Paying for Productivity

Meanwhile, corporate profits have soared. The GDP share of after-tax corporate profits is at a , whereas labor compensation has .

Strong productivity growth is an important policy goal. But it is not enough to increase most workers’ wages or most families’ incomes. Reconnecting productivity gains and wage gains requires both policy actions, such as an increase in the minimum wage with a link to productivity growth, and changes in corporate human-resources practices, such as broader reliance on profit-sharing programs.

Such programs have intuitive appeal. Employees who have a direct stake in a company’s profitability are likely to be more motivated and engaged, and turnover is likely to be lower. This intuition is confirmed by empirical research.

Some 20 years ago, Alan Blinder of Princeton University corralled a number of economists, including me, to examine existing studies on the link between profit-sharing and productivity. The overwhelming majority of the studies found a . , a recent book edited by Douglas Kruse, Richard Freeman, and Joseph Blasi, confirms this conclusion with more recent evidence.

Various forms of profit-sharing – including grants of options and restricted stock, annual profit-based bonuses, and employee stockownership plans – have been growing as a share of labor compensation since the 1960s. But most workers are not covered by such plans, and the biggest beneficiaries have been CEOs and top managers, a significant fraction of whose pay is tied to productivity, as reflected in profits and stock performance. Such incentive pay schemes for the top 1% of the wage and salary distribution.

America’s long-run living standards and economic competitiveness depend not just on productivity growth, but also on how that growth is shared. More equitable sharing of profits with America’s workers and their families would do much to address the worrisome stagnation of wages and middle-class incomes in recent decades.

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

Copyright: Project Syndicate, 2014.