Income distribution or lack thereof

September 6, 2006

Free Market Foundation

The failure of productivity growth to boost the real incomes and wages of median families and workers calls into question the standard economic paradigm that productivity growth automatically translates into rising living standards, say economists Ian Dew-Becker and Robert Gordon.

The first half of this decade has witnessed an “explosion” in U.S. labour productivity growth, a trend in productivity growth faster than in any previous sub-period of the post war era, say the authors. But not everyone shared in the productivity gains:

Median household income fell by 3.8 per cent from 1999 to 2004, and grew at an annual rate of only 0.9 per cent per year from 1995 to 2004, despite the growth rate of non-farm private business output per hour of 2.9 per cent over the same period.

Similarly, the median real wage for all workers over 1995-2003 grew at 1.4 per cent per year, less than half the rate of productivity growth.

In addition, using IRS micro data on 5 million individual tax returns, the authors show:

From 1966-2001, only the top 10 per cent 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 per cent of the income distribution fell behind or were even left out of the productivity gains entirely.

The top one-tenth of one per cent of the income distribution earned as much of the real increase in wage-and-salary income from 1997-2001 as the bottom 50 per cent.

Source: Les Picker, Inflation Dynamics and the Distribution of Income, NBER Digest Online, August 2006; based upon: Ian Dew-Becker and Robert J. Gordon, Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income, National Bureau of Economic Research, Working Paper No. 11842, December 2005.

For text: http://nber.com/digest/aug06/w11895.html

For NBER Working Paper: http://www.nber.org/papers/w11842

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 29 August 2006