Tuesday, September 13, 2016
The Gap Between Labor Productivity And Compensation
Economic theory assumes that workers are compensated in relation to their productivity. Therefore, compensation should be rising as labor becomes more productive. Labor compensation following the last recession has not kept up with labor productivity and many economists blame this on the uniqueness of the last recession. This study by the Federal Reserve Bank of St. Louis finds that the gap between labor productivity and compensation has been widening since 1970. It is part of a long term trend that began more than 40 years ago. The labor productivity gap must be explained by other factors. We can expect the gap to continue to grow as long as the real factors behind that gap are not addressed. Executive compensation has grown much faster than labor compensation over this period. Presumably, the increase in firm productivity is attributed to increases in executive productivity. That is the explanation that many economists use to defend the growth in executive compensation. They are simply being rewarded for their productivity.