"The top 1 percent of the income distribution accounted for 21.6 percent of real total income gains during 1966-2001 and 21.3 percent during the productivity revival period 1997-2001."
A basic tenet of economics is that productivity growth is the source of growth in real per capita income for the typical -- that is, median -- American worker. However, in Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income (NBER Working Paper No. 11842), authors Ian Dew-Becker and Robert Gordon raise doubts about that tenet when they demonstrate that shifts in the income distribution have prevented the typical American worker and household from enjoying the gains of the recent upsurge in productivity growth.
The first half of this decade has witnessed a sharp contrast between strong output growth, on the one hand, and slow employment growth on the other. Taken together, these contrasting factors have resulted in the 2001-4 "explosion" in U. S. labor productivity growth, a trend in productivity growth faster than in any previous sub-period of the postwar era.
Yet who received the benefits of this productivity growth explosion? Median household income fell by 3.8 percent from 1999 to 2004 and grew cumulatively at an annual rate of only 0.9 percent per year from 1995 to 2004, much slower than the growth rate of non-farm private business (NFPB) output per hour over the same period of 2.9 percent. Similarly, the median real wage for all workers over 1995-2003 grew at 1.4 percent per year, less than half the rate of productivity growth. The failure of the productivity growth revival to boost the real incomes and wages of the median family and median worker calls into question the standard economic paradigm that productivity growth automatically translates into rising living standards.
Using IRS micro data on 5 million individual tax returns, the authors show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage-and-salary income equal to or above the average rate of economy-wide productivity growth. To translate the tax data into a form comparable with aggregate data on real labor income, the authors adjust for changes in untaxed benefits and in hours per worker. The ratio of untaxed benefits to taxed wages and salaries is assumed, pending further research, to change at an equal annual rate for each percentile of the income distribution.
Similarly, hours per worker are assumed to change at the same rate across the income distribution. Subsequent research by Peter Kuhn and Fernando Lozano (NBER WP No. 11895, summarized in the July 2006 NBER Digest) shows that the frequency of long work hours has increased for the top quintile of wage earners and decreased for the bottom quintile. Taking this research into account would imply that the rate of increase of labor income per hour in the top percentiles would be somewhat slower than of total labor income.
Median real wage-and-salary income in the tax data barely grew at all. Average wage-and-salary income kept pace with productivity growth, but only because half of the income gains went to the top 10 percent of the income distribution, leaving the remaining half for the bottom 90 percent.
The authors' most surprising result from the large IRS micro data set is that over the entire period 1966-2001, only the top 10 percent of the income distribution enjoyed a growth rate of total real income (excluding capital gains) equal to or above the average rate of economy-wide productivity growth. Those in the bottom 90 percent of the income distribution fell behind or were even left out of the productivity gains entirely.
Stating their main results differently, the authors note that the top 1 percent of the income distribution accounted for 21.6 percent of real total income gains during 1966-2001 and 21.3 percent during the productivity revival period 1997-2001. Another way to describe these results is that the top one-tenth of one percent of the income distribution earned as much of the real increase in wage-and-salary income from 1997-2001 as the bottom 50 percent.
In addition to this microanalysis, the authors explore whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. They find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction. This is an impact of the change in the rate of trend productivity growth and dies out if trend productivity growth stabilizes at a new level, as happened in 1995-2005. Symmetrically, the post-1965 acceleration of inflation was caused in part by the infamous "productivity slowdown." Simulations of the authors' model suggest that the 1965-80 slowdown in productivity growth boosted inflation on average by 1.3 percentage points during the 1965-80 simulation period, while the 1995-2005 revival of productivity growth held down inflation on average by 1.2 percentage points over the 1995-2005 period. These results pose challenges for monetary policy by showing that the moderate behavior of inflation over th e past decade has been a byproduct of a one-time acceleration of productivity growth that may now be reversing its direction.
The authors believe that economists have placed too much emphasis on "skill-biased technical change" and paid too little attention to the sources of increased "skewness" at the very top, within the top 1 percent of the income distribution. They distinguish two complementary explanations, the "economics of superstars," that is, the earnings of sports and entertainment stars, and the escalating compensation of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of de-unionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensatio
-- Les Picker