Journal of Policy Modeling 30 (2008) 627–631

Available online at www.sciencedirect.com

Growth, productivity and compensation in the UnitedStates and in the other G-7 countries

Dominick Salvatore ∗Department of Economics, Fordham University, Bronx, NY 10458, USA

Available online 22 April 2008

Keywords: Growth; Labor productivity; Wages; Total compensation

1. Introduction

The growth of labor productivity is crucial to raise in individuals’ real incomes and standardof living, and many public policies are directed at stimulating it in most countries. The growth oflabor productivity can vary a great deal over time and across nations, and in how much of it goesto increase workers’ incomes as opposed to firms’ profits. In this paper, I will present data on theincrease in labor productivity in the United States and in other G-7 countries, and show how muchof it goes into individual compensation, and how and why it varies across the G-7 countries.

2. Average growth, productivity, wages and compensation in the United States

Table 1 shows the growth of real GDP, the output per hour or labor productivity, real wages, aswell as total real compensation (which includes wages and fringe benefits) in the United Statesfrom 1947 to 2007. From the table, we see that real GDP grew at an average annual rate of 3.8%from 1947 to 1973, at 2.9% from 1974 to 1995, and 3.3% from 1996 to 2006 in the United States.The growth rate was lower in 2007 as the U.S. was heading toward recession. The reason forthe resurgence of growth in the United States during the 1996–2006 period has been attributedto the creation of the New Economy based on the technological revolution (Salvatore, 2003), asreflected in the growth of output per hour or labor productivity.

∗ Tel.: +1 718 817 4045; fax: +1 914 337 3355.E-mail address: salvatore@fordham.edu.

0161-8938/$ – see front matter © 2008 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.doi:10.1016/j.jpolmod.2008.04.006

628 D. Salvatore / Journal of Policy Modeling 30 (2008) 627–631

Table 1Average growth, productivity, wages, and total compensation, in the United States, 1947–2007

1947–1973 1974–1995 1996–2006 2007 (est.)

Real GDP 3.8 2.9 3.3 2.2Output/h 2.8 1.4 2.6 1.1Real wages 1.7 −1.1 0.6 0.9

Total real compensationUsing CPI – 0.2 1.5 2.2

Total real compensationUsing GDP deflator – 0.9 1.9 3.0

Source: Economic Report of the President (2008) and OECD economic outlook, various issues.

From the table we see that a declining fraction of the increase in labor productivity has beenreflected in real wages over time (except for 2007) and, in fact, real wages declined over the1974–1995 period. Feldstein (in this issue) and others, however, have correctly argued that thegrowth of labor productivity should be compared to the total real compensation of labor, not toreal wages. The reason is that fringe benefits have increased much faster than real wages and it istotal compensation, not wages alone, that is the relevant measure. Feldstein also correctly pointsout that the same price index, as used to deflate output, and not the CPI, should be used to deflatenominal compensation to get the real compensation. Table 1, in fact, shows that the growth of totalreal compensation has been faster than the growth or real wages (it also avoids a negative valuefor the 1974–1995 period), and this has been rising faster when the total nominal compensationis deflated with the GDP deflator than with the CPI.

3. Average growth, labor productivity, and compensation in the G-7 countries

Table 2 shows the growth of total real GDP, real GDP per capita, labor productivity, as wellas total real compensation in the United States and in the other G-7 countries from 1980 to 2006.From the table, we see that total real GDP grew faster in the United States than in any of the otherG-7 countries, except Japan, from 1980 to 1990. Although lower than in 1980–1990, the U.S.growth rate was still faster than in any of the other countries in 1996–2000. The United Statesgrew at the fastest rate (equaled only by Canada) during the 1996–2000 period. In 2001–2006,U.S. growth slowed but was still faster than in the other countries, except for the United Kingdomand Canada. The comparison is not as favorable to the United States for the growth of real percapita income because of the much faster rate of population growth in the United States than inthe other countries.

When we look at the growth of labor productivity, we see from the table that the UnitedStates did worse than any of the other G-7 countries, except Germany and Canada in 1980–1990,and Japan in 1991–1995, but then it did better than the other countries (equaled by Canada) in1996–2000, and better than all in 2001–2006. The better U.S. productivity performance since1996 has been attributed to the faster introduction of the New Economy in the United States thanelsewhere.

Looking at total real compensation (using the CPI to deflate nominal compensation to get thereal compensation), not only the United States did worse than any of the other G-7 countries,except Germany, in the 1980–1990 period, but also it faced the situation that a smaller percentageof the increase in labor productivity went into labor compensation than in any other country (again

D. Salvatore / Journal of Policy Modeling 30 (2008) 627–631 629

Table 2Average growth of GDP, labor productivity, and total real compensation in G-7 countries, 1980–2006

1980–1990 1991–1995 1996–2000 2001–2006

Real GDP U.S. 3.3 2.5 4.1 2.4Japan 3.9 1.5 1.0 1.5Germany 2.3 2.0 2.0 1.0UK 2.6 1.7 3.2 2.5France 2.4 1.0 2.8 1.7Italy 2.3 1.3 1.9 0.9Canada 2.8 1.7 4.1 2.6

Real GDP/capita U.S. 2.1 1.5 2.9 1.4Japan 3.6 1.2 0.8 1.4Germany 2.0 1.4 1.9 1.0UK 2.2 1.4 2.9 2.3France 2.0 0.5 2.4 1.1Italy 2.1 1.1 1.7 0.4Canada 1.8 0.4 3.2 1.7

Labor productivity U.S. 1.4 1.2 2.0 1.9Japan 2.7 0.8 1.0 1.6Germany 1.3 2.2 1.2 1.0UK 1.9 2.5 1.9 1.6France 2.2 1.4 1.4 1.0Italy 1.8 2.0 0.9 −0.4Canada 1.0 1.4 2.0 0.7

Total real compensation using CPI U.S. 0.4 0.2 2.2 0.7Japan 1.7 0.2 −1.9 −0.4Germany 0.3 1.7 0.0 −0.6U.K. 2.0 0.3 3.2 2.6France 1.2 0.1 0.4 1.2Italy 1.6 0.3 −0.2 −0.1Canada 0.7 0.5 2.3 1.8

Total real compensation using GDP deflator U.S. 0.9 0.9 3.0 0.8Japan 1.5 0.7 −1.2 0.4Germany 0.5 1.9 0.8 0.0U.K. 1.7 0.6 2.3 1.5France 1.3 0.2 0.7 1.2Italy 0.6 0.5 −0.5 −0.4Canada 1.5 1.0 2.4 1.7

Source: OECD Data Bank.

except for Germany). When the GDP deflator was used to get the real compensation, the U.S. didnot do as badly, and a much larger percentage of the growth of labor productivity went to laborduring the decade of the 1980s. To be noted is that this occurs only for the United States andCanada, while for all the other five countries, the total real compensation using the GDP deflatorwas larger than when using the CPI. The same is generally true for 1991–1995.

Table 2 also shows that the growth of the total real compensation using the GDP deflator wasmuch higher in the United States than in the other countries during the 1996–2000 period.

To be noted is the negative values for Japan and Italy. Also to be noted is that using the GDPdeflator gives better results than using the CPI, not only for the United States but also for Japan,Germany, France and Canada. The 2001–2006 period gives mixed results. The growth of labor

630 D. Salvatore / Journal of Policy Modeling 30 (2008) 627–631

Table 3International competitiveness and competitiveness factors, G-7 countries 2007

Nation Competitiveindex

Taxes as %of GDP

Cost to start new businessas % per capita income

Labor market rigidity(index 0–100)

Ease of doing business(rank 1–178)

U.S. 100.0 34.6 0.7 0 3Japan 72.4 33.1 7.5 17 12Germany 78.0 44.3 5.7 44 20U.K. 75.4 41.7 0.8 7 6France 62.6 50.5 1.1 56 31Italy 48.3 46.2 18.7 38 53Canada 83.8 39.9 0.9 4 7

Source: IMD (2007), OECD (2007), World Bank (2007a, 2007b), and WEF (2007/2008).

productivity remained high but was declining (and much lower in 2005 and 2006 than the aver-age for the 6-year period) in the United States, where only about 40% of the increase in laborproductivity went into increased real compensation. In Japan it was much less, and in Germanynone of the increase in productivity seems to have gone into increased labor compensation asthese nations successfully contained labor costs in order to increase their international compet-itiveness. In the United Kingdom almost all of the increase in labor productivity went to laborcompensation, while in France and Canada real compensation increased faster than the increasein labor productivity, thus raising their labor costs. Italy is a nation in economic crisis.

4. International competitiveness and competitiveness factors

Why did the U.S. seem to have done better economically since 1996 than most of the otherG-7 countries? This better performance has been attributed to the faster introduction of the NewEconomy in the United States than in the other countries. But what does this New Economyentail and how it is measured? One way to measure the New Economy is to calculate a score ofinternational competitiveness for each nation. Various research organizations do this. One of thebest measures of the international competitiveness is provided by the Institute for ManagementDevelopment (IMD) in Lausanne, Switzerland. These scores have been greatly criticized, butthey do have some value, and they seem to be highly correlated with growth in the variouscountries.

Table 3 shows that if a competitiveness score of 100 is given to the most competitive economyand relatively lower values to other nations, we find that the United States ranked as the mostcompetitive economy in the world in 2007, followed by Canada, Germany, the United Kingdom,Japan, France and Italy, in that order. The rest of the table provide data on some of the factors onwhich the greater competitiveness of the United States, Canada and the United Kingdom rests inrelation to the other countries. These are the rate of taxation, the cost of starting a new business,labor market flexibility, and the ease of doing business in the nation. The United States does beston all these factors and so it should not be surprising that it ranks as the most competitive economy(see, Salvatore, 1998).

References

Economic Report of the President. (2008). Washington, DC: U.S. Government Printing Office.IMD. (2007). The world competitiveness yearbook. Lausanne: IMD.OECD. (2007, December). OECD economic outlook. Paris: OECD.

D. Salvatore / Journal of Policy Modeling 30 (2008) 627–631 631

Salvatore, D. (1998, March). Europe’s structural and competitiveness problems and the Euro. The World Economy,189–205.

Salvatore, D. (2003, July). The new economy and growth in the G-7 countries. Journal of Policy Modeling, 531–540.World Bank. (2007a). Development report. Washington, DC: World Bank.World Bank. (2007b). Doing business. Washington, DC: World Bank.WEF. (2007/2008). The global competitiveness report. Geneva: WEF.