South-Western College Publishing - Economics  
Working Harder; Getting Less
Topic Productivity and Growth
Key Words Real Wages, Productivity, and Living Standard
News Story As the economy (debatably) begins to slow, analysts are pointing out a rare macroeconomic occurrence: Although the U.S. economy has enjoyed sustained economic growth since 2000, the situation has not resulted in higher real wages for American workers. The data show that the American worker's median hourly wage has declined 2 percent since 2003 after adjusting for inflation. This adjusted measure is what economists call "real wages".

Economists say this finding is especially notable because productivity - the amount that the average worker produces in an hour - has risen steadily over the same time period. Normally, rises in productivity translate into higher real wages and thus into higher living standards.

Until last year, the rising value of employee benefits, especially health insurance, offset stagnating wages and caused overall compensation for most American workers and their families to increase. However, since last summer, the value of American workers' benefits has also lagged behind inflation and growth of overall compensation, adjusted for inflation, has not kept pace with previous years.

U.S. productivity rose by 16.6 percent from 2000 to 2005, while total compensation for the median worker rose only 7.2 percent. At the very top of the income scale, many workers have continued to receive raises that outpace inflation, and their gains have been large enough to keep average income and consumer spending rising. "There are two economies out there," political analyst Charles Cook said. "One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings. And then, there's the working stiffs," he added, "who just don't feel like they're getting ahead despite the fact that they're working very hard. And there are a lot more people in that group than the other group."

Discussion Questions:
1. Discuss the difference between real wages and nominal wages.
2. Define the notion of productivity.
Multiple Choice/True False Questions:
1. Real wages have been adjusted for:
  1. productivity
  2. unemployment
  3. inflation
  4. economic growth
2. The amount that an average worker produces in an hour is called:
  1. a price index.
  2. medium income.
  3. technological improvement.
  4. productivity.
Source Steven Greenhouse and David Leonhardt, "Real Wages Fail to Match a Rise in Productivity", The New York Times Online, August 28, 2006.
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