In the decades following World War II, inflation-adjusted hourly compensation for the vast majority of American workers rose in line with economy-wide productivity. Since the 1970s, however, hourly compensation for the typical worker has essentially stagnated, even as net productivity continues to increase. This trend continues to present day. From 2000 to 2014, net productivity grew by 21.6 percent, while the hourly compensation of a typical worker grew by just 1.8 percent.
EPI has long-documented the productivity-pay divergence in work that has been widely cited by economists and policymakers concerned with growing income inequality. In Understanding the Historic Divergence between Productivity and a Typical Worker’s Pay, EPI President Lawrence Mishel and Research and Policy Director Josh Bivens 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 percent 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.”