Workers Producing More Getting Paid Less

My analysis of today’s revised third-quarter 2011 report for real labor output, productivity and compensation (salary plus all benefits for ALL nonfarm employees) by the Bureau of Labor Statistics shows that “average” labor market conditions are far more grim and polarized even than previously estimated.

“Average” real compensation per hour of work is now shown to have fallen at a 3.2 percent annual rate in the third quarter rather than the 2.4 percent decline the BLS previously estimated. And this sharper decline comes after revised figures for second quarter now show average real compensation per hour plunging at a -4.1 percent rate rather than the previously estimated -1.3 percent decline. That is, today’s revisions show average real compensation plunging at a -3.7 percent annual rate during second quarter and third quarter, is down -2.3 percent year over year to the lowest levels since the worst of the economic collapse three years ago.

And remember these are “average” compensation data – not medians – suggesting that conditions for most workers likely deteriorated even more sharply.

Also remarkable in today’s data and revisions is the intensifying bifurcation between the amount labor produces and the amount labor is paid. While real labor compensation per hour was falling at a 3.2 percent rate in the third quarter, real labor output per hour (productivity) was rising at a 2.3 percent rate. Over the past year as real compensation per hour fell 2.3 percent, real labor output per hour rose 0.9 percent.

Those who merely assume and repeat long-obsolete economic theory still claim that average real compensation rises with productivity growth. However, the data long have shown that the link between compensation and output was broken in the early 1980s, with the divergence accelerating in recent years. The share of output received as compensation by labor has plunged at an unprecedented rate in the 11 years of the 21st century and is now, by far, the lowest on record that begin in 1947. (See these updated historical data graphics.)

Along with the unprecedented problems of even “average” compensation per hour, and even worse than the fact that the U.S. has fewer jobs today than it had in 2000, 11 years ago, because of fewer paid hours per week and year, U.S. nonfarm businesses now pay for fewer hours of work than at the end of 1996—almost 15 years ago, when the U.S. population had 43 million fewer people.

Finally, although media outlets constantly continue to blame any price increases on labor costs, today’s BLS data again make it clear that labor compensation and productivity reduce inflation in the economy while price rises are almost entirely the result of (rarely discussed) non-labor costs. Non-labor costs per unit of production were up at a 9.3 percent annual rate in third quarter, and are up 4.7 percent year over year and up 47.2 percent over the past 11 years. Comparable unit labor costs fell at a 2.5 percent rate in third quarter, are up just 0.5 percent year over year and up only 9.7 percent since 2000-third quarter.

Today’s new BLS data show that household finances are under even more unprecedented stress than was previously believed. The data also show that the fast-worsening 30-year gap between even “average” compensation and output undermines obsolete economic catechisms and policy “remedies.”

Globalization and deregulation matter enormously.


Charles W. McMillion is president and chief economist of MBG Information Services.

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