Productivity Slowing But Do We Care?

    This morning, The Wall Street Journal has a story about the slowing of productivity. But it misses the main point. First, here's the main thesis:

Productivity Lull
Might Signal
Growth Is Easing

Ripples Could Confuse
Interest-Rate Outlook;
Fed Remains Optimistic

By GREG IP
March 31, 2007; Page A1

The U.S. productivity boom that began in the mid-1990s is showing signs of running out of steam.

If it proves more than a temporary lull, slower growth in productivity -- that is, output per hour worked -- could lead to slower growth in living standards, more difficultly paying for the baby boomers' retirements and a greater risk of inflation. Inflation fears would make the Federal Reserve more reluctant to lower interest rates.

Official measures have slowed since the late 1990s, when an acceleration in productivity growth made possible faster growth, lower unemployment, lower inflation and lower interest rates. It fueled a boom in business investment and stock prices. Today, in contrast, productivity growth has slowed, business investment has turned down and inflation is proving stubborn.

"All the elements of the good years of the '90s have now turned around," said Robert Gordon, an economist at Northwestern University who has been studying productivity trends for years. As a result, he said, current Federal Reserve Chairman Ben Bernanke faces "tougher decisions" than his predecessor, Alan Greenspan.

    The main issue though is that while productivity was on fire for many years, workers got very little from the gains. Here is something I wrote almost two years ago to make the point:

The link between productivity gains and wages has been broken. Recently, the Economic Policy Institute showed that productivity has grown almost three times faster than wages since 2001. During that time, 70 percent of the nation’s income growth has gone straight into corporate coffers as profits—presumably to continue to finance staggering pay and benefits for executives—a complete reversal from the previous seven business cycles when 77 percent of the overall income growth went to wages.

Although the theft of workers’ sweat of the brow is even more obvious today, the erosion began about three decades ago. Joel Rogers, director of the Center on Wisconsin Strategy, has made a recent stunning calculation: Had wages tracked productivity as they have over the past 30 years, “median family income in the U.S. would be about $20,000 higher today than it is.”

Check this out: Taking into account productivity, the minimum wage should be $19.12—which would make it almost 50 percent above today’s median wage (not to mention the pathetic $5.15 current minimum wage). Rogers concludes: “It’s fair to say that most American workers today are making substantially less than the (historically, productivity-normed) wage of the economy’s worst-off workers of a generation ago.”  Now, most of us would find this lopsided economic arrangement obscene just by its sheer unfairness: No matter how hard you work, you won’t get a fair return on your labor. Beyond the unfairness, it also tears at the country’s social fabric because an economic system cannot endure if it is perceived to be unfair and fails to deliver a rising standard of living.

    Here's the post where you can link to the rest of the article.