Low skilled workers are less productive

Workers are delivering more, and they’re getting a lot less,” argued former Vice President Joe Biden in a speech at the Brookings Institution this summer. “There’s no correlation now between productivity and wages.
Senator Elizabeth Warren, a Democratic presidential rival, agrees. Her campaign website states that “wages have largely stagnated,” even though “worker productivity has risen steadily.”
The claim that productivity no longer drives wages is common enough on both political left as well as right. Proponents of this view argue that workers aren’t getting what they deserve based on their contributions to employers’ bottom lines.
Income inequality — the gap between incomes of the rich and everyone else — supposedly demonstrates that the economy’s rewards are flowing, undeservedly, to those at the top. Populists take that conclusion even further, arguing that capitalism is fundamentally broken.
If that is what’s happening, it refutes textbook economics, which argues that wages are determined by productivity — by the amount of revenue workers generate for their employers. If a company paid a worker less than her productivity suggests she should be making, then she would go down the street and get a job that would pay her what she’s worth. Employers compete for workers, ensuring that workers’ wages are in line with their productivity.
This theory leaves out a lot, of course. Pay and productivity can diverge for any number of reasons not included in the standard economic model. Workers may not know how much revenue they create, or what other employment options are available to them. And changing jobs has its own costs, which in the real world gives employers some power over wages.
Like several previous studies, Stanford University economist Edward P. Lazear’s research finds that low-, middle- and high-wage workers all benefit from growth in average productivity. This suggests that improvements in overall economic efficiency help all workers, not just the rich.
It is infeasible to measure the productivity of individual workers. So Lazear examines productivity at the industry level, and compares industries that employ highly skilled workers with those that employ lesser-skilled ones.
Using data on the US from 1989 through 2017, Lazear finds that productivity in industries dominated by higher-skilled workers increased by (roughly) 34 percent in that period. The wages of those workers grew by 26 percent. For industries requiring lesser skills, productivity increased by 20 percent, while wages grew by 24 percent.
In other words, pay increased faster than productivity in industries with lesser-skilled workers, and slower than productivity in industries with higher-skilled workers. Another striking implication of this finding is that “productivity inequality” may have grown faster than wage inequality over this period. While wage differences have increased over time, differences in productivity between groups of workers have increased even more.
So contrary to what Biden, Warren and (many) others say, market forces, not power dynamics, are the principal driver of inequality.
—Bloomberg

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”