Since the 1970s hourly compensation for the typical US worker has essentially stagnated, even as net productivity continued to increase. This trend continues to the present day and from 2000 to 2014, net productivity grew by 21.6%, while the hourly compensation of a typical worker grew by just 1.8% according to the Economic Policy Institute (EPI) think-tank.

In 'Understanding the Historic Divergence between Productivity and a Typical Worker’s Pay,' published last Thursday, Lawrence Mishel, EPI president, and Josh Bivens, research and policy director, update their research and address several critiques of their analysis.


“The fact of the matter is, for decades, a typical worker’s pay rose alongside productivity — but since the 1970s, as a hugely disproportionate share of income generated by rising productivity has gone to extraordinarily highly paid managers and owners of capital,” said Mishel. “The relationship between rising productivity and worker pay has broken down because workers’ bargaining power has been intentionally hamstrung by a series of intentional policy decisions, made on behalf of those with the most income, wealth, and power.”

Mishel and Bivens identify three “wedges” that are responsible for the disparity between productivity and worker pay. Two are elements of income inequality: a falling share of income going to workers relative to capital owners and widening inequality of compensation. These inequality-related wedges explain more than 80% of the pay-productivity divergence since 2000.

“If we are going to break the upward spiral of inequality and end the stagnation of hourly wages, we need to relink productivity growth to the pay of typical American workers,” said Bivens. “We need a policy platform that explicitly seeks to re-establish this connection, by strengthening workers’ bargaining power vis-à-vis their employers.”

The third wedge responsible for the productivity-pay gap is the difference between the rising costs of consumer goods compared to economy-wide output, sometimes referred to as the “terms of trade.” The prices of things that workers buy—as measured by consumer price indices—have risen faster than prices of economy-wide output (which includes non-consumption items like exports, government purchases and investment goods). Mishel and Bivens argue that this discrepancy, which has shrunk in the 2000-2014 period, is a reflection of actual dynamics in the economy and not simply a statistical anomaly that should be ignored by analysts.

“Our problem is not a lack of growth. For the past 40 years, productivity has gone up substantially, but these gains have not reached working people,” said Mishel. “The problem is that wages have been suppressed by a restructuring of rules on behalf of those with wealth and power.”

1) For decades following the end of World War II, inflation-adjusted hourly compensation (including employer provided benefits as well as wages) for the vast majority of American workers rose in line with increases in economywide productivity. Thus hourly pay became the primary mechanism that transmitted economy-wide productivity growth into broad-based increases in living standards. 2) Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economywide productivity. 3) In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2% between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7%, or 0.20% annually, over this same period, with essentially all of the growth occurring between 1995 and 2002. 4) Another measure of the pay of the typical worker, real hourly compensation of production, nonsupervisory workers, who make up 80% of the workforce, also shows pay stagnation for most of the period since 1973, rising 9.2% between 1973 and 2014. Again, the lion’s share of this growth occurred between 1995 and 2002. 5) Net productivity grew 1.33% each year between 1973 and 2014, faster than the meager 0.20% annual rise in median hourly compensation. In essence, about 15% of productivity growth between 1973 and 2014 translated into higher hourly wages and benefits for the typical American worker. Since 2000, the gap between productivity and pay has risen even faster. The net productivity growth of 21.6% from 2000 to 2014 translated into just a 1.8% rise in inflation-adjusted compensation for the median worker (just 8% of net productivity growth). 6) Since 2000, more than 80% of the divergence between a typical (median) worker’s pay growth and overall net productivity growth has been driven by rising inequality (specifically, greater inequality of compensation and a falling share of income going to workers relative to capital owners). Over the entire 1973–2014 period, rising inequality explains over two-thirds of the productivity–pay divergence. 7) If the hourly pay of typical American workers had kept pace with productivity growth since the 1970s, then there would have been no rise in income inequality during that period. Instead, productivity growth that did not accrue to typical workers’ pay concentrated at the very top of the pay scale (in inflated CEO pay, for example) and boosted incomes accruing to owners of capital. These trends indicate that while rising productivity in recent decades provided the potential for a substantial growth in the pay for the vast majority of workers, this potential was squandered due to rising inequality putting a wedge between potential and actual pay growth for these workers. 8) Policies to spur widespread wage growth, therefore, must not only encourage productivity growth (via full employment, education, innovation, and public investment) but also restore the link between growing productivity and the typical worker’s pay. 9) Finally, the economic evidence indicates that the rising gap between productivity and pay for the vast majority likely has nothing to do with any stagnation in the typical worker’s individual productivity. For example, even the lowest paid American workers have made considerable gains in educational attainment and experience in recent decades, which should have raised their productivity.

A Wall Street Journal blog sums up some quibbles but the Mishel/Bivens arguments remain essentially intact. Productivity for example is not evenly distributed throughout the economy. The WSJ says: "Mssrs. Bivens and Mishel counter that what they call 'capital deepening,' the spread of capital investment across sectors, should have made all kinds of workers more productive, such as supermarket cashiers who can now scan barcodes instead of punching in prices item by item. Furthermore, they argue, according to basic economic theory, rising productivity should lift wages even in sectors or firms that haven’t experienced the same productivity. This is due to a phenomenon known as 'Baumol’s cost disease,' which proposes that workers in sectors not known for productivity gains—symphony musicians, barbers—will experience wage gains to prevent them from simply migrating to higher-productivity sectors."

US skills gap inequalityThis is a similar analysis from Robert Lawrence, professor of International Trade and Investment at the Kennedy School of Government at Harvard University and a senior fellow at the Peterson Institute for International Economics.

As for employees who had health care benefits, the cost to employers jumped from 1965. Erza Klein wrote in The Washington Post in 2011 on the cost of the US and Canadian health systems: "As recently as 1965, the cost of those two systems competed neck-and-neck. That year, Canada spent 5.9% of its GDP on health care. The United States spent 5.7%. But around that time, Canada was transitioning to its current single-payer system. Over the next four decades, the growth of health-care costs slowed in Canada while it accelerated in the United States. By 2009, Canada was spending 11% of its GDP on health care — and covering everyone. The United States was spending 17.4% of its GDP and leaving 45 million uninsured."

Last July the OECD reported that in 2013 the US ratio excluding investment was 16.4% of GDP. Germany's was at 11% and the UK's was at 8.5%.

The OECD said also in July that new evidence presented in the 2015 edition of the OECD Employment Outlook shows that the internationally high level of wage inequality in the United States is attributable, in considerable part, to the combination of a highly uneven distribution of cognitive skills across the US workforce and a very high skill pay premium. "If the US skills distribution and pay premium matched that in an average OECD country, wage inequality would be 6.1% lower."

The Bureau of Labor Statistics reported in last Friday's August jobs report that at last wages had started to rise, with average hourly earnings for all private-sector workers up 2.2% over the past year.

Jason Furman, chairman of the Council of Economic Advisers explained that over the past twelve months, rising real hourly earnings accounted for close to 40% of the increase in real aggregate weekly earnings.

"Aggregate weekly earnings are the total wages and salaries paid to all private employees on nonfarm payrolls. Changes in aggregate earnings can be driven by contributions from employment, from the length of the average workweek, and from average hourly earnings. The large contribution of rising hourly earnings is a recent trend. Aggregate earnings reached a cyclical trough in December 2009, and over the following year-and-a-half, real hourly wages declined. The aggregate earnings increase during that early period was more than accounted for by a combination of rising employment and a longer workweek. Over the next three years, both hourly earnings and the workweek were largely stable, with rising employment accounting for more than 80% of the growth in aggregate earnings. Real wage growth over the past year has been a major contributor to the speed-up in aggregate earnings, due to both rising nominal wages and slowing consumer price growth as oil prices have declined."

Earnings rise US 2015

A recent paper by Andrew Figura and David Ratner, Fed economists, suggest the labour share of income — the portion of GDP that flows to workers via income — has dipped from an average of 70% in 1947-2001 to 63% in 2010-14. 

Strong jobs growth will increase pressure in some sectors for more rises.

Last year Ben Casselman of FiveThirtyEight wrote: "In 1970, 55% of U.S. income was earned by households in the middle 60% of the income distribution. More than half of households were in what Pew Research Center has labeled the 'middle tier' of households (those earning between two-thirds and twice the median income). In 2013, both numbers had fallen to about 45%. In a 2012 report, Pew researchers called the 2000s 'the lost decade of the middle class.'”

The federal minimum wage has been at $7.25 an hour since 2009 and Senator Bernie Sanders, who is seeking the Democratic Party's nomination for president, wants the rate hiked to $15.than half of households were in what Pew Research Center has labeled the 'middle tier' of households (those earning between two-thirds and twice the median income). In 2013, both numbers had fallen to about 45%. In a 2012 report, Pew researchers called the 2000s 'the lost decade of the middle class.'”

The Wall Street Journal reports that the city councils in Seattle, San Francisco and Los Angeles have already voted to increase their minimum wage to $15 an hour over several years. For large employers in Seattle, the first increase to $11 from $9.47 took effect in April. In San Francisco a hike to $12.25 from $10.74 began in May. Los Angeles rolled out a minimum wage for hotel workers of $15.37 in July.

US employment ratio in 2015 remains at recession trough in June 2009