This is why people don't think the economy is doing well

With GDP growing at 3-4% per year, unemployment at 4.6%, and productivity growing at record rates, why don't people believe the economy is doing well? Here's one reason:













In theory, compensation (wages + benefits) per hour should keep pace with productivity. For decades now, however, total compensation growth has been lagging behind productivity growth. This graph shows the pattern since 1990: from 1992-1997 compensation was flat while productivity rose. The tight labor market of the late 1990s allowed workers to recoup most of the losses they had suffered since the early 1990s. Since 2000, however, and despite the recovery that began in earnest in 2003, real compensation has fallen further and further behind productivity; since 2000, compensation growth has grown about 9 percentage points slower than productivity. Put it this way: the average worker produces about 19% more stuff per hour for his employer than he did in 2000, yet his employer pays him only 10% more.

The numbers are actually worse than they appear. First, much of the increase in compensation represents rising health care costs, not rising wages. Second, much of the increase in compensation goes to high-income workers (including stock options, etc. that go to executives) not your typical production worker.

The cure to this problem is a tight labor market such as we experienced in the late 1990s. We don't have that, and judging from the September employment report (employment increased by 51,000, whereas we need about 130,000 new jobs every month to keep pace with increased population) and other economic indicators, we're not going to get it any time soon.