Inequality, Productivity and Compensation

The Brookings Institution social economist, William Galston, has an interesting column in yesterday’s Wall Street Journal, “The U.S. Needs a New Social Contract”, deploring the fact that worker compensation (i.e. wages + benefits) has not kept up with gains in worker productivity since the 1970s.  Here is a chart published by the Economic Policy Institute showing the divergence between productivity and compensation for a “typical” ( i.e. in the middle) worker beginning in the 1970s:
CaptureThe Heritage Foundation’s James Sherk has addressed this same question in a recent report “Productivity and Compensation: Growing Together” and shows that the “average” compensation of an American worker does track productivity very closely as shown in the chart below:
Capture1What is the explanation for this apparent discrepancy?  In fact, it is the difference between the average earnings of U.S. workers and the earnings of the median or middle worker.  The very high earnings of the top 10% and the even higher earnings of the top 1% raise average worker compensation way above the income level of the median worker.  In other words it is the result of the skewed and unequal distribution of incomes which is heavily weighted toward those at the top of the scale.  The typical or median worker is falling behind and is not benefitting from the steady rise in the overall productivity of the American economy.  This is what income inequality is all about.
The question is what to do about it.  Faster economic growth will create more opportunity by creating more jobs and better paying jobs.  Raising high school graduation rates as well as creating high quality technical training programs will also help.
Mr. Galston insists that this is not enough.  Too many workers will continue to lag farther and farther behind.  We could raise the Earned Income Tax Credit for low income workers but this would be very expensive in our currently tight fiscal situation which is likely to continue indefinitely.
Do we need a new social contract?  If so, what form will it take?  How will we pay for it?  These are indeed very difficult questions to answer!

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