The Wage Decoupling Mess

The media continues to obsess over the so-called “wage decoupling” issue, the gap between the growth rate of median wages and the growth rate of GDP. Let’s start by asking why people are even interested in comparing these two growth rates. What are they supposed to show? Why not compare wages to average global temperature or the average score in an NBA game?

I suppose people must have in mind some sort of concept that GDP is like a pie, and workers are not getting their fair share. But if that’s your concern then why not compare wages to total per capita income? After all, GDP includes things like depreciation, which nobody is “getting”.Income is the “pie”, not GDP.

Because depreciation grows faster than GDP it turns out that there is a “decoupling” between total income and total GDP. Total combined income earned by workers and capital rises more slowly than GDP. That’s not a scandal.

Scott Alexander valiantly tries to make sense out of this mess but ends up being sort of overwhelmed by too much information, too many claims. Tyler Cowen makes this observation:

On Scott’s broader points (not discussed in my excerpt), I think he is underemphasizing the possibility that productivity may be measuring better than it really performed, and thus there is not so much decoupling at all.

In a perfect world, the mismeasurement of productivity would have absolutely no impact on estimates of “decoupling”. Indeed, let’s take a step back and consider the absurdity of the various measures of decoupling that people use, which all seem to rely on comparisons of real GDP and real wages. Obviously, the variables that ought to be used are nominal wages and nominal national income per capita. And any gap between nominal wages and nominal national income per capita would be completely unaffected by the mismeasurement of productivity.

Of course, that’s how things would be done in a non-idiotic world, where people don’t use different price indices to deflate national income and wage income. We don’t live in that world, and thus Tyler’s point may have some validity. These comparisons typically deflate wages by the CPI, which rises faster than the GDP deflator. But why?

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Gary Anderson 1 month ago Contributor's comment

Another interesting article. But clearly, the Fed itself measures the worker's share of GDP. Obviously the Fed thinks it is an important measurement. I don't think it can be dismissed. And it is in a steady decline, with blips up prior to recessions. So, it seems like a worthwhile measurement. And it is obvious from the Fred chart that prosperity for workers has been in decline in relation to GDP: