The impact of inflation and productivity on earnings growth across educational levels
Productivity growth has risen steadily in recent decades while the real wages of workers have seen much more modest growth and in some cases have decreased. The purpose of this paper is to study the link between the growth of earnings and the growth in productivity, as measured by output per hour, at different levels of educational attainment. For the period 1975 to 2010, we find that earnings growth is positively related to the level of education. However, the growth in mean earnings is not statistically different from the growth in the CPI for all levels of education. This holds true when alternate measures of inflation are employed. Specifically, regressions using personal consumption expenditures and the GDP deflator yield similar results to the regressions using the CPI, confirming the existence of a gap between real wages and labor productivity growth. Data from the Bureau of Labor Statistics and the Bureau of Economic Analysis are used in the empirical analysis.
The findings suggest that the growth in productivity is not a good predictor for the growth in mean earnings for individuals’ at all educational levels. These results have implications for the practice of using past gains in macroeconomic measures of output as justification for increases in expected earnings at a rate greater than the expected rate of inflation at each level of education. The paper concludes with an examination of the leading explanations put forth to explain the wage–productivity gap. These include the rising value of benefits which increase total compensation more than real wages, the increasing share of income going to capital income rather than labor income, and the decreased membership and influence of unions in the U.S. economy.