Wages Fail to Keep Pace With Productivity Increases, Aggravating Income Inequality By GREG IP March 27, 2006; Page A2 Since the end of 2000, gross domestic product per person in the U.S. has expanded 8.4%, adjusted for inflation, but the average weekly wage has edged down 0.3%. That contrast goes a long way in explaining why many Americans tell pollsters they don't believe the Bush administration when it trumpets the economy's strength. What is behind the divergence? And what will change it? Some factors aren't in dispute. Since the end of the recession of 2001, a lot of the growth in GDP per person -- that is, productivity -- has gone to profits, not wages. This reflects workers' lack of bargaining power in the face of high unemployment and companies' use of cost-cutting technology. Since 2000, labor's share of GDP, or the total value of goods and services produced in the nation, has fallen to 57% from 58% while profits' share has risen to almost 9% from 6%. (The remainder goes to interest, rent and other items.) The Bush administration's defenders, and many private economists, say wages are bound to catch up. "Everything we know about economics and historical experience is that when productivity goes up, real wages go up, too," says Phillip Swagel, a scholar at the conservative American Enterprise Institute who worked in the Bush White House. It took a couple of years for wages to catch up with accelerating productivity in the late 1990s, he says. "This time, it's taking three, maybe four or five." Another factor holding down wages is that employer-paid health benefits, pensions and payroll taxes have risen almost 16% since 2000, making employers less generous with wages. In addition, it appears that the highest-salaried workers -- executives, managers and professionals -- are widening their lead on the typical worker. The role of inequality is contentious. Treasury Secretary John Snow, point man in the administration's campaign to persuade Americans they are doing better, says, "Since the early 1980s on, we've seen a rise in inequality but we've also seen parallel to that a continuous rise in living standards." How the average family is doing in absolute terms is more important than how it is doing relative to others, he says. "What I've been trying to focus on here is...how do we raise the living standards of Americans?" he says. Nonetheless, he argues that inequality has narrowed since Mr. Bush took office. His staff calculates that the richest 20% of U.S. taxpayers saw their average after-tax income, defined broadly to include capital gains, fall 9.4% from 2000 to 2003, the latest year for which data are available. The middle 20% had a drop of 0.2%; the bottom 20% had a rise of 1.6%. For the same years, the Congressional Budget Office finds a decline in the income for those at the bottom, but it, too, said the rich were harder hit so inequality narrowed. An important reason is that capital gains, which go mainly to upper-income families, rose sharply with the stock market in the late 1990s and then plunged as the market did. Comparable data for 2004 and 2005 aren't yet available. Jared Bernstein, a senior economist at the Economic Policy Institute, a liberal Washington think tank, says inequality probably rose again as the stock market recovered and the best-paid workers widened their lead on those in the middle. (Most inequality statistics don't track the same person over time, but instead compare snapshots of the population at different times. Not all people in the top or bottom in one year will still be there a few years later.) [Slicing Up the Pie] <img src=http://online.wsj.com/public/resources/images/NA-AI264_OUTLOO_20060326174014.gif> The Bush tax cuts appear to have widened the income gap, according to many analyses. They increased take-home pay of almost all working Americans, but boosted it most for those at the top. Mr. Swagel, acknowledging that cuts in taxes on capital gains and dividends benefit the affluent in the short run, argues that they will benefit all workers in the long run as they spur investment and higher productivity. Still, the gap between the wages of the highest- and lowest-paid workers has continued to widen. Based on Labor Department data, Mr. Bernstein estimates the weekly wage of the worker at the 10th percentile -- the one earning less than 90% of all workers -- fell 2.7% from 2000 to 2005, adjusted for inflation. The wage of the worker at the 90th percentile rose 5.3%. Many economists predict that with the U.S. unemployment rate below 5% now, workers will regain their leverage. Indeed, wages have picked up recently. Still, wage inequality may continue to rise. Lawrence Katz, an economist at Harvard University who worked in the Clinton administration, says the wage gap has been growing for the past 25 years, particularly between the top and the middle. He believes the biggest factor is technology, which has complemented the skills of the well-educated while rendering redundant routine skills of many in the middle. "The factors that seem to be driving it are continuing: the broad span of the computer revolution," he says. "For people in the middle the big question is: Will our education system give them interpersonal skills that are very valuable? You can make a lot of money today if you can interact with people who are the winners." Mr. Snow, a Ph.D. economist, says income equality ultimately reflects "equality of educational opportunities," and if the U.S. can "reduce the variability of educational opportunities," it will also reduce the income gap. History suggests that with unemployment low and growth steady, the typical family will see its income rise noticeably. As that happens, Americans' spirits will rise, as well.