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Another interesting read.
Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real | Economic Policy Institute
Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real | Economic Policy Institute
Introduction and key findings
Wage stagnation experienced by the vast majority of American workers has emerged as a central issue in economic policy debates, with candidates and leaders of both parties noting its importance. This is a welcome development because it means that economic inequality has become a focus of attention and that policymakers are seeing the connection between wage stagnation and inequality. Put simply, wage stagnation is how the rise in inequality has damaged the vast majority of American workers.
The Economic Policy Institute’s earlier paper, Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, presented a thorough analysis of income and wage trends, documented rising wage inequality, and provided strong evidence that wage stagnation is largely the result of policy choices that boosted the bargaining power of those with the most wealth and power (Bivens et al. 2014). As we argued, better policy choices, made with low- and moderate-wage earners in mind, can lead to more widespread wage growth and strengthen and expand the middle class.
This paper updates and explains the implications of the central component of the wage stagnation story: the growing gap between overall productivity growth and the pay of the vast majority of workers since the 1970s. A careful analysis of this gap between pay and productivity provides several important insights for the ongoing debate about how to address wage stagnation and rising inequality. First, wages did not stagnate for the vast majority because growth in productivity (or income and wealth creation) collapsed. Yes, the policy shifts that led to rising inequality were also associated with a slowdown in productivity growth, but even with this slowdown, productivity still managed to rise substantially in recent decades. But essentially none of this productivity growth flowed into the paychecks of typical American workers. Second, pay failed to track productivity primarily due to two key dynamics representing rising inequality: the rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees. Third, although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority.
Ever since EPI first drew attention to the decoupling of pay and productivity (Mishel and Bernstein 1994), our work has been widely cited in economic analyses and by policymakers. It has also attracted criticisms from those looking to deny the facts of inequality. Thus in this paper we not only provide an updated analysis of the productivity–pay disconnect and the factors behind it, we also explain why the measurement choices we have made are the correct ones. As we demonstrate, the data series and methods we use to construct our graph of the growing gap between productivity and typical worker pay best capture how income generated in an average hour of work in the U.S. economy has not trickled down to raise hourly pay for typical workers.
Key findings from the paper include:
- 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 economy-wide productivity. Thus hourly pay became the primary mechanism that transmitted economy-wide productivity growth into broad-based increases in living standards.
- Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economy-wide productivity. In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7 percent, or 0.20 percent annually, over this same period, with essentially all of the growth occurring between 1995 and 2002. Another measure of the pay of the typical worker, real hourly compensation of production, nonsupervisory workers, who make up 80 percent of the workforce, also shows pay stagnation for most of the period since 1973, rising 9.2 percent between 1973 and 2014. Again, the lion’s share of this growth occurred between 1995 and 2002.
- Net productivity grew 1.33 percent each year between 1973 and 2014, faster than the meager 0.20 percent annual rise in median hourly compensation. In essence, about 15 percent 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 percent from 2000 to 2014 translated into just a 1.8 percent rise in inflation-adjusted compensation for the median worker (just 8 percent of net productivity growth).
- Since 2000, more than 80 percent 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.
- 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 thepotential 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 potentialand actual pay growth for these workers.
- 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.
- 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.
Growing together then pulling apart: Productivity and compensation in the postwar era
Productivity is simply the total amount of output (or income) generated in an average hour of work. As such, growth in an economy’s productivity provides the potential for rising living standards over time. However, it is clear by now that this potential is unrealized for many Americans: Wages and compensation for the typical worker have lagged far behind the nation’s productivity growth in recent decades, and this reflects a break in a key transmission mechanism by which productivity growth raises living standards for the vast majority of workers.
That this has not always been the case is seen in Figure A, which presents the cumulative growth in both net productivity of the total economy (inclusive of the private sector, government, and nonprofit sector) and inflation-adjusted average hourly compensation of private-sector production/nonsupervisory workers since 1948.1 Given that this group comprises over 80 percent of private payroll employment, we often label trends in its compensation as reflecting the “typical” American worker.
FIGURE A
Disconnect between productivity and a typical worker’s compensation, 1948–2014
Year Hourly compensation Net productivity
1948 1948\u20131973:<\/strong>
Productivity:\u00a096.7%<\/strong>
Hourly compensation:
91.3%<\/strong>"}" style="box-sizing: border-box; margin: 0px; padding: 0px; border: 0px; outline: 0px; font-style: inherit; font-variant: inherit; font-weight: inherit; font-stretch: inherit; font-size: inherit; line-height: inherit; font-family: inherit; vertical-align: baseline;"> 0.0% 0.0%
1949 6.3% 1.5%
1950 10.5% 9.3%
1951 11.8% 12.3%
1952 15.0% 15.6%
1953 20.8% 19.5%
1954 23.5% 21.6%
1955 28.7% 26.5%
1956 33.9% 26.7%
1957 37.1% 30.1%
1958 38.2% 32.8%
1959 42.5% 37.6%
1960 45.5% 40.0%
1961 48.0% 44.3%
1962 52.5% 49.8%
1963 55.0% 55.0%
1964 58.5% 60.0%
1965 62.5% 64.9%
1966 64.9% 70.0%
1967 66.9% 72.0%
1968 70.7% 77.2%
1969 74.7% 77.9%
1970 76.6% 80.4%
1971 82.0% 87.1%
1972 91.2% 92.0%
1973 1973\u20132014:<\/strong>
Productivity:\u00a072.2%<\/strong>
Hourly compensation: 9.2%<\/strong>"}" style="box-sizing: border-box; margin: 0px; padding: 0px; border: 0px; outline: 0px; font-style: inherit; font-variant: inherit; font-weight: inherit; font-stretch: inherit; font-size: inherit; line-height: inherit; font-family: inherit; vertical-align: baseline;"> 91.3% 96.7%
1974 87.0% 93.7%
1975 86.8% 97.9%
1976 89.7% 103.4%
1977 93.1% 105.8%
1978 96.0% 107.8%
1979 93.4% 108.1%
1980 88.6% 106.6%
1981 87.6% 111.0%
1982 87.8% 107.9%
1983 88.3% 114.1%
1984 86.9% 119.7%
1985 86.3% 123.4%
1986 87.3% 128.0%
1987 84.6% 129.1%
1988 83.9% 131.8%
1989 83.7% 133.6%
1990 82.2% 137.0%
1991 81.9% 138.9%
1992 83.0% 147.5%
1993 83.4% 148.4%
1994 83.8% 150.7%
1995 82.7% 150.8%
1996 82.8% 156.9%
1997 84.8% 160.5%
1998 89.2% 165.7%
1999 91.9% 172.1%
2000 92.9% 178.5%
2001 95.6% 182.9%
2002 99.5% 190.7%
2003 101.6% 200.2%
2004 101.0% 208.3%
2005 100.0% 213.6%
2006 100.2% 215.6%
2007 101.7% 217.8%
2008 101.8% 218.3%
2009 109.7% 224.9%
2010 111.5% 234.4%
2011 109.1% 234.8%
2012 107.3% 236.6%
2013 108.3% 236.9%
2014 109.0% 238.7%
Cumulative percent change since 1948Productivity238.7%Hourly compensation109.0%196019802000050100150200250300%1948–1973roductivity: 96.7%Hourly compensation:91.3%1973–2014
ChartData
Note: Data are for average hourly compensation of production/nonsupervisory workers in the private sector and net productivity of the total economy. "Net productivity" is the growth of output of goods and services minus depreciation per hour worked.
Source: EPI analysis of data from the BEA and BLS (see technical appendix for more detailed information)
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The hourly compensation of a typical worker essentially grew in tandem with productivity from 1948 to 1973. After 1973, these series diverge markedly. Between 1973 and 2014 productivity grew 72.2 percent, or 1.33 percent each year, while the typical worker’s compensation was nearly stagnant, growing just 0.22 percent annually, or 9.2 percent over the entire 1973–2014 period. Further, nearly all of the pay growth over this 41-year period occurred during the seven years from 1995 to 2002, when wages were boosted by the very tight labor markets of the late 1990s and early 2000s. This divergence of pay and productivity has meant that the vast majority of workers were not benefiting much from productivity growth; the economy could afford higher pay but was not providing it.
Figure B provides another look at the post-1973 period using cumulative productivity growth (as did Figure A) but also displaying the cumulative growth of another measure of typical worker pay: hourly compensation (wages and benefits) of the median worker—that worker who earns more than half of all earners but less than the other half of earners. Between 1973 and 2014 the median worker’s inflation-adjusted hourly compensation grew just 0.20 percent annually, and 8.7 percent in total. Thus, the growth of the median worker’s compensation almost exactly mirrors the growth of production/nonsupervisory worker compensation shown in Figure A. Figure B also presents the growth in average hourly compensation—the average for all workers, including both top executives and low-wage workers—which rose 42.5 percent between 1973 and 2014. The gap between the growth of average and median hourly compensation reflects the growing inequality of compensation, as the highest-paid workers enjoyed far faster growth in their compensation.
FIGURE B
Growth of productivity, real average compensation, and real median compensation, 1973–2014
Year Real median hourly compensation Real average hourly compensation Net productivity
1973 0.0% 0.0% 0.0%
1974 -2.0% -0.9% -1.6%
1975 -0.5% 1.0% 0.6%
1976 0.4% 2.8% 3.4%
1977 1.3% 3.9% 4.6%
1978 2.5% 5.0% 5.6%
1979 1.9% 4.9% 5.8%
1980 1.1% 4.1% 5.0%
1981 -1.2% 4.5% 7.2%
1982 0.5% 5.6% 5.7%
1983 0.4% 5.8% 8.8%
1984 0.7% 6.0% 11.7%
1985 1.7% 7.7% 13.6%
1986 3.8% 11.2% 15.9%
1987 3.4% 11.9% 16.5%
1988 2.7% 13.3% 17.8%
1989 2.6% 12.1% 18.8%
1990 2.6% 13.4% 20.4%
1991 3.6% 14.6% 21.4%
1992 5.2% 18.0% 25.8%
1993 4.5% 17.1% 26.2%
1994 2.4% 16.3% 27.4%
1995 0.7% 15.7% 27.5%
1996 -0.4% 17.1% 30.6%
1997 1.4% 18.4% 32.4%
1998 4.0% 22.7% 35.0%
1999 7.1% 25.3% 38.3%
2000 6.8% 29.1% 41.6%
2001 9.6% 31.2% 43.8%
2002 11.3% 32.5% 47.8%
2003 13.3% 35.1% 52.6%
2004 13.6% 37.7% 56.7%
2005 12.5% 37.9% 59.4%
2006 12.3% 38.7% 60.4%
2007 11.0% 40.6% 61.5%
2008 11.6% 39.3% 61.8%
2009 14.0% 42.1% 65.1%
2010 12.7% 42.6% 70.0%
2011 9.6% 41.1% 70.2%
2012 8.5% 41.6% 71.1%
2013 9.6% 41.2% 71.2%
2014 8.7% 42.5% 72.2%
Cumulative percent change since 197372.2%42.5%8.7%Net productivityReal average hourly compensationReal median hourly compensation020406080%1980199020002010
ChartData
Note: Data are for all workers. Net productivity is the growth of output of goods and services minus depreciation, per hour worked.
Source: EPI analysis of data from the BEA, BLS, and CPS ORG (see technical appendix for more detailed information)
Embed Download image
Assessing the wedges between productivity and median compensation growth
In this section we provide an analysis of the “wedges” that create the divergence between the growth of net productivity and median worker compensation shown in Figure B. The analysis below is an update, and improvement, of the previous analysis of Mishel (2012), which drew heavily on Mishel and Gee (2012) and the decomposition framework developed by the Centre for the Study of Living Standards (Sharpe, Arsenault, and Harrison 2008a; Sharpe, Arsenault, and Harrison 2008b; Harrison 2009). We focus primarily on net productivity (productivity net of capital depreciation) but also present an analysis using gross productivity (as in Mishel 2012).
There are three important “wedges,” or factors, between net productivity growth and the paychecks of typical American workers, paychecks that provide the foundation for their standards of living. As shown in Figure B, average hourly compensation—which includes the pay of CEOs and day laborers alike—grew just 42.5 percent from 1973 to 2014, lagging far behind the net productivity growth of 72.2 percent. In short, workers, on average, have not seen their pay keep up with productivity. This partly reflects the first wedge: an overall shift in how much of the income in the economy is received by workers in wages and benefits, and how much is received by owners of capital. As shown below (in Figure C), the share going to workers decreased, especially after 2000. We sometimes refer to this as the “loss in labor’s share of income” wedge.
The second wedge, shown in the gap between the bottom two lines in Figure B, is the growing inequality of compensation, reflected in the fact that the hourly compensation of the median worker grew just 8.7 percent, far less than average worker compensation. Most of the growth in median hourly compensation occurred in the short period of strong recovery in the mid- to late 1990s; excluding 1995–2000, median hourly compensation grew just 2.6 percent between 1973 and 2014.
A third wedge important to examine but not visible in Figure B is the “terms-of-trade” wedge, which concerns the faster price growth of things workers buy relative to the price of what they produce. This wedge is due to the fact that the output measure used to compute productivity and net productivity is converted to real, or constant (inflation-adjusted), dollars based on the components of national output (GDP), while the compensation measures are converted to real, or constant, dollars based on measures of price change in what consumers purchase. Prices for national output have grown more slowly than prices for consumer purchases. Therefore, the same growth in nominal, or current dollar, wages and output yields faster growth in real (inflation-adjusted) output (which is adjusted for changes in the prices of investment goods, exports, and consumer purchases) than in real wages (which is adjusted for changes in consumer purchases only). That is, workers have suffered worsening terms of trade, in which the prices of things they buy (i.e., consumer goods and services) have risen faster than the prices of items they produce (consumer goods but also capital goods). Thus, if workers consumed investment goods such as machine tools as well as groceries, their real wage growth would have been better and more in line with productivity growth. We sometimes refer to this terms-of-trade wedge as the difference between “consumer” and “producer” price trends.
These wedges are illustrated in Figure C, which expands on Figure B by adding in two separate lines for average hourly compensation. The bottom of these two lines has average hourly compensation growth deflated by the “consumer” deflator, which is the same measure used to deflate median hourly compensation. The gap between this line and that of median hourly compensation growth (the bottom gap in our graph) reflects the gap associated with rising compensation inequality (remember, fast growth of compensation for the highest paid raises the average for everybody). We add another line for average hourly compensation growth deflated by the deflator for net domestic product, the “producer” deflator. The middle gap in our graph—the gap between the two average hourly compensation growth lines—solely reflects the divergence between consumer and producer price trends, thus illustrating the terms-of-trade gap. The top gap in our graph, between the average hourly compensation growth line deflated by producer prices and net productivity growth, reflects changes in labor’s share of income.
