Pay and productivity

Date posted: November 8, 2010

Workers like to get paid what they are worth, and throughout our history there does seem to have been a link between how productive a worker is and his or her pay. But I understand that link has recently broken. N.C. State University economist Mike Walden explains.

“What we do is we look at what a person is paid and particularly how fast that pay goes up to how productive they are — how many widgets they’re making per hour, to use the classic economic example. And we economists saw a very close link between how fast your pay went up and how your productivity improved until about 1975, and since 1975 the two have diverged. Pay has not gone up; take home pay has not gone up anywhere near the improvements in productivity, and so that is the puzzle.

“There is an answer to the puzzle, and it has to do with how people are getting paid. And they are getting paid differently today than they did in the past. Much more of pay, if you will, is going into the value of benefits. In fact, the value of benefits has gone from 10 percent of pay up to 20 percent of pay.

“Now the problem is people don’t see the cost of those benefits in their paycheck — what they take home with them to spend — but behind the scenes they are obviously very important. And if, indeed, you look at a measure of pay that includes the value of benefits, it has gone up in lockstep with improvements of productivity. So the link has not been broken.

“So the bottom line here is you have to look broadly at how people are paid and, very importantly, include the value of benefits, like health-care benefits. And when you do that, there is still this link between pay and productivity.”

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