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BPO Journal

Wednesday, August 30, 2006

High Productivity, Low Wages

The New York Times reports that the current economic expansion is the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers:

The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

This causal linkage between productivity and wages may seem paradoxical at first, but is perfectly logical given the path to such productivity increase. As economists at Goldman Sachs point out, the most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income. Permeable national boundaries, technological advances and the declining cost of capital goods have reduced the value of the denominator in the productivity equation, thereby enhancing productivity levels. However, outsourcing and technological advances have also increased job insecurities, resulting in an erosion of workers' bargaining power and yielding a downward pressure on wages.

In addition, wage increases (or lack of) have also been influenced by high energy prices and rising health care costs, among others. Therefore, firms are spending more on benefits at the expense of wages. This is evidenced in the marginally better performance of total employee compensation - wages plus benefits:
Total employee compensation — wages plus benefits — has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990’s and otherwise has not been so low since 1966.

I think this is an interesting turn in the century to mark. Moving forward, as the benefits of globalization evidence themselves in economic performance, companies must develop means of redistributing income and providing employees with their fair share of growth.

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