Productivity and Wages Are In Sync
According to Donald Boudreax and Liya Palagashvili:
Many pundits, politicians and economists claim that wages have fallen behind productivity gains over the last generation.
The illusion is the result of two mistakes that are routinely made when pay is compared with productivity. First, the value of fringe benefits — such as health insurance and pension contributions — is often excluded from calculations of worker pay. Because fringe benefits today make up a larger share of the typical employee’s pay than they did 40 years ago (about 19% today compared with 10% back then), excluding them fosters the illusion that the workers’ slice of the (bigger) pie is shrinking. The second mistake is to use the Consumer Price Index (CPI) to adjust workers’ pay for inflation while using a different measure — for example the GDP deflator, which converts the current prices of all domestically produced final goods and services into constant dollars — to adjust the value of economic output for inflation.
Different inflation adjustments give conflicting estimates of just how much the dollar’s purchasing power has fallen. So to accurately compare the real (that is, inflation-adjusted) value of output to the real value of worker pay requires that these values both be calculated using the same price index.
Consider, for instance, that between 1970-2006 the CPI rose at an average annual rate of 4.3%, while the GDP deflator rose only 3.8%. Economists believe that such a difference arises because the CPI is especially prone to overestimate inflation. Therefore, much of the increase in the real purchasing power of workers’ pay is mistakenly labeled by the CPI as mere inflation. (WSJ)
“First, the value of fringe benefits—such as health insurance and pension contributions—is often excluded from calculations of worker pay.”
As much of an impact that these benefits are for workers now, they must be taken into account.
Especially since the impact of these benefits have nearly doubled in the past 40 years. One would think these benefits would be included in past estimations as well.
Of course it becomes an illusion whenever they exclude these benefits and contributions. These play a major factor into an employee’s pay.
“…have compared worker pay (including the value of fringe benefits) with productivity using a consistent adjustment for inflation. They move in tandem.”
So it indeed is all just an illusion. When taking benefits into account, there is no decoupling.
“True enough, membership in the middle class seems to be declining—but this is because more American households are moving up.”
I wonder if this is due to the increase in fringe benefits. The increase in benefits are causing households to move up.
This most likely makes the most sense. Especially once most Americans receive health benefits through ObamaCare