Workers’ Compensation: Growing Along with Productivity

Raising workers’ compensation requires increasing productivity. Competition causes employees’ compensation to closely track the value of the goods and services they produce. Firms that pay workers more than the value that they add go out of business. Conversely, firms that pay their employees less than the value they create see competitors steal their employees away. This dynamic explains why more than 95 percent of Americans earn more than the minimum wage—despite companies having no legal obligation to pay more. Since 1973, employee productivity has grown 81 percent; average compensation has increased 78 percent. Economists from across the political spectrum agree that businesses pay their workers according to their productivity. Nonetheless, some analysts produce studies showing—falsely—that pay and productivity have diverged since the 1970s. Studies that compare the same groups of workers and use the same measure of inflation, however, show that pay growth closely tracks productivity growth.

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