By Blair Fix
Does productivity explain income? I asked this question in a previous post. My answer was a bombastic no. In this post, I’ll dig deeper into the reasons that productivity doesn’t explain income. I’ll focus on wages.
The Evidence
Let’s start with the evidence trumpeted as proof that productivity explains wages. Looking across firms, we find that sales per worker correlates with average wages. Figure 1 shows this correlation for about 50,000 US firms over the years 1950 to 2015.
Mainstream economists take this correlation as evidence that productivity explains wages. Sales, they say, measure firms’ output. So sales per worker indicates firms’ labor productivity. Thus the evidence in Figure 1 indicates that productivity explains (much of) workers’ income. Case closed.
