Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income
A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10% of the income distribution, leaving little left over for the bottom 90%. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10%. In addition to its micro analysis, this paper also asks whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. We find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction. This paper revives research on wage adjustment and produces a dynamic interactive model of price and wage adjustment that explains movements of labour's share of income. What caused rising income inequality? Economists have placed too much emphasis on 'skill-biased technical change' and too little attention to the sources of increased skewness at the very top, within the top 1% of the income distribution. We distinguish two complementary explanations, the 'economics of superstars,' i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation.
|Date of creation:||Dec 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gali, Jordi & Gertler, Mark, 1999.
"Inflation dynamics: A structural econometric analysis,"
Journal of Monetary Economics,
Elsevier, vol. 44(2), pages 195-222, October.
- Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
- Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
- Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
- Lucian Bebchuk, 2005.
"The Growth of Executive Pay,"
Oxford Review of Economic Policy,
Oxford University Press, vol. 21(2), pages 283-303, Summer.
- James H. Stock & Mark W. Watson, 1996. "Asymptotically Median Unbiased Estimation of Coefficient Variance in a Time Varying Parameter Model," NBER Technical Working Papers 0201, National Bureau of Economic Research, Inc.
- Goldin, Claudia & Margo, Robert A, 1992.
"The Great Compression: The Wage Structure in the United States at Mid-century,"
The Quarterly Journal of Economics,
MIT Press, vol. 107(1), pages 1-34, February.
- Claudia Goldin & Robert A. Margo, 1991. "The Great Compression: The Wage Structure in the United States at Mid- Century," NBER Working Papers 3817, National Bureau of Economic Research, Inc.
- David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005.
"Trends in U.S. Wage Inequality: Re-Assessing the Revisionists,"
NBER Working Papers
11627, National Bureau of Economic Research, Inc.
- David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Trends in U. S. Wage Inequality: Re-Assessing the Revisionists," Harvard Institute of Economic Research Working Papers 2095, Harvard - Institute of Economic Research.
- Daron Acemoglu, 2003.
"Cross-Country Inequality Trends,"
Royal Economic Society, vol. 113(485), pages F121-F149, February.
- Jordi Galí & Mark Gertler & J. David López-Salido, 2000.
"European Inflation Dynamics,"
Banco de Espa�a Working Papers
0020, Banco de Espa�a.
- Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
- Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
- James R. Spletzer & Katharine G. Abraham & Jay C. Stewart, 1999. "Why Do Different Wage Series Tell Different Stories?," American Economic Review, American Economic Association, vol. 89(2), pages 34-39, May.
- David Card & John E. DiNardo, 2002.
"Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles,"
NBER Working Papers
8769, National Bureau of Economic Research, Inc.
- David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
- Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
- Laurence Ball & Robert Moffitt, 2001.
"Productivity Growth and the Phillips Curve,"
Economics Working Paper Archive
450, The Johns Hopkins University,Department of Economics.
- Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5419. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.