Posted by AzBlueMeanie:
The Economic Policy Institute released a new report on income inequlaity last week. Lawrence Mishel writes, Understanding the divergence of pay and productivity:
Income inequality has grown over the last 30 years or more driven by three dynamics: rising inequality of labor income (wages and compensation), rising inequality of capital income, and an increasing share of income going to capital income rather than labor income. As a consequence, examining market-based incomes one finds that “the top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share: 36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent” (Mishel and Bivens 2011).
A key to understanding this growth of income inequality—and the disappointing increases in workers’ wages and compensation and middle-class incomes—is understanding the divergence of pay and productivity. Productivity growth has risen substantially over the last few decades but the hourly compensation of the typical worker has seen much more modest growth, especially in the last 10 years or so. The gap between productivity and the compensation growth for the typical worker has been larger in the “lost decade” since the early 2000s than at any point in the post-World War II period. In contrast, productivity and the compensation of the typical worker grew in tandem over the early postwar period until the 1970s.
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[T]he experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth.
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The hourly compensation of a typical worker grew in tandem with productivity from 1948–1973. That can be seen in Figure A, which presents both the cumulative growth in productivity per hour worked of the total economy (inclusive of the private sector, government, and nonprofit sector) since 1948 and the cumulative growth in inflation-adjusted hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). After 1973, productivity grew strongly, especially after 1995, while the typical worker’s compensation was relatively stagnant. This divergence of pay and productivity has meant that many workers were not benefitting from productivity growth—the economy could afford higher pay but it was not providing it.
Note: Hourly compensation is of production/nonsupervisory workers in the private sector and productivity is for the total economy.
Source: Author's analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series
Figure B provides more detail on the productivity-pay disparity from 1973 to 2011 by charting the accumulated growth since 1973 in productivity; real average hourly compensation; and real median hourly compensation of all workers, and of men and of women. As Figure B illustrates, productivity grew 80.4 percent from 1973 to 2011, enough to generate large advances in living standards and wages if productivity gains were broadly shared. But there were three important “wedges” between that growth and the experience of American workers.
First, as shown in Figure B, average hourly compensation—which includes the pay of CEOs and day laborers alike—grew just 39.2 percent from 1973 to 2011, far lagging productivity growth. 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 in wages by workers and how much is received by owners of capital. The share going to workers decreased.
Note: Compensation is for production/nonsupervisory workers in the private sector, and productivity is for the total economy.
Source: Author's analysis of unpublished total economy data from the Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series
Second, as also shown in Figure B, the hourly compensation of the median worker grew just 10.7 percent. Most of the growth in median hourly compensation occurred in the period of strong recovery in the mid- to late 1990s: Excluding 1995–2000, median hourly compensation grew just 4.9 percent between 1973 and 2011. There was a particularly large divergence between productivity and median hourly compensation growth from 2000 to 2011. In sum, the median worker (whether male or female) has not enjoyed growth in compensation as fast as that of higher-wage workers, especially the very highest paid. This reflects the wedge of growing wage and compensation inequality.
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 what they produce. . . 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 items they produce (consumer goods but also capital goods). Thus, if workers consumed microprocessors and machine tools as well as groceries, their real wage growth would have been better and more in line with productivity growth.
Lots more analysis for you policy wonks in the full report. But let's get to the conclusions of the report:
The large productivity-median compensation gap in the 2000–11 period was driven primarily by growing compensation inequality and the decline in labor’s share of income, accounting respectively for 38.9 percent and 45.3 percent of the total gap. The impact of terms of trade, or price divergences, was smaller in this period than in any other and accounted for only 15.8 percent of the growing gap between productivity and median compensation.
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In contrast, the earliest period, 1973–79, saw no appreciable growth in compensation inequality or change in labor’s share of income: the productivity-median compensation divergence primarily reflected price differences.
Over the entire 1973 to 2011 period, roughly half (46.9 percent) of the growth of the productivity-median compensation gap was due to increased compensation inequality and about a fifth (19 percent) due to a loss in labor’s income share. About a third of the gap has been driven by price differences.
The analysis above has shown that from 1973 to 2011, the largest factor driving the gap between productivity and median compensation has been the growing inequality of wages and compensation, followed by the divergence of consumer and output prices and the shift of income from labor to capital. From 2000 to 2011, when the productivity-median compensation gap grew the fastest, the divergence of prices had only a modest impact, whereas the shift from labor to capital income was the single largest factor, accounting for roughly 45 percent of the gap.
Conclusion
Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent, and nearly all of that growth occurred in a short window in the late 1990s. The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity. Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt. It is hard to see how reestablishing a link between productivity and pay can occur without restoring decent and improved labor standards, restoring the minimum wage to a level corresponding to half the average wage (as it was in the late 1960s), and making real the ability of workers to obtain and practice collective bargaining.
The forthcoming The State of Working America (Mishel, Bivens, Gould, and Shierholz 2012) will provide a detailed account and explanation.
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