Compensation confusion

According to Harvard economist Martin Feldstein, the share of US national income going to employees is at approximately the same level now as it was in 1970. This finding contradicts an oft-repeated claim about stagnant incomes, says the American.

Two principal measurement mistakes have led some analysts to conclude that the rise in labour income has not kept up with the growth in productivity, says Feldstein. The first of these is a focus on wages, rather than total compensation:

Because of the rise in fringe benefits and other non-cash payments, wages have not risen as rapidly as total compensation.

It is important to compare the productivity rise with the increase of total compensation rather than with the increase of the narrower measure of just wages and salaries.

The second mistake is to use different price deflators to measure productivity and real compensation, which yields misleading results, says Feldstein:

Since 1970, productivity has grown at an average rate of 1.9 percent per year.

Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same non-farm business sector output price index.

In the more recent period between 2000 and 2007, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).

Source: Compensation Confusion, The American, July/August 2008.

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