Productivity Growth

   The productivity and compensation numbers used in this chapter describe averages, but over the last 30 years, the economic gains for some groups have not kept up with those averages, while the gains for other groups have been well above the average. These uneven gains have led to growing disparity (or inequality) in compensation and wages. The same competition for workers that makes average employee compensation track productivity growth over the long term will occur for particular groups of employees within the overall labor force. The compensation for groups whose productivity has increased relative to the rest of the labor force will increase relative to average compensation. A number of studies have shown that factors associated with higher productivity-such as education and work experience-have also been increasingly associated with higher wages. This is consistent with the view that growing compensation disparity has been driven by faster growth in productivity for skilled workers than for the less skilled.

   In the 1980s, the increase in disparity was seen both in falling wages at the bottom of the wage distribution and rising wages at the top. Since then, wages in the bottom half of the distribution have either been flat or have grown modestly while disparity has continued to increase in the upper part of the distribution. For example, between 1990 and 2005 the wage at the 10th percentile grew 13 percent while the median wage grew 10 percent, so the difference between them narrowed somewhat. The wage at the 90th percentile of the distribution grew 18 percent over that period, widening the gap between the upper tail of the distribution and the median.

   Why have wage levels grown increasingly disparate? Changes in technology that increase the productivity advantages associated with skill-often termed skill-biased technical change-appear to be the most likely cause. That is, technological advances increased the productivity of skilled workers more than the productivity of the less skilled, leading employers to want to hire more skilled workers. In doing so, employers bid up the wages of skilled workers, widening the difference in pay associated with skill.

   Why does skill-biased technical change appear to be the most reasonable explanation for this trend? The main reason is that the price that employers pay for skilled workers trended upward even while the supply of skilled workers continued to grow. For example, although the fraction of the workforce that is college educated has grown consistently over the past 30 years (an increase in supply), the additional wages needed for an employer to hire a college-educated worker have also grown (an increase in price). Absent a shift in demand, increases in supply should drive down prices, so a price increase implies that demand has shifted toward skilled workers as well.

   Do improvements in the way goods and services are produced necessarily lead to greater disparity in pay? If changes in technology have increased disparity, does that mean that technological change is always bad for those who are in the lower portion of the wage distribution? There are two reasons to doubt that this is true. First, economists studying earlier periods have found that wage disparity actually narrowed in the first half of the 20th century, providing evidence that, in some periods, change has favored less skilled workers as opposed to skilled workers.