Laura Tyson: Paying for Productivity

When the chair of the Federal Reserve Board gives a major speech about the steady rise of inequality in the United States, as Janet Yellen did last month, it may be time to think about ways to respond.

Laura Tyson, in a recent column for Project Syndicate, suggests a strategy that private business could consider on its own: an expansion of profit-sharing.

[getty src=”180405687?et=zqDzhYorSgNh8TPhMEzPFw&sig=fksqLxdoSW_xlF64_B9p-vZzuyFQHfgB2qTv8T0LPKE=” width=”507″ height=”338″]

As Tyson notes, one of the most defining and disheartening trends in the United States over the 40 years has been real-wage stagnation for most workers.  The average family income for the bottom 90 percent of households has been flat since 1980, while incomes have climbed substantially for those in the top 10 percent and top 1 percent.

Worker productivity isn’t the problem. Productivity has been climbing at a healthy clip throughout this period. What’s new is that wage growth has fallen far behind.

Standard economic theory holds that wages and productivity should climb roughly in line with each other, and that did happen during the first 30 years after World War II (which included stellar periods of growth). But as this chart from the Economic Policy Institute shows, we have  experienced a huge de-coupling since then:


Gap between productivity and wages







A growing number of influential economists warn that this stagnation will mean anemic growth and long-term “secular stagnation.”  Two of the nation’s best-known gurus on business competitiveness – Michael Porter and Jan Rivkin of Harvard Business School – recently warned that business itself is at risk from “an inadequate workforce, a population of depleted consumers, and large blocs of anti-business voters.”

Tyson argues that expanded profit-sharing could be good for all sides. A long series of studies over the years has documented a strong positive link between profit-sharing and productivity. Alan Blinder edited a collection of studies on the issue by many economists, including Tyson, some 20 years ago. A new book, Shared Capitalism at Work by Douglas Kruse, Richard Freeman, and Joseph Blasi, confirmed that conclusion with more recent evidence.

Profit-sharing has grown steadily in various forms, from grants of stock options and restricted stock to profit-based bonuses.  But it has been awarded to only a small slice of executives and key employees.

Wider profit-sharing offers both public and private benefits. It would raise real incomes for a broad base of middle-income families, which would likely boost consumer spending and prevent a hollowing-out of the economy. It would not increase the size of government, and there are strong reasons to think that it would increase profitability by having employees who are more engaged and committed to their companies’ long-term prospects.

America’s rising productivity is a signature strength of its economy.  Tyson suggests that it may be time to share more of the fruits of that productivity with those who helped create it.

Share this: