Productivity Is Offseting Wage Gains

50 Years of Productivity Gains



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There has been lots of ink spilled on the dangers of rising wages as a source of inflation. The problem with focusing on input costs is that it is incomplete. To fully understand the wage and labor picture, you need to see the other half of the equation: Output. And the biggest single driver of output today is technology-enhanced Productivity.

Deciphering how much output companies get for each dollar of labor can help answer the “transitory or permanent” quandary that has become de rigueur in the media.

To be sure, prices have risen, and some robustly: Crude Oil is over $83, back to where it was in 2015. Consumers, flush with CARES act cash and bored at home, sent retail sales over pre-pandemic levels soon after the lockdown began, driving prices up further. And wages, especially those on the lower half of the economic scale, have risen; I expect those gains to prove sticky.1 For companies that are short-staffed and have-to-hire, $15/hour is becoming an “unofficial” minimum wage, espeically for restaurants and retail stores.

But the current inflation debate is excessively focused on price inputs. Ships lined up in the Pacific waiting to unload at the Long Beach docks make for great visuals, but that will likely prove to be a temporary phenomenon that will ameliorate on its own. By ignoring output – what companies get for their money from their workforce – we are missing the most important part of the inflation equation.

That half is being driven by technology. The impact has been deflationary for decades, as employees have become much more productive at the same wage levels. The odds of sustained wage-driven inflation decrease when productivity outpaces these wage increases.

Said differently: Supply chain price increases tend to be temporary, but productivity gains stick around.

A lot has changed since 1987, when economist Robert Solow quipped “You can see the computer age everywhere but in the productivity statistics.”

It’s an old joke: Two young fish are asked by an older fish, “How’s the water?” and one young fish turns to the other and says, “What the hell is water?

Productivity gains are everywhere, and have become so ubiquitous we simply overlook them.


The world today is very different from what it was in 1987. Productivity measures have seen a marked cumulative increase, driven primarily by computer technology. That increase in productivity was kicked into an even higher gear during the pandemic months of working from home: Labor Productivity, as measured by Output per Hour for All Employed Persons, nearly tripled over that period versus prior years.

It wasn’t just white-collar workers who had increases in productivity. Nearly every field can lay claim to some technology-driven increase in efficiency and production.

Consider restaurants, a challenging business that has shown itself to be particularly resistant to productivity gains. But even eateries have adapted and become more productive, accelerated in part by the industry’s response to Covid. Technology now dominates nearly every aspect of the business, from reservations to menus to ordering and paying your check. The net result is more meals served and higher revenue per restaurant with fewer staff members.

Apps like Resy and Open Table have automated the reservation process; QR codes eliminate the need for printed menus, allowing for instantaneous updates of daily offerings. Waitstaff take orders on iPads, reducing errors (and wasted returned dishes). Mobile point of sale systems (mPOS) like Square or Upserve turn the process of paying your check into a single operation, instead of a time-consuming, three-step transaction. All told, modern technology-enabled restaurants can serve more diners each day with less staff. There is an upfront cost of tech and ongoing training. But the productivity gains result in greater revenues for the restaurant at a lower total cost.

Multiply this by 100s of industries, and you begin to see the impact on output.

Productivity remains notoriously difficult to measure. But we need only look around to see how much more productive each of us has become over the past few decades. These gains have touched every sector and nearly every job. That we find it difficult to track is more of a measurement problem than a function of productivity itself.

Wage gains are a reset, and supply-chain price increases are likely to be proven temporary; productivity gains, on the other hand, will persist forever. That is a deflationary, not inflationary result.



Shifting Balance of Power? (April 16, 2021)

Deflation, Punctuated by Spasms of Inflation (June 11, 2021)

The Inflation Reset (June 1, 2021)

Elvis (Your Waiter) Has Left the Building (July 9, 2021)

Wages in America





1. Arguably, wage increases are just a catch-up, a belated reset of prices. We can contextualize it this way: The low minimum wage that has lagged everything else for so long artificially suppressed wages AND inflation. The current wage spike is a recognition that an unsustainably low wage rate is, well, no longer being sustained. This is an entirely different conversation, worthy of its own post.


Update: Here is that post: Generational Reset of Minimum Wage.



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