US Productivity Measures Overstate Domestic Gains: Explains Lack Of Workers' Wage Gains And Lack Of Job Growth: McKinsey & Co.

From McKinsey & Co, "Not all productivity gains are the same. Here's why." by Michael Mandel and Susan Houseman, June 2011:

Under ordinary circumstances, economic theory would tell us that an industry with rising productivity would pay higher wages and/or boost employment. However, real wages for many production and nonsupervisory workers stagnated in most tradable industries during this period, even as jobs disappeared. Notably, the durable goods manufacturing sector showed only a 0.2 percent cumulative increase in real wages for production and supervisory workers from 1990 to 2008, despite more than doubling in productivity over the same stretch, according to the Bureau of Labor Statistics.

But recent work suggests a resolution to this apparent paradox. [See, for example, Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel, “Offshoring Bias in U.S. Manufacturing,” Journal of Economic Perspectives, Spring 2011. See also Michael Mandel, “Implausible Numbers: How our current measures of economic competitiveness are misleading us and why we need new ones,” February 2011.] The key is to understand that the US government’s systems for tracking the national economy were never designed to deal with offshoring or global supply chains. In particular, shifts in global sourcing to take advantage of lower costs—the very essence of globalization—are incorrectly picked up in the US economic statistics.

As a result, the apparent strong growth in the productivity or value-added per job in tradable industries actually combines three very different effects:

• Improvements in domestic production processes
• Gains in global supply chain efficiency
• Productivity gains at foreign suppliers.

Each of these components of “productivity growth” has different implications for real wages and for the creation of new jobs. Understanding the distinctions among them can improve understanding of our current situation and open up new avenues for policy.***It matters greatly for wages and employment whether rising value-added per worker is being driven by domestic production improvements, supply chain efficiencies, or by productivity gains abroad.

Read the complete article here.