Productivity growth and income inequality in USA ... a sad correlation?

money.jpg This post will take me around quite a few corners and roundabouts so bear with me gentle readers. My offset is one of Mark Thoma's recent posts about Treasury Secretary John Snow's recent (defense) explanation of the huge CEO compensations in USA and the rising inequality. The gist of Mr. Snow's argument is that CEO's pay is based on the marketplace's evaluation of them. As such they paid according to their high productivity.

"What's been happening in the United States for about 20 years is [a] long-term trend to differentiate compensation (...) Mr. Snow said the same phenomenon explains why compensation for corporate chief executive officers has climbed so sharply. "In an aggregate sense, it reflects the marginal productivity of CEOs. Do I trust the market for CEOs to work efficiently? Yes. Until we can find a better way to compensate CEOs, I'm going to trust the marketplace."

As also shown by the article cited by Mark Thoma the empirical evidence shows a different or at least differentiated story.

"Robert Gordon, an economist at Northwestern University, says the past few years represent the continuation of a 35-year trend in which a growing share of all labor income goes to a small group of "superstars: professional athletes, CEOs and top corporate officers." On top of this trend, income on capital -- such as interest, dividends, rent and capital gains -- has taken a growing share of national income from labor, and it "goes mainly to a small slice of the population at the very top."

Adding further to this I would like to turn the attention towards as post I did at Cultunomics on a similar matter a month ago. Citing an Economist article which dealt with two NBER working papers one of them co-written by Robert Gordon mentioned above it is clear that the empirical research on the area merits a different conclusion than that of Snow's. 

The two working papers;

1. "Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income" Ian Dew-Becker and Robert Gordon; December 2005 

"Our most surprising result is 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."

2.  "The Evolution of top incomes: A historical and International perspective" Thomas Piketty and Emmanuel Saez; december 2005

"Their latest study [Saez and Piketty] shows that the top 1% of Americans now receive about 15% of all income, up from about 8% in the 1960s and 1970s. Virtually all that rise came from marked increases in labour income. The share going to the top 1% is back to where it was a century ago"

I wonder what Snow would say to this?

Incidentally, also Michael Mandel also shows us in a recent article in BW that productivity does not automatically go into wages as you might expect. 

"(...) it's becoming clear to me that the New Economy has been at best a mixed blessing for one group: the young. The reason is simple. Most of the benefits of strong productivity growth over the past decade seem to have flowed not through rising wages, but through higher returns on capital.

Call this a New Economy definition of torture: to be forced to watch a feast of rising property values without being able to partake.

Here's a number that summarizes the problem: Between 1995 and 2004, the median net worth of young households (aged 25-34) rose by a meager 1.3%, adjusted for inflation. Meanwhile, the net worth of older households (aged 35-64) soared by almost 40%."

This is clearly not the same issue but it teaches us that growth in productivity is not a solid indicator in itself, we need to see where the growth is going and crucially why.