Thread by @annastansbury

“Productivity and pay: is the link broken?” In the book launched on Weds @PIIE #LowProductivityLaunch, @LHSummers and I investigate whether US productivity growth benefits typical workers. Since I wasn't on Twitter when we first wrote it, here's a thread:

piie.com/publications/w…

When people ask “has pay kept up with productivity” they may be asking one of 3 questions:
(1) Has the pay of workers on average kept up with productivity?
(2) Has the pay of the “typical” worker kept up with productivity?
(3) If productivity growth rises, does pay rise? 2/

On (1), the answer is “mostly”. Since 90s/2000s there has been a small divergence between average pay and productivity (size depending on your choice of inflation measure and whether you use gross or net productivity). This is the analog of the fall in the labor share 3/

On (2), as has been thoroughly shown by @EconomicPolicy, the answer is “no”. Since 1973 there has been a very large divergence between typical workers' pay and productivity. (This graph illustrates the divergence using the CPI or the PCE price inflation measures) 4/

(Note: there are legit differences of opinion on which inflation measure and which pay series to use. They make some difference but in all cases there has been a large divergence between typical pay and productivity - as income inequality has risen 5/)

The above facts had been documented and debated by many other researchers including Mishel & Bivens, Lawrence, Baker, Feldstein, Pessoa & Van Reenen. The paper by @LHSummers and myself focused on answering (3): “if productivity growth increases, does pay increase?” 6/

Why is that a different q from (1) or (2)? You can imagine different views for why productivity and pay diverged. On one extreme is delinkage: something may be blocking the transmission mechanism so that higher productivity growth doesn’t translate into higher pay growth. 7/

But just as two time series growing together doesn't mean that one causes the other, two series diverging may not mean that the causal link between the two has broken down. Other factors may have come into play which appear to have severed the connection. 8/

A good analogy: think of typical workers' pay as the level of water in a bucket. A tap is supposed to fill the bucket (tap = productivity growth). Over the last forty years, the tap has been running but the level of water has barely risen. You are trying to figure out why. 9/

Perhaps there is a blockage in the tap, so despite the tap being on, very little water has come out of it into the bucket. Or perhaps the water from the tap has been flowing into the bucket but at the same time there's a hole in the bucket and water has been leaking out 10/

If the first view is correct, the most urgent issue is to unblock the tap. There's no point trying to turn up the water pressure because the water won't be able to flow past the blockage. 11/

But if the second view is correct, then if you turn up the water pressure the level of water in the bucket will rise even if the hole doesn't get fixed -- though it’s clearly best ALSO to fix the hole. 12/

What do we find? We regress productivity growth on median, average and production/nonsupervisory pay growth. In years where productivity grew faster, pay grew substantially faster too. A 1% faster rate of productivity growth was associated with 0.7-1% faster median pay growth 13/

So there’s not much of a blockage in the tap – the transmission mechanism from productivity to typical pay is alive and well. But this means that there has been a *big* hole in the bucket: other factors have been pulling down pay even as productivity has acted to raise it. 14/

So – even though productivity and typical pay have diverged so much, faster productivity growth benefits typical workers substantially. When seeking to raise typical workers' pay, we need to focus *both* on raising prod growth *and* on tackling the root causes of inequality. 15/