Abstract
A common sentiment in popular discourse is that employed United States workers are undercompensated. This study investigates this belief and answers the question: “Are US workers really underpaid?” Answering this question requires a measure that can better assess the relationship between compensation and productivity levels. In this paper I develop a straightforward measure of workers’ real compensation relative to productivity that can be applied to different regional units of analysis and sectors in the U.S. I then estimate this “Compensation-Productivity Difference” (CPD) measure for each state over the years 2008 to 2019 for the six largest U.S. sectors. As a snapshot of average worker outcomes across the United States, CPD estimates show that, accounting for price differentials and ignoring sector, the average worker's compensation has indeed lagged behind productivity. This matches the conclusions of previous literature; however, such results become less consistent as region and sector are considered. In Midwest states, for example, productivity lagged behind productivity in some sectors over the sample. Because of its ability to display such nuanced labor market outcomes, the CPD represents a promising step in labor market research that would be of interest to researchers and policymakers alike.
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Data availability
The datasets generated during and/or analyzed during the current study are available from the corresponding author on reasonable request.
Notes
One study does show does find that approximately 5% of workers report feeling overpaid and this percentage is significantly higher in technology companies such as Facebook and Uber (Ivanova, 2018).
Indeed, price differences across states appear to be driving most of these results.
For example, the RPD for Alabama in 2016 is 95.6. The interpretation is that in 2016, Alabama's prices were approximately 95.6% of the national prices.
For example, 2009 is used as the base year and so the CPI is normalized to unity in that year. In Alabama, the RPD value is 87.2 and so the price level used to adjust nominal compensation values for all Alabama workers would be given by: \({P}_{jt}=CP{I}_{t}*\frac{RP{D}_{jt}}{100}\). This adjustment yields comparable prices in each year for each state.
Here, readers may ask if the results change if compensation is mapped to lagged productivity in the same vein as Feldstein (2008. The results do not fundamentally change when either 1-year or 2-year lagged productivity is used instead.
While not shown, the state of Louisiana demonstrates the impact that output changes can have on the measure. The CPD is more than $10,000 in 2012, indicating the average worker was paid approximately $10,000 more in compensation than productivity would suggest and the state itself experienced an increase in the CPD from 2011. The explanation? The year 2012 saw Hurricane Isaac, which caused significant flooding and damage in Louisiana. Accordingly, Louisiana Manufacturing output fell almost 11.3% between the second and fourth quarters of 2012 (U.S. Bureau of Economic Analysis 2021a). As output fell, but compensation remained relatively sticky, the CPD for those workers became more positive. Of course, Hurricane Isaac and its resulting damage was a tragedy. It seems odd, then, that the CPD would suggest workers that were better off through increased pay relative to productivity. While this is true, those still employed saw relatively sticky wages and struggle to produce as much at work with damaged infrastructure. In this way, output shocks caused their labor market outcomes to “improve" from being paid approximately the same amount for fewer output units produced. The increase in the CPD captures this fact.
To account for zero values, an inverse hyperbolic sine adjustment is made prior to taking the logs of the CPD. The dependent variable would then take the following form: \(\text{log}\left(CPD+{\left(CP{D}^{2}+1\right)}^\frac{1}{2}\right).\)
Two-year lags were also tested and yielded the same results.
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Special thanks to editing work from professional editor Ulrike Guthrie. Thank you also to Dr. Daniel Walter for very specific comments on the language of the paper and Brenna Valentine for copy editing.
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Blake, C.D. A method for comparing compensation and productivity levels across US regions. SN Bus Econ 2, 195 (2022). https://doi.org/10.1007/s43546-022-00366-4
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DOI: https://doi.org/10.1007/s43546-022-00366-4