Faster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes.

April 21st, 2015 at 8:21 am

Recently, a number of economists and commentators have suggested that faster productivity growth would be a big way to boost the income of middle-class households. I’m all for faster productivity growth, though I’d argue no one knows how to reliably make it happen. But given the wedge of inequality between productivity and low and middle incomes, wages, and wealth, I’m skeptical that this would work as well as some think.

So I wrote this paper exploring the issue and adding some of my own estimates. Here’s the intro:

Faster productivity growth would be great. But don’t count on it to raise middle-class incomes.

The stagnation of middle-class incomes is one of the most important and influential trends in American economics. Politicians, from President Obama to Hillary Clinton and Jeb Bush have consistently argued that loosening the middle-class squeeze is a major goal of their policies. Prominent economist Larry Summers recently wrote that in crafting “global as well as domestic” economic policy, “the middle class matters the most,” warning against approaches that offer “little to those in the middle.”

In recent weeks, largely motivated by an analysis by President Obama’s economic team, a solution to stagnant middle-income growth has been elevated: faster productivity growth. The President’s Council of Economic Advisors (CEA) tells us the following:

“What if productivity growth from 1973 to 2013 had continued at its pace from the previous 25 years? In this scenario, incomes would have been 58 percent higher in 2013. If these gains were distributed proportionately in 2013, then the median household would have had an additional $30,000 in income.”

That’s a huge increase—more than 50 percent—over the current median household income of about $52,000. Given an increase of this magnitude, it’s no surprise that the idea that higher productivity growth is an important answer to stagnant middle-class incomes has been touted by various commentators in this debate. Based on the CEA’s calculation, Tyler Cowan goes as far as to claim that faster productivity growth would not just boost middle class incomes, but would increase their economic mobility, implying they’d gain relative to other groups.

There are, however, two problems with all this cheerleading. First, there is a large and persistent gap between productivity growth and middle-class incomes: we cannot realistically assume that faster productivity growth would reach the middle as opposed to doing an end-run around them on its way to the top. Second, while it would be great to have faster productivity growth, I’m afraid we must be humble about our ability to make that happen.

In what follows, I document the inequality-induced split between median family income and productivity growth, with a focus on the point that, while productivity did slow in the mid-1970s, it still grew much faster than middle incomes. In this regard, income inequality has increasingly played a wedge-like role between middle-class income and productivity growth.

This observation on the role of inequality in the income/productivity split is key to my argument. Productivity is really another way of looking at overall, or macroeconomic growth—it is aggregate output per hour. A central, even definitional, characteristic of increased inequality is that less growth reaches the middle class relative to the wealthy. Thus, to assign the benefits of faster productivity growth to the middle class is analogous to assuming away growing inequality, an obvious “diagnostic” mistake with the potential to distract policy makers who want to help middle-class families from the importance of policies designed to push back against rising inequality.

To be clear, faster productivity growth would be a highly welcomed development, and would surely help boost median incomes to some degree. But as long as inequality continues to play a wedge-like role between aggregate growth and the incomes of low- and middle-income households, analysts need to be much more cautious in their assumptions regarding the benefits of faster productivity to the middle class.

…read the rest of the paper; and here’s the data set I used for those who’d like to mess around with the numbers.

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9 comments in reply to "Faster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes."

  1. PJR says:

    It is important to look at the combined effects of the decrease in productivity growth and the increase in inequality because both are affected by policies. I’d like to see more on this. During the past 3-4 decades, looking at real income growth, is it correct that only people on the top rungs (3-4 percent?) have done as well or better than they did during prior decades? And that the lowest rungs of the income ladder sunk both absolutely and relatively?

  2. Smith says:

    Your data doesn’t exactly have clear labels. But I went to Fred and downloaded labor productivity. What it shows is that productivity hasn’t changed since 1960. 1973 is a totally bogus inflection point concerning productivity, it does not exist. Since 1960 it takes 35 years to double productivity. The postwar WWII boom goosed productivity from 1948 to 1960, probably due to a couple million GIs no longer in foxholes, not the most productive use of their labor. But productivity immediately started falling, the doubling time lengthening from 25 to 30 years by the mid 1950s and then by 1960 reaches 35, where we still are today.

    The $30,000 figure is a crazy figure and it is not real, the way it was computed was purposefully deceptive. They are comparing apples to oranges, and the administration should be ashamed of themselves because the the $30,000 actually includes the effects of inequality. Tyler Cowan knows better too, but he is the same economist arguing for mobility and opportunity vs. inequality.

    Opportunity, mobility, productivity are part of campaign to sell the public on the illusionary win-win proposition. You need not disturb the rich in the least, or raise their taxes. Everyone can enjoy the good life without having fret over inequality and class warfare.

    Check my figures someone, I think the results are pretty shocking, or is labor productivity the wrong measurement? Does it not include capital? Show me the way brother.

  3. Bob says:

    Productivity growth will be inadequate to increase incomes for the bottom half, or even bottom 90%, unless the labor share increases. This has been one of the significant contributors to rising inequality – no? For this to happen we need at least 2 things (1) a Fed that will tolerate moderate inflation and lower unemployment; and (2) stronger labor unions.

    The first is doable in the short run – the second notsomuch.

    • Procopius says:

      This is the point that’s been baffling me for years. I keep seeing these references to declining productivity, or a large decline in productivity growth, or something, and then on the other hand I see quite clear charts showing that the gains from productivity growth have not been going to the employees. Especially since about 1980. It really seems bizarre to me that there are people touting increasing productivity as a good thing. We can infer from recent history that the benefits are not going to go to workers, so who cares?

  4. dwb says:

    Entirely depends in what sectors we see faster productivity growth. The middle class spends a lot of money on health care, education, and housing. If we see faster productivity growth in those areas, it is effectively a middle class tax cut even if nominal incomes stay flat. Unfortunately, the government cannot promote productivity growth except by getting out of the way. In areas like housing, where there are significant barriers to land use and denser development, govt is generally the issue not the solution.Even worse, most policy proposals on the left I see assume more money means more value, which is false. In fairness, policy proposals on the right assume less money means more value for the money, also false. It’s a shame that the economics profession has been captured by lobbyists. There are just not any good independent ones with any credibility out there anymore.

    • Smith says:

      The government has a huge impact on productivity growth. Infrastructure, promotion of technology, protection of nascent technology, education, labor policy, corporation law, immigration.
      This goes back 200 years, the Erie Canal began construction 1817. The power industry, communications industry, transportation system, providing infrastructure necessary for productivity improvements are heavily subsidized, regulated, and controlled directly or indirectly by the government. The money government spends on education, everything from public funding of primary school, to NIH grants for basic research, and DOD DARPA spending (ever hear of the internet?) are vital to productivity growth. The government played an important role in the agricultural revolution of the 19th century. Patent protection used to encourage innovative productivity gains, until it became self-funded enterprise encouraging frivolous grants while subverting the constitution by changing first-to-invent to first-to-file (thank you Obama and Democrats).
      Instead of the government standing idly by while labor is eviscerated by capitalists racing to the bottom, they need to pass laws to protect manufacturing and technology, as Germany and other countries have (though I’d retain at-will-employment). While the rich have played havoc with the economy and productivity, improving productivity by paying less, buying competitors, cutting workers, shipping jobs overseas, the government has gotten out of the way (except for bailouts).

      The government needs to get in the way!

  5. Hossein says:

    My study on OCT countries between 1985-2010 showed that productivity has positive sig. Impact on health outcome. So I can argue productivity is correlated to income and should be have positive impact on higher income families than lower or in a larger scale in country and city.

  6. Hossein says:

    Oecd countries

  7. dilbert dogbert says:

    Productivity arguments seem to me to be talking about how big a herd of elephants can dance on the head of a pin. The real thing to talk about is power.