Tuesday, April 19, 2016

Pay Productivity Gap

Welcome to the grand illusion
Come on in and see what's happening

Bureaucrats including those in the Obama administration have been touting the so called 'pay productivity gap' portrayed by the difference between the red and green lines below as justification for various interventions (e.g., minimum wage laws, overtime pay rules) in the labor market. Because worker incomes have not been capturing productivity increases in their incomes, so the argument goes, then force must be used to more closely align compensation with productivity.

A forthcoming study by labor economist James Sherk suggests that the pay productivity gap has been an illusion--an artifact of measurement error. He shows that methodological choices have created a gap that, in reality, does not exist. Those errors include comparing the pay of only some workers to the productivity of all workers, counting productivity of self-employed workers but excluding their wage growth, and measuring inflation differently to calculate pay and productivity growth.

When Sherk corrects these errors, then wage growth becomes the yellow line above--one that closely tracks productivity growth.

Another lesson in why data should never be accepted at face value. Measurement error is always present. The question is how much.

Also a reminder of how data are subject to manipulation by special interests.

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