Productive Economy ≠ Higher Living Standards

Author: Allyson Stewart, Research & Public Policy Fellow, Women’s Initiative


In a recent issue brief, “The wedges between productivity and median compensation growth,” Economic Policy Institute President Lawrence Mishel debunks a common misconception: Increased productivity growth in the American economy does not benefit the average American. Instead, productivity gains have translated into exacerbated income inequality.


“We are often told that greater competitiveness and higher productivity are the keys to higher living standards,” said Mishel. “In fact, productivity growth only establishes the potential for improved standards of living. In the past four decades, and especially recently, it has not translated into proportionate gains for working families.”


The brief highlights a major divergence between productivity growth (growth of the output of goods and services per hour worked) and compensation growth for the average worker that has contributed to rising income inequality over the past thirty years and in particular the last decade. According to the brief, “Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent.” The figure below shows the rising gap between productivity and compensation:





The brief attributes this phenomenon to three causes: The rising inequality of compensation, the erosion of labor’s income share (and corresponding increase in capital income’s share), and a more minor cause, the deterioration in “labor’s terms of trade.” Essentially, firms are making more money, but not sharing it equally, or even close to equally, amongst workers. Instead, most of the gains are going to the highest paid employees and shareholders, and at the same time the cost of goods workers purchase are going up faster than their wages increase. Unless productivity gains are distributed more equally, those gains will continue to exacerbate income inequality.


At the Women’s Initiative for Self Employment we create opportunities for working class Americans to create better paying jobs for themselves, build assets, and make greater investments in labor (as opposed to capital) through small business ownership. Just one year after graduating, our clients' average household income leaps from $22,008 to $34,980—an increase of nearly 60%. Graduates also double their rate of home ownership in the two years after training, and their average household net worth grows by more than 300%, from $12,968 to $53,572. In keeping with The Andersonville Study of Retail Economics finding that local businesses spend 28 percent of revenue on labor compared to 23 percent for chains stores, we find that our graduates consistently make significant investments in their workers - Women’s Initiative graduates provide an average of 2.5 jobs through their businesses and pay an average wage of $16.45 per hour—more than double the federal and State minimum wage. These outcomes suggest that increased investment in microenterprise training and support offered by organizations like the Women’s Initiative could help close the gap between productivity growth in the U.S. economy and the well-being of the average worker.