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Does Productivity Growth Still Benefit Working Americans?

June 13, 2007
| Reports

In the last few years many researchers, commentators, and elected officials have bemoaned the fact that the middle class has not been receiving its fair share of income growth. Given the increased work effort of female spouses, it is claimed that the middle class has been treading water while working longer. When this is contrasted with the rise in productivity, CEO pay and corporate profits, the natural conclusion is that the system is rigged and needs changing. As a result, the focus of many, particularly those on the left, has shifted from promoting growth, particularly productivity growth, to redistribution. Since growth no longer appears to benefit “working” Americans, it’s better, they argue, to focus on policies like universal health care, stronger retirement security, and other redistributionist programs as a way to raise living standards for this group of Americans.

This change in political mood, particularly among Democrats, represents a significant and troubling shift. Since the time of FDR, Democrats have been the party of growth, albeit growth that is widely shared, but growth nonetheless. As a result, Democrats from FDR through Clinton saw robust and vibrant economic growth as progressive and supported policies that led to that. In contrast, in recent years, many Democrats appear to have lost the faith they once had in growth as a “rising tide that lifts all boats.” Indeed, it’s been an article of faith among many on the left to state scathingly that JFK’s famous phrase no longer applies, if it ever did.

This loss of faith in productivity as an engine of middle class prosperity matters because it means that it will become harder to gain support for government policies to spur productivity growth. And government policies can help boost productivity growth. Indeed, government support for R&D and the digital transformation of the economy are particularly critical for ensuring robust growth in the future. If, in contrast, government gives short shrift to policies to boost productivity in favor of social policies to distribute an already fixed pie, then growth, and middle class opportunity, will suffer. The stakes are not small, for maintaining the productivity rates of the last decade for the next 25 years will mean that per capita incomes will more than double (105 percent) instead of growing just 44 percent if productivity growth slips to pre-1995 levels.

This paper examines carefully the trends over the last 25 years in income growth and finds that, contrary to the conventional explanation embraced by many on the left, the fruits of productivity growth have actually been harvested by most working Americans. Much of the difference in productivity and median income growth can be explained largely by demographic change and rising non-wage benefits. This is not to say that growth in recent years has not been more inequitable than it should be, or that recent tax and social policies have not exacerbated this inequality. Both are true. However, the historical link between productivity growth and wage growth is not broken and it would be a grave mistake for the future of our nation if Democrats gave up on growth.