Alan Reynolds

I propose this new addition to my growing list of Reynolds' Laws: "The closer we get to elections, the worse economic reporting becomes."

Consider the recent New York Times front-page story, "Real Wages Fail to Match a Rise in Productivity" by Steven Greenhouse and David Leonhardt. It began by claiming: "The current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers. ... The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity ... has risen steadily over the same period."

The authors appear confused. The current expansion began in late 2001 and is not over, so whatever happened after hourly wages "peaked in early 2003" or "since last summer" tells us next to nothing about whether or not there will be an increase in real wages and benefits over the whole cycle.

The suggestion that every previous expansion offered "a prolonged increase in real wages" contradicts Leonhardt's thesis in last year's "Class Matters" series. His lead article, co-authored with Janny Scott on May 15, 2005, said, "For most workers, the only time in the last three decades when the rise in hourly pay beat inflation was during the speculative bubble of the 1990s." In this week's update, we are instead told that "for most of the last century, wages and productivity ... have risen together."

The title's comparison of productivity to wages makes sense only if benefits are worthless to workers and free to employers. If productivity was growing faster than total compensation, then unit labor costs would be falling. Yet unit labor costs rose 3.2 percent over the past year, and real hourly compensation rose by 1.7 percent.

Non-farm business productivity rose by 3 percent in 2004, and hourly compensation rose by 3.6 percent; productivity rose by 2.3 percent in 2005, and hourly compensation rose by 4.4 percent; productivity rose at a 2.7 percent rate in the first half of 2006, and hourly compensation rose at a 6.2 percent rate. The headline should have read, "Productivity Fails to Match Rise in Worker Compensation."

The article ignores recent facts, but compares last year with the peak of the previous cycle. "Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute (EPI), a liberal research group."

Alan Reynolds

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