Today’s young people, some commentators claim, will be the first generation of Americans to be poorer than their parents. While others reject such predictions, they do serve to remind us that we need policies that will keep Americans’ paychecks rising.

What are the best ways to keep employees’ paychecks rising? Policy analysts tend to advocate two quite different approaches: One is ineffective; the other quite effective.

The ineffective approach is to boost the percentage of total gross domestic product (GDP) paid to employees – a rise in labor’s slice of the economic pie. The effective approach is to boost GDP itself – to make a bigger pie. And the key to a bigger pie, it turns out, is to raise productivity.

The “larger slice of the pie” strategy is ineffective for two reasons. First, the pay increases that this strategy can yield are strictly limited. Right now, labor’s share of the economic pie – broadly, the earnings of employees plus earnings of self-employed proprietors – is about 65 percent of GDP. If we convert the remaining 35 percent to employee pay, we’ve done everything we can do; we’ve allocated all of GDP to employee pay. End of strategy.

Second, the “larger slice” strategy may be self-defeating. That last 35 percent of GDP is made up of investors’ interest and dividend earnings; companies’ costs of replacing worn-out plants, offices and machinery; and companies’ profits. If we convert that 35 percent to paychecks, investors and companies will have no incentive to invest and expand output – they will stop spending on machinery and construction and stop founding new businesses. Output, and consequently incomes, surely will drop.

Few people, if any, want to reduce interest, dividends and profits to zero. But large reductions in these types of income would still severely dampen investor incentives.

The “bigger pie” strategy is far superior, partly because there is no limit on growth of employee pay. If GDP were to double, it would increase by 100 percent. If labor’s share remains 65 percent of GDP, then it also would increase 100 percent. This increase would be much bigger than that yielded by the first strategy because it can yield only a 35 percent increase at best. And here is the topping on the pie: After GDP and employee pay have doubled, they can keep on growing.

Productivity is our instrument for increasing GDP and employee pay. Productivity is defined as the relationship of output to the batch of inputs used to produce that output. It grows when we make more output with the same inputs – for example, when two roofers who have been laying 1,000 square feet of shingles a week start to lay 2,000 square feet. When workers achieve more output with the same inputs, their productivity rises – by definition. And as productivity grows, output and employee pay also can grow.

Productivity growth can occur through several channels. Workers may learn new skills; companies can introduce new production techniques, often by installing new machinery or equipment; and companies can invent new or improved products. Some programs that boost productivity also directly boost employee pay: programs to train unskilled workers, reduce high-school drop-out rates, and improve the quality of schools are important examples.

Through these channels, productivity has grown and employee pay has risen. Data from the U.S. Bureau of Labor Statistics (BLS) show that between 1948 and 2007 output in the business sector of the U.S. economy – a sector that accounts for 78 percent of GDP – increased eight times. Meanwhile, employee pay – called “worker compensation per hour” by the BLS – almost tripled, after taking account of inflation. Underlying the output and pay growth was a striking rise in productivity: It increased almost fourfold. The tripling of compensation per hour could not have happened without the fourfold productivity increase.

The case for “making a bigger pie” becomes stronger still if we examine several sub-periods of the post-war years.

From 1948 to 1973, business sector productivity grew at its fastest pace in the postwar years, 3.1 percent a year. And real compensation per hour also grew at its fastest, 2.7 percent.

Between 1973 and 1990, known to economists as the productivity slowdown years, productivity grew only 1.6 percent a year, and – no surprise here – compensation per hour grew at a snail’s pace, only 0.8 percent.

Finally, after 1990 productivity growth sped up to 2.3 percent, while compensation growth – again no surprise – also accelerated, to 1.5 percent.

The computer industry, a source of countless new products and production techniques, is giving a huge stimulus to productivity growth. This industry barely existed in Maine a generation ago, but now employs more than 11,000 Mainers, almost all paid above the state average.

So productivity is the key to making bigger pies – and to boosting workers’ pay. The best strategy for helping our young people prosper is to focus on ways to strengthen productivity.

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.