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John Hood: Economic growth closely tied to worker pay

RALEIGH — If the most important factor determining the welfare of workers is the growth rate of the economy, that has policy implications that free-market conservatives, among others, will welcome.

Real, long-term economic growth is about investment, about both the amount invested and how skillfully it is invested in capital assets that make labor more productive. Assembling financial capital to start or expand a business is one example. Building physical capital such as plants, stores, equipment, information networks, and highways would be another. Direct investment in the productivity of workers themselves, in their knowledge and skills, is yet another example of capital formation, and obviously a critically important one.

Here in North Carolina, we’ve spent the past decade debating how best to boost economic growth. Are we more likely to boost it by spending more tax dollars on new infrastructure and education programs, or would it be more growth-enhancing to reduce taxes and thus promote investment in the private sector?

It’s been a robust debate, at the very least. But was it all an irrelevant distraction?

In recent years, some politicians and activists have come to question the fundamental assumption that economic growth and worker welfare are joined at the hip. They point to evidence that even as the productivity of the economy has gone up, worker wages haven’t. They observe that the share of national income that goes to workers has declined. Faster growth just means more money in the pockets of CEOs, business owners, and investors, while everyone else gets left behind.

This is, inescapably, an argument about the validity and interpretation of statistics. Those who challenge the link between overall growth and worker well-being have passed around charts showing a widening disparity between productivity gains and workers’ share of national income since the 1970s. These charts are based on official government data. But they do not convey reality.

For one thing, they focus on gross income, not net income. When businesses use capital assets to produce goods and services for sale, those assets aren’t unaffected. Over time, they get used up. That’s called depreciation, and any accounting that fails to subtract depreciation is not conveying true net income.

For another thing, “official” statistics are not necessarily valid ones. Over the past few decades, the federal government has changed the way it measures and allocates an important category of income: self-employment. If you both own a business and work for it, some of the income you receive is payment for labor and some of it is return on your capital investment. It’s hard to figure out what the allocation should be. Unfortunately, federal statisticians haven’t been consistent about it. Over time, they’ve decided to treat self-employment income more as return to capital than as return to labor.

When former Heritage Foundation analyst James Sherk adjusted for these two factors alone — depreciation and inconsistent allocation of self-employment income — he found that the share of national income going to workers has been “remarkably stable” since the end of World War II, at around 69 percent. Only briefly did the share move significantly above 70 percent, during the tech bubble of the late 1990s.

In other words, the measured income of workers — which overlooks some of the ways that workers are compensated, by the way — remains closely tied to the overall growth rate of the economy. Making workers’ labor more productive, through capital investment of various kinds, remains the best way to improve their well-being. We don’t need new regulations, or stronger unions, or more income redistribution to do the job.

I continue to believe, based on valid theories of economic growth and sound empirical evidence, that the best way for North Carolina to do its share of the job is to stay its current conservative course. Maintain our pro-investment tax and regulatory policies while increasing the productivity of the public dollars we put into our education, transportation, and public-safety programs.

As our work becomes more valuable, we are paid more for it. Still true. Still matters.

John Hood is chairman of the John Locke Foundation and appears on “NC SPIN,” broadcast statewide Fridays at 7:30 p.m. and Sundays at 12:30 p.m. on UNC-TV.



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