Saturday, September 16, 2006

Wages and productivity

Prof Stephen Gordon over at Worthwhile Canadian Initiative has me thinking about why wages are tracking productivity in Canada but not in the US. If this is the case, I wonder if these opposing patterns can tell us something about the discrepancy in the type of labour being demanded between the two countries.

In the US the median wage has been falling in proportion to GDP, while the growth of average real wage has slowed. If demand for unskilled workers is increasing in the US and CEO's are receiving a greater share of income, we could expect the national median to be pulled down while the mean real income grows slowly in its proportion to GDP.

In Canada, a great proportion of the jobs being created demand high-skilled workers. For example, positive net employment change in Canada has largely taken place in the high-paying resource sector.
The mysterious but knowledgeable happyjuggler0 offered a good explanation on this subject over at Greg Mankiw's blog, so I drug up an excerpt from him/her:

Imagine you have a American compensation pool of 3x 4x 5x 6x 7x 8x 9x, with x being some amount of dollars. Both the median and the mean average is 6x.
Imagine that ten years later you have absolutely no improvement in compensation for those same people and thus they are 3x 4x 5x 6x 7x 8x 9x. But due to low skill immigration from Mexico you also have two new people, and they both make 3x. Now the pool looks like 3x 3x 3x 4x 5x 6x 7x 8x 9x.
The median income has now fallen to 5x from 6x! The mean income is a bit better than the median at 5 1/3, but it is still significantly worse than it was ten years ago.

Simple enough. If we were to focus only on the energy-rich province of Alberta, the post-immigration pool might look less like 3x 3x 3x 4x 5x 6x 7x 8x 9x and more like 3x 4x 5x 6x 6x 6x 7x 8x 9x. And Alberta happens to be where job creation is most concentrated in Canada.
Another curiosity: how much of the discrepancy in median growth can be accounted for by increased healthcare costs, since employers provide healthcare insurance in the US while Canadians rely on public health insurance?
I wish I had time to actually look at some data rather than speculate on this post, but I'm running late this morning. I'll return to this subject.

In fact, I find this area to be so exciting that I think I've entered the neighborhood of my undergrad thesis! (Side note to those who may be confused: Yes, I'm a third-year student, but I've crammed my requirements into three years. Therefore, I can jump into my thesis project now). I obviously have some major narrowing down to do; if anyone has any guidance or suggestions for narrowing down a subject in the area in wage/productivity growth, I'd love an email or a comment.
Addendum: Mark Thoma also has a post on this.

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