Compensation and Productivity in China and the United States

Moneybox
A blog about business and economics.
Sept. 24 2012 10:15 AM

Compensation and Productivity in China and the United States

Corey Robin asks on Twitter why I was making a big deal out of the gap between wages in Chinese factories and the productivity of Chinese factory workers when there's a similar divergence between economy-wide productivity and economy-wide wages in the United States and United Kingdom.

The best glance at the difference is offered by this great summary table from Lawrence Mishel's "Wedges Between Productivity and Median Compensation Growth" table:

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What's happening in the Chinese Industrial Revolution is very similar to what you saw during the Industrial Revolution in the West. On one hand, you have farmers engaged in the not very lucrative pursuit of farming. On the other hand, you have factories full of splendid machines. A worker equipped with machines can produce drastically more value than a similarly skilled farmer. Consequently, the owners of the machines will offer workers a modest wage premium over farm earnings to induce people to come to the cities and toil in the factories. But this modest wage premium is but a fraction of the worker's increased productivity. You could demand more, but it would be easy enough to fire you and replace you with some other farmer. The result is windfall profits for the owners of capital—profits that Chinese workers are trying to claim for themselves.

If you look at Mishel's table, you see that although there has been a decline in the labor share of national income (and not unrelated, there's been labor unrest just not at Chinese levels), this is not the biggest share of the story.

A more important cause has been the divergence between consumer and output prices. In other words, as an economy we've gotten a lot better at making business equipment (i.e., computers) and haven't gotten much better at making consumer goods (i.e., health care). The labor share of income question—which is a huge deal in China, where private consumption is less than half of GDP—has been much less central over the past 35 years in the United States, so we've seen different dynamics. On the other hand, as you see in the table, the labor share question looms much larger in the past decade than in the period as a whole. In China, meanwhile, wages have been rising. So conditions are, to an extent, converging, and not by coincidence—U.S. workers have increasingly been thrown into competition with the very same Chinese peasants with immiserating consequences. In the 1990s, policymakers delivered on full employment so a rising tide lifted the majority of boats, but in the aughts they haven't, so it hasn't.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.