Labor Compensation and Productivity Gap Keeps Growing

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Since the end of the past recession, labor productivity has risen, while labor compensation has declined.¹ However, this seems to be a continuation of a long-term trend, rather than a response to the Great Recession.

In a recent Economic Synopses essay, Vice President and Deputy Director of Research B. Ravikumar and Lin Shao noted that real labor compensation per hour was 0.5 percent lower 20 quarters after the start of the current recovery. As they wrote: “One might then wonder whether the slow growth in labor compensation is simply due to slow growth in labor productivity.”

The authors then examined labor productivity over the same time period. They found that, while compensation decreased, labor productivity actually increased by 6 percent.

Ravikumar and Shao compared the current recovery to the one following the 2001 recession. The previous recovery saw a similar disparity between labor productivity and labor compensation. Twenty quarters after the start of the recovery, labor productivity was 13 percent higher, while labor compensation was only 5 percent higher.

The authors noted that this trend was not limited to recoveries following recessions. They wrote: “In fact, labor productivity has been growing at a higher rate than labor compensation for more than 40 years.”

Ravikumar and Shao found that labor productivity was 3.8 times as high in the first quarter of 2016 as it was in the first quarter of 1950. However, labor compensation was only 2.7 times higher. These two measures largely moved together until about 1970, when labor productivity began growing at a higher rate. (For figures showing the widening gap over the various times periods studied, see the essay “Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend.”) They wrote: “In other words, the gap between labor productivity and compensation has been widening for the past four decades.”

The authors concluded that labor compensation failed to catch up with labor productivity after the 2007-09 recession. “However, the driving force behind it is not unique to the recent recession but is part of a long-term trend of a widening productivity-compensation gap.”

Notes and References

¹ Ravikumar and Shao examined labor productivity and compensation for the nonfarm business sector.

• Economic Synopses: Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend
• On the Economy: Job Flexibility and the Gender Pay Gap
• On the Economy: Regulations, Labor Costs and the Recovery