Throughout history, whether pay for most workers tracked economywide productivity growth depended entirely on policy decisions. In the first 30 years following the end of World War II, for example, specific historical circumstances convinced U.S. policymakers that they had better ensure growth was broadly shared. To achieve this, they instituted a number of policies that spread growth evenly across income classes.  

Macroeconomic policymakers targeted “high-pressure” labor markets with sustained low unemployment, the federal minimum wage was increased rapidly and regularly, unionization rights were actively safeguarded by the federal government, top tax rates were high, and regulations barred anti-trust and many other anti-worker efforts by corporations, employers, and the financial services industry.  

Over these decades, the pay (wages and benefits) of the vast majority of workers rose in lockstep with economywide productivity. This tight link between hourly pay and productivity was the primary way that typical Americans benefited from economic growth.

Of course, the economy during those decades had serious and terrible flaws. Black workers faced high levels of discrimination in nearly every market they participated in—with particular harm done through discrimination in housing, labor, and financial markets. U.S. immigration policy welcomed migrants from a select group of European countries but generally treated migrants from other countries as nothing but a source of potential cheap labor to be exploited. Women faced high barriers to finding steady and decent work. Policymakers often actively sought to keep the benefits of overall growth from reaching these groups and focused on boosting the prospects only of white men—and these efforts often succeeded.

And yet the broad benefits of class-based policies that led to tight labor markets, high and rising minimum wages, unionization, high tax rates, and pro-worker regulation were so powerful that they spilled over to also greatly benefit even workers who were not white men. For example, even in the face of government-sanctioned, race-based discrimination, the median Black–white earnings gap for men narrowed between the 1940s and 1970s.

Identifying the Levers Generating Wage Suppression and Wage Inequality | May 13, 2021

This paper estimates the effect of a range of discrete, identifiable policy changes on the gap between pay and productivity. These policy changes account for a sizable share of the gap.

State of Working America, Wages 2019: A Story of Slow, Uneven, and Unequal Wage Growth Over the Last 40 Years | February 20, 2020

This paper calculates key wage trends and wage gaps over the past 40 years, highlighting brief episodes of wage growth and why they occurred. 

Black Workers’ Wages Have Been Harmed by Both Widening Racial Wage Gaps and the Widening Pay–Productivity Gap | October 25, 2016

This paper highlights how much higher Black workers’ wages would be if both racial wage gaps closed and median Black wages kept pace with economywide productivity growth. It finds that closing the productivity–pay gap for Black workers is essential to ensuring that Black workers secure their share of economic growth.

Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real | September 2, 2015

This paper analyzes the productivity–pay disconnect and the factors behind it, and explains the measurement choices and data sources used to calculate the gap.

Raising America’s Pay: Why It’s Our Central Economic Policy Challenge | June 4, 2014

The paper argues that broad-based wage growth is the key to reversing the rise of income inequality, enhancing social mobility, reducing poverty, boosting middle-class incomes, and aiding asset-building and retirement security.

How to Raise Wages: Policies That Work and Policies That Don’t | March 19, 2015

This paper shows that wage stagnation is not inevitable: It is the direct result of public policy choices on behalf of those with the most power and wealth. Because wage stagnation was caused by policy, it can be alleviated by policy.

Methodology and data sources 

This section describes how EPI constructs the figure tracking the growing gap between overall productivity growth and the pay of the vast majority of workers. Specifically, we detail how the productivity and pay indices being compared are created, and we briefly describe the economic logic and rationale behind the data choices we make. Readers can find a more detailed description of the methodology in our 2015 report, Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay.  

A productivity index for the total economy, not just the nonfarm business sector 

The most-cited measures of U.S. productivity tend to use the publicly released measures from the Bureau of Labor Statistics (BLS), which measure productivity in the non-farm business sector. We are interested in measuring productivity growth over the total economy, not just the non-farm business sector. To construct our productivity index, we begin with a measure of total hours worked in the total economy, a nonpublished series calculated by the Bureau of Labor Statistics (BLS).  

Accounting for depreciation 

To account for the fact that depreciation of the existing capital stock (the plant, equipment, and buildings used to produce goods and services) will reduce future income growth if it’s not replaced, we calculate a measure of net productivity growth that fully replaces capital depreciation. To do this, we divide net domestic product by the data series on total hours worked referenced above. Our   measure of net domestic product is provided by the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA), table 1.7.6.This gives us a measure of net, nominal domestic product per hour worked in the U.S. economy. 

Choosing a price deflator to calculate how much productivity growth is ‘effective’ for boosting living standards 

Normally, measures of productivity use output measures that are deflated by price indices that track inflation in total economic output. In the jargon, an output deflator is usually used for productivity indices. But productivity growth is only effective in boosting the living standards of households if it is translated into growth in consumption goods and services that these households consume. To measure “effective” productivity growth, we deflate our measure of net, nominal output by the consumer price index (CPI-U-RS).  calculated by the BLS. The result is an index of productivity growth that is “effective” in boosting households’ consumption possibilities. 

Constructing the pay index

We start with a measure of average hourly wages for production and nonsupervisory workers in the private sector (shorthanded as nonsupervisory hereafter). In some contexts we have used median wages to describe pay for “typical” workers, but these are derived from the Current Population Survey (CPS), which only goes back to 1973. Since we want to go back further in time than this to compare pay and productivity, we use the hourly earnings of production and nonsupervisory workers instead. The Bureau of Labor Statistics (BLS) includes only private-sector workers in their calculations of hourly pay for this group. But because production and nonsupervisory workers account for roughly 80% of private-sector workers, and they largely do not include extremely well-paid corporate executives, their wages are a good proxy for what a typical worker earns. Hourly wages for all production and nonsupervisory workers are available from 1964 on. For earlier years, we use the trend in hourly earnings of production and nonsupervisory workers in the goods-producing sectors and assume that the hourly pay of all production and nonsupervisory workers followed that trend before 1964.

Accounting for the benefits that make up part of compensation

To account for non-wage benefits that workers receive in addition to wages and salaries, we use data from Table 7.8 (“Supplements to Wages and Salaries by Type”) from the BEA NIPA and combine it with data from NIPA Table 2.1 (“Personal Income and Its Disposition”). This allows us to construct the ratio of total compensation to wages and salaries across the economy. We can then multiply this ratio by the BLS wage data on nonsupervisory workers to get a measure of nominal compensation.  

Further, we want to account for the fact that a big part of nonwage compensation takes the form of health insurance payments, and, for the fact that inflation in health care makes the real (inflation-adjusted) value of a given dollar of these health insurance payments rise more slowly than a dollar of other benefits. To account for this, we calculate the share of total compensation that takes the form of health insurance payments (using the same data sources above). We then separate total compensation into health-care compensation and all other forms. For the health care compensation, we apply a health-care specific price deflator – specifically the CPI for health care. For all other compensation, we apply the overall CPI-U-RS. We then add together these two deflated forms of compensation to get our measure of real compensation for workers.