The Missing Productivity Puzzle

The Conventional Wisdom is that while productivity has continued to increase, very little of it went to the middle class during recent decades. Since we know inequality was going up contemporaneously, the qualitative-thinking conclusion is that the “the rich” and “corporations” are simply taking the rest.

However, quantitative-thinking shows that no estimates of inequality increase is large enough to account for the mystery of missing output.

This time I start at 1975 since some of the public data doesn’t go back further. Between 1975-2008, real Per Capita GDP increased by 90%. During the same period, real Median Household income increased by merely 17%. The issue is not just with the median, mean household income for the lowest earning 80 percent of the population grows just 21% measured this way. So what’s going on?

Growing inequality is an important part of the story. If we use Pickety and Saez estimates to calculate the share of income that went to the top 10 percent earners, the rest of the population (the “Poorest 90 Percent”) had a real income growth rate of 50%. What about the rest of the gap?

Additional explanations for the disconnect is that the standard inflation measure (CPI-U-RS) may be biased upward, and has at any case increased about 13% faster 1975-2008 than the GDP-deflator used to calculate GDP. Meanwhile average household size decreased by 11%.

Let’s make inflation comparable by using the GDP-deflator also for household income, and hold household size fixed by looking only at 4-person households.

You can see a sizable disconnect between Median Household Income and the “Bottom 90 Percent” growth calculated by combining GDP data with Pickety and Saez distribution numbers. However, once we make two simple (and I hope uncontroversial) adjustments to the Census Median Household Income data the gap vanishes!

(click to enlarge)

While disappointing for such a long period, 50 percent real growth is not quite “stagnation”. The narrative that all productivity increases have been eaten up by the rich is a myth, driven by measurement problem and the unwillingness of many journalists and economists to ruin a good narrative by digging deeper.

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About Tino Sanandaji 39 Articles

Tino Sanandaji is a 29 year old PhD student in Public Policy at the University of Chicago, and the Chief Economist of the free-market think tank Captus.

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