U.S. Department of Commerce

Economics and Statistics Administration

Taking the High Road:

New Data Show Higher Wages May Increase 

Productivity, Among Other Benefits

Introduction

 here is a wealth of evidence that manufacturing jobs are good jobs.1But not all 

mamanufacturing jobs are created equal. Published data highlight the considerable 

variation in pay and productivity across manufacturing industries. For example, 

workers in the computer and electronic product manufacturing industry earn an 

average of $34 per hour (as of May 2015), while those in apparel manufacturing 

earn an average of $17 per hour. Now, thanks to a special tabulation of data from 

the 2012 Economic Census by the Census Bureau, we can also begin examining 

differences in the highest- and lowest-paying establishments within the same 

industry.2

Our special tabulation of Economic Census data divides manufacturing 

establishments in two ways. Industries are first categorized at a detailed level 

(using 4-digit NAICS codes), and then they are divided into four equally sized 

groups (or quartiles) by payroll per employee.3The resulting tabulations show 

payroll per employee, value-added per employee and other output and cost 

measures for each of the quartiles. This division allows us to see how much wage 

variation there is between the top- and lowest-paying establishments. The payroll 

data tells us how much, on average, an establishment is paying all of its employees 

(including line workers, engineers, and administrators).

The variation in pay across manufacturing establishments is quite high. Across all of 

manufacturing, the lowest-paying establishments are in the bottom quartile of cutand-sew apparel manufacturing (NAICS 3152), with an average annual payroll per 

employee of $15,972. At the opposite end of the spectrum is the top quartile of 

communications equipment manufacturing (NAICS 3342), with an average annual 

payroll of $113,070—a variation of over 600 percent. As a point of comparison, 

average payrolls in communications equipment manufacturing are $97,765, or just 

170 percent higher than the overall average for cut-and-sew apparel ($36,085).

T

By 

Susan Helper and 

Ryan Noonan

ESA Issue Brief

# 04-15

August 4, 2015
Page 2 U. S. Department of Commerce, Economics and Statistics Administration

Even when we control for industry, significant 

variation remains. The gap between the 

highest- and lowest-paying quartiles within 

industries varies from a low of around 63 

percent in household, institutional furniture, 

and kitchen cabinet manufacturing (NAICS 

3371) to a high of more than 220 percent in 

tobacco products (NAICS 3122).

Why Are Some Establishments 

Different?

Understanding why this dispersion exists and 

what is different about high- and low-paying 

establishments within an industry is 

complicated.4There is, however, a fairly high 

degree of correlation between certain 

establishment characteristics. The chart on the 

following page compares payroll per employee 

to value added per employee, using the same 

quartile tabulation as above. The top quartile of 

each industry is represented by a purple dot, 

with lower quartiles in green, red, and blue.

Overall, we can see that payroll and value 

added are related—as one variable increases, 

so does the other. In statistical terms, they have 

a correlation coefficient of nearly 0.7. There 

appears to be a stronger correlation for 

establishments in the bottom quartile (greater 

than 0.75) than for establishments in the top 

quartile (about 0.55), indicating a closer link 

between productivity and wages among lowerpaying establishments than higher-paying ones.

We also observe a relationship between capital 

expenditures and payroll. Overall, the 

correlation between an establishment’s capital 

expenditures per employee and its payroll is 

about 0.6. Unlike the relationship between 

payroll and value added, however, this 
U. S. Department of Commerce, Economics and Statistics Administration Page 3

relationship is looser at both the top and 

bottom (around 0.45) than in the middle (about 

0.6 for the second and third quartiles).

The quartile data provides interesting summary 

statistics and complements existing academic 

literature exploring the wide variation in 

business practices—as measured by pay, capital 

intensity, productivity, and other measures—

even within the same industry5. The research 

underscores how some firms, to follow the old

adage, may take the high road while others take 

a lower road.

Taking the High Road

How can establishments with such different 

labor costs compete in the same market? One 

possibility is product and process 

differentiation. Manufacturing establishments 

within the same industry may produce fairly 

different products—for example, athletic socks 

and designer wool overcoats are both 

manufactured by industries classified in NAICS 

code 3151. 

Still, the persistence of establishments paying 

very different wages in the same industry 

suggests that more than one “production 

recipe” is viable.6Research suggests that firms 

with higher payroll per employee have more 

skilled workers who also work harder, and the 

companies adopt other practices to take 

advantage of this talented, dedicated workforce 

and further boost its productivity. In this “highroad” recipe, firms harness the knowledge of all 

their workers to create innovative products and 

processes; the higher wages paid to these 

workers are offset by their higher productivity. 

Three factors generate this higher productivity.

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 (value added per employee)

(payroll per employee)

Annual Payroll per Employee vs. Annual Value Added per Employee

(average by quartile of payroll per employee, select manufacturing industries)

Q1

Q2

Q3

Q4

Note: Most industries shown here. Some outliers and industries from which data is not available have been omitted.

Source: Economics and Statistics Administration analysis using special tabulation data from the Census Bureau, Annual Survey of Manufactures
Page 4 U. S. Department of Commerce, Economics and Statistics Administration

First, paying higher wages allows firms to 

attract workers with more and better skills. 

Second, firms that pay their employees more 

are effectively able to “buy” increased morale, 

lower turnover, and higher productivity from 

employees who are committed to keeping a 

good job.

7

Third, high-road firms adopt other practices 

that increase the return to having skilled and 

motivated workers. One example is the greater 

capital intensity of high-wage firms mentioned 

above.

8 Other practices are important as well. 

For example, a study of automotive stampers 

(NAICS 33637) found that high-wage firms were 

more likely to design their own products and 

have “quality circles” where a diverse group of 

workers discuss incremental ways of improving 

operations. Adopting one practice often 

increases the productivity impact of other 

practices. Thus, a firm’s product designs will be 

better if it takes into account suggestions from 

workers about how to change aspects of the 

design that frequently lead to defects. These 

suggestions are likely to be better if workers are 

more skilled and experienced. In the end, 

product design, quality circles, and high pay are 

most effective if adopted together.9

Zeynep Ton at MIT has observed similar results 

in the retail sector.10 According to Ton, many 

highly successful retain chains—such as 

QuikTrip, , Trader Joe’s, Costco, and Spain’s 

Mercadona—are able to combine investment in 

their employees with low prices, financial 

success, and industry-leading customer service. 

Ton argues that companies benefit from having 

well-trained, flexible workers who can shift 

between sales, customer service, and 

operations. At the successful retailers Ton has 

studied, employees are able to run a cash 

register, sweep floors, restock items, order new 

merchandise, and offer product 

recommendations to customers—switching 

between these tasks as time and circumstances 

require. Ultimately, companies create a virtuous 

cycle, paying higher wages and benefits, which 

in turn increases loyalty and productivity, 

increasing revenue and making up for higher 

compensation costs.

Taken together, these results imply that higher 

wages often lead to improvements in skills, 

motivation, and workforce stability, especially

when combined with changed strategies in 

areas such as product design and cross-training. 

Thus, employers can often adjust to higher 

wages without significant reductions in 

employment or profits.

Acknowledgements

In addition to those whose work is cited, the 

authors would like to thank the following for 

their contributions to this report:

Julius Smith, Census Bureau

Rob Rubinovitz, Deputy Chief Economist

David Langdon, Senior Economist

Jessica Nicholson, Economist

William Hawk, Economist

Jane Callen, Editor

Susan Helper is the Chief Economist of the U.S. 

Department of Commerce. Ryan Noonan in an 

Economist in the office of the Chief Economist.

Technical inquiries:

Office of the Chief Economist

(202) 482-3523

Media inquiries:

Office of Communications

(202) 482-3331

Administration

U.S. Department of Commerce

1401 Constitution Ave., NW

Washington, DC 20230

www.esa.doc.gov
U. S. Department of Commerce, Economics and Statistics Administration Page 5

 

1

ESA economists have written several reports about the existence and persistence of the manufacturing wage 

premium. According to The Benefits of Manufacturing Jobs, wages and salaries in manufacturing were higher than 

non-manufacturing jobs, even when controlling for demographic, geographic, and job characteristics. The Earnings 

of New Hires in Manufacturing finds new hires in manufacturing jobs earned 38 percent more at the end of 2011 

than other new hires in other industries.

2

Another recent paper has used data from the Current Population Survey, the Longitudinal Business Database, and 

the Longitudinal Employer-Household Dynamics program to show that much of the increase in inequality observed 

during the 1970s-2000s is driven by a widening distribution of establishment-level earnings. The paper shows that 

these results are seen across the economy and are not limited to the manufacturing sector. See Erling Barth, Alex 

Bryson, James C. Davis, and Richard B. Freeman, “It’s Where You Work: Increases in Earnings Dispersion Across 

Establishments and Individuals in the U.S.” (NBER Working Paper 20447), National Bureau of Economic Research, 

September 2014, available at: http://www.nber.org/papers/w20447 (last accessed July 2015).

3

In the case of the Economic Census, payroll refers to all forms of direct compensation, including salaries, wages, 

commissions, bonuses, vacation and sick leave pay. It does not include pensions, Social Security contributions, 

group insurance premiums, or workers’ compensation. For more information, please consult the Census Bureau at:

http://www.census.gov/econ/census/help/sector/definitions.html. 

4

Additional related research on the cause of productivity differences across firms (which are likely closely related 

to payroll differences) can be found in Chad Syverson, “What Determines Productivity?”, Journal of Economic 

Literature, 2011, vol. 49:2, pp. 326-365, available at: http://home.uchicago.edu/syverson/productivitysurvey.pdf

(last accessed July 2015).

5

See Barth, et.al (2014) and Syverson (2011). 

6

Daniel Luria, “Why Markets Tolerate Mediocre Manufacturing,” Challenge, July-August 1996, vol. 39:4, pp. 11-16, 

available at: http://www.jstor.org/stable/40721689 (last accessed July 2015).

7

Paul Krugman, “Liberals and Wages,” New York Times, July 17, 2015, available at: 

http://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html?_r=0 (last accessed July 

2015). Krugman’s column also relies on research originally presented in David Card and Alan B. Krueger, “Minimum 

Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania” (NBER Working 

Paper 4509), National Bureau of Economic Research, October 1993, available at: 

http://www.nber.org/papers/w4509 (last accessed July 2015).

8

Having more capital generally increases a firm’s productivity. However, having more capital also increases the 

costs of downtime. To obtain qualified, motivated workers who will work to avoid this downtime, capital-intensive 

employers pay higher wages. 

9

Susan Helper, Timothy Krueger, and Howard Wial, “Why Does Manufacturing Matter? Which Manufacturing 

Matters?” Brookings Institution, February 2012, available at: 

http://www.brookings.edu/~/media/Research/Files/Papers/2012/2/22%20manufacturing%20helper%20krueger%

20wial/0222_manufacturing_helper_krueger_wial.pdf (last accessed July 2015). For a summary of the “high road” 

literature, see Thomas A. Kochan, Eileen Applebaum, Jody Hoffer Gittell, and Carrie R. Leana, “The Human Capital 

Dimensions of Sustainable Investment: What Investment Analysts Need to Know,” February 22, 2013, available at: 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222657 (last accessed July 2015).

10 Zeynep Ton, “Why ‘Good Jobs’ Are Good for Retailers,” Harvard Business Review, January-February 2012, 

available at: https://hbr.org/2012/01/why-good-jobs-are-good-for-retailers (last accessed July 2015).