generally pay workers according to the value they create. Workers’ pay has risen in tandem with their productivity.
EPI President Larry Mishel has responded by arguing that isn’t the point of the chart. He claims EPI doesn’t meant to imply that companies are short-changing workers. Rather “the point is to show that the pay of a typical worker has not grown along with productivity in recent decades, even though it did just that in the early post-war period.”
Setting aside disagreements over whether the earnings have, in fact, stagnated, the appropriateness of using different measurements of inflation, and the ambiguity of what constitutes “typical,” is itself a fair point for discussion. Technological changes have disproportionately increased skilled workers’ productivity, and their pay has increased much more than that of less skilled workers. Average pay and median pay have—unsurprisingly—diverged. If EPI were only saying that some workers pay has risen less quickly than others, and policymakers should look for ways to help those workers increase their productivity, there would be little to argue about.
However, EPI most emphatically does not draw that conclusion. Mishel recently lauded a Hillary Clinton speech for not suggesting improving education as a way to raise wages. EPI places little stock in the notion that technological changes have affected the earnings distribution. Instead, Mishel and the EPI argue that the U.S. economy is fundamentally unfair and the government should redistribute wealth.
While EPI’s technical writings carefully explain they are juxtaposing median pay and average productivity, their mass-market writings do not. The EPI frequently argues that individual workers’ salaries have not risen commensurately with their own productivity and that businesses no longer compensate workers for the value they create.
Consider how Mishel and other EPI analysts write about the productivity and pay gap:
- In a 2015 report Mishel writes “From 1973 to 2013, hourly compensation of a typical (production/nonsupervisory) worker rose just 9 percent while productivity increased 74 percent … this means that workers have been producing far more than they receive in their paychecks and benefit packages from their employers.”
- EPI created an online calculator so workers can calculate how much the productivity-pay gap has cut into their paychecks. The calculator asks: “Since the 1979, workers are working more, making more goods, and not reaping the rewards of their increased productivity. Instead, CEOs and executives—the top 1% of earners—now take home 20% of the nation’s income … Today, the gap between American workers’ productivity and their wages is at an all-time high. What could you be making if wages had grown with productivity?”
- An op-ed by former EPI President Jeff Faux states “Workers’ output-per-hour continued to rise, but their wages and benefits flattened … The forty-year gap between wages and productivity refutes the theory that workers get paid according to their efficiency.”
And on and on and on and on. The Economic Policy Institute frequently argues that workers’ pay and productivity have diverged. In their mass-market writings, they rarely note that average pay tracks average productivity, and that workers as a whole’ enjoy the fair fruits of their labor. Instead, EPI gives the strong impression—or states outright—that companies deny workers fair compensation.
This is why the Clinton campaign argued that “You’re working harder, but your wages aren’t going up.” It is why so many writers have been surprised to learn that average pay has grown right along with average productivity. The Economic Policy Institute communicates the message that higher productivity doesn’t boost workers’ pay. The evidence shows otherwise.