Why haven't wages kept up with productivity gains?

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    Do “Productivity” and Lagging Wage Growth Disprove Marginal Productivity Theory?

    I found something written by Bob Murphy but it is way over my head.

    Does anyone have a less technical explanation for the above?


    Two things:

    1.) Employers pay their employees a TOTAL compensation based on their marginal productivity, not just wages. For example, if an employer pays a given employee wages + paid holidays + paid sick leave + paid personal days + paid vacation time + employer subsidized dental/medical/vision/prescription insurance + retirement plan employer contributions + employer paid life insurance + Medicare tax + Social Security tax + unemployment tax + workers compensation tax + etc., etc., etc. Economic theory shows that the TOTAL compensation paid for an employee (not just the hourly wage rate) equals marginal productivity.

    2.) From the Bureau of Labor Statistics website (they put together these graphs):

    “Labor Productivity: Labor productivity describes the relationship between real output and the labor
    hours involved in its production. These measures show the changes from period to period in the amount
    of goods and services produced per hour worked. Although the labor productivity measures relate output
    in an industry to hours worked of all persons in that industry, they do not measure the specific
    contribution of labor to growth in output. Rather, they reflect the joint effects of many influences,
    including changes in technology; capital investment; utilization of capacity, energy, and materials; the
    use of purchased services inputs, including contract employment services; the organization of
    production; managerial skill; in addition to the characteristics and effort of the workforce.”

    Their idea of “labor productivity” is an aggregate average among only manufacturing industries. This is not the same as the “discounted marginal revenue product” (the amount of additional revenue generated by one hour of a specific individual’s labor) that sound economic theory shows actually determines wage rates.


    Thanks for the detailed answer.

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