What is the Greatest Challenge Facing the U.S. Economy?
By William N. Pieroni
“In the long run we are all dead…” – John Maynard Keynes
(“…we are all living in someone else’s long run.”)
“I write for the money…” – William F. Buckley (Interview with Charlie Rose)
The U.S. faces a number of near- and long-term economic issues. Challenges include
government and consumer debt, education, healthcare, tax reform, and relative global competitiveness.
Economists tend to having varying opinions when examining data or making forecasts. However, most
economists would agree that increasing worker productivity is the key factor in improving the standard of
living for workers. Consequently, the most critical issue facing the U.S. economy is sustaining continued
labor productivity improvement, while simultaneously addressing the productivity-wage gap. There are
two distinct components to this issue. First, supporting annual U.S. labor productivity over time and
second, increasing the correlation between productivity and compensation changes.
The first aspect of the issue is U.S. labor productivity. Labor productivity is defined as the real
output per labor hour worked. Growth in labor productivity is the change in this ratio over time.
Improvements in labor productivity enable U.S. workers to produce more output, goods or services, for a
given number of labor hours. This is important because improvements in labor productivity are one of the
key ways to improve the standard of living for workers. Increases in labor productivity allow individual
workers to produce more output for the same amount of effort. However, if productivity improvements
don’t lead to increased wages, workers may not feel the benefit of improved productivity. Over time, this
divergence of productivity and wages leads to a gap, a productivity-wage gap. When worker productivity
increases faster than worker compensation, improvements in the standard of living may not occur. It is
important to simultaneously increase labor productivity and pay.
Examination of changes in real worker productivity and hourly compensation over time reveal
several troubling issues (figure 1). From 1948 through 1973 productivity increased 96.7% while
compensation increased 91.3% reflecting an average annual increase of 3.7% and 3.5% respectively.
Productivity did grow marginally faster than labor but the two factors did move closely together. The rsquared for the two variables during this timeframe is .99. Improvements in productivity led to
improvements not only for business owners but also workers. However, the 1973 through 2014 time
period saw a “decoupling” of this alignment. Productivity during this time period improved 72.2% for an
average annual improvement of 1.7%. There was a clear slowing of productivity improvement relative to
the 1948 – 1973 timeframe. Worker compensation during this time period increased only 9.3% for an
average increase of .22% per year. The r-squared between the two variables was only .66, barely
statistically significant. Worker compensation did not keep pace with labor improvements. Moreover,
during the 2009-2014 post-recessionary timeframe productivity exhibited a weak .71% average annual
increase while hourly compensation was approximately flat with an average annual decrease of -.06%.
It is widely accepted that the only way to improve the standard of living in the U.S. is to improve
worker productivity and achieve increases in real wages for workers. Clearly the U.S. has faced slowing
productivity improvement over the past several decades. Average annual productivity increases slowed
from the 1948-1973 average of 3.7% to 1.7% during the 1973 –2014 period with real wages stagnating
over the same period. Analysis and research reveals a number of potential clues as to why productivity
slowed and compensation virtually stopped. On the positive side, productivity improvement could be
What is the Greatest Challenge Facing the U.S. Economy?
By William N. Pieroni
driven by investment in non-labor capabilities like improved technologies. Enhanced non-labor
capabilities would support improved productivity with labor capturing minimal benefit. On the negative
side, is a weakening of U.S. workers’ position due to diminishing labor power with majority of wage
increases going to the senior executives and owners. The research around factors reduced U.S.
productivity and a widening productivity-wage gap is varied and inconclusive. Regardless of root causes,
we must collectively acknowledge the importance improved productivity and reconnecting it to wages.
The causes and potential solutions to address this issue are not fully clear. All key U.S. economic
stakeholders, government, businesses, and labor must increase the level of coordination and cooperation
around this critical issue.
What is the Greatest Challenge Facing the U.S. Economy?
By William N. Pieroni
Figure 1 Data
Hourly compensation
Year
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
% of 1943
0.00%
6.30%
10.50%
11.80%
15.00%
20.80%
23.50%
28.70%
33.90%
37.10%
38.20%
42.50%
45.50%
48.00%
52.50%
55.00%
58.50%
62.50%
64.90%
66.90%
70.70%
74.70%
76.60%
82.00%
91.20%
91.30%
87.00%
86.80%
89.70%
93.10%
96.00%
93.40%
88.60%
87.60%
87.80%
88.30%
86.90%
86.30%
87.30%
84.60%
83.90%
83.70%
82.20%
81.90%
83.00%
83.40%
83.80%
82.70%
82.80%
84.80%
89.20%
91.90%
92.90%
95.60%
99.50%
101.60%
101.00%
100.00%
100.20%
101.70%
101.80%
109.70%
111.50%
109.10%
107.30%
108.30%
109.00%
Net productivity
Average
annual %
change
converted
%
converted
%
base
change
base
change
% of 1943
1.00
0.00%
1.00
1.06
1.50%
1.02
1.11
9.30%
1.09
1.12
12.30%
1.12
1.15
15.60%
1.16
1.21
19.50%
1.20
1.24
21.60%
1.22
1.29
26.50%
1.27
1.34
26.70%
1.27
1.37
30.10%
1.30
1.38
32.80%
1.33
1.43
37.60%
1.38
1.46
40.00%
1.40
1.48
44.30%
1.44
1.53
49.80%
1.50
1.55
55.00%
1.55
1.59
60.00%
1.60
1.63
64.90%
1.65
1.65
70.00%
1.70
1.67
72.00%
1.72
1.71
77.20%
1.77
1.75
77.90%
1.78
1.77
80.40%
1.80
1.82
87.10%
1.87
1.91
92.00%
1.92
1.91
91.3% 3.5%
96.70%
1.97 96.7%
1.87
93.70%
1.94
1.87
97.90%
1.98
1.90
103.40%
2.03
1.93
105.80%
2.06
1.96
107.80%
2.08
1.93
108.10%
2.08
1.89
106.60%
2.07
1.88
111.00%
2.11
1.88
107.90%
2.08
1.88
114.10%
2.14
1.87
119.70%
2.20
1.86
123.40%
2.23
1.87
128.00%
2.28
1.85
129.10%
2.29
1.84
131.80%
2.32
1.84
133.60%
2.34
1.82
137.00%
2.37
1.82
138.90%
2.39
1.83
147.50%
2.48
1.83
148.40%
2.48
1.84
150.70%
2.51
1.83
150.80%
2.51
1.83
156.90%
2.57
1.85
160.50%
2.61
1.89
165.70%
2.66
1.92
172.10%
2.72
1.93
178.50%
2.79
1.96
182.90%
2.83
2.00
190.70%
2.91
2.02
200.20%
3.00
2.01
208.30%
3.08
2.00
213.60%
3.14
2.00
215.60%
3.16
2.02
217.80%
3.18
2.02
218.30%
3.18
2.10
224.90%
3.25
2.12
234.40%
3.34
2.09
234.80%
3.35
2.07
236.60%
3.37
2.08
236.90%
3.37
2.09
9.3% 0.22% -0.06%
238.70%
3.39 72.2%
Average
annual %
change
3.7%
1.7%
0.71%
Productivity vs.
compensation rsquared
0.79
total
0.99
1948-1973
0.66
1973-2014