Productivity up, not wages

By • on February 4, 2013

The Atlantic increasingly is one of the places I go to learn what is happening in the economy. Worth checking out. They just published an insightful article on “The End of Middle Class Growth”. The article explores “disruptions in long-established connections between productivity and earnings, between labor and capital, between top earners and everyone else, between men and work, between men and marriage.” Each a serious challenge to the country’s economic well being.

In this post I want to explore the first: the decoupling of productivity and employment earnings (both wages and benefits). This, of course, is the mechanism that in the past has created a broad American middle class. As companies become more productive the economic gains are shared between employers and employees. The article makes clear that this win/win––where both capital and labor benefit from rising productivity––economy is disappearing.

The Atlantic reports: “For decades, productivity and compensation rose in tandem. Their bond was the basis of the social compact between the economy and the public: If you work harder and better, you and your family will be better off. But in the past few decades, and especially during the past 10 years or so, the lines have diverged. … Productivity is rising handsomely, but compensation of workers isn’t keeping up. … From the end of World War II through about 1980, almost two-thirds of every dollar of income generated by the economy flowed to workers in the form of wages and benefits. Beginning around 1980, workers’ share began to slide and, in the past decade or so, has nose-dived, to about 58 percent. The difference went to shareholders and other investors–who provide capital rather than labor–in the form of higher returns on their holdings.”

To make matters worse the 58 percent of economic output that is going to workers is increasingly concentrated in the top 1 percent of wage earners. As the Atlantic reports since 1980: “The higher you stood on the income ladder, the better you did; the highest-paid 1 percent of earners soared above and away from everyone else, practically occupying an economy of their own. By contrast, the bottom 90 percent of earners–which is to say, almost everyone–saw barely any increase, and much of what they did see came in the boom years of the late 1990s.”

The article makes clear that those with a four-year degree or more are doing better. As are women compared to men. Largely because women are adjusting better to a more knowledge-driven economy. Education attainment, particularly four year degree attainment (something we have written about frequently), is now the most reliable path to the middle class. That said even college educated adults are increasingly operating against a strong headwind from the decoupling of productivity and employment earnings. If we don’t figure out why the divergence is happening and then figure out how to recouple productivity gains with employment earnings gains it is hard to envision an America with an expanding middle class.

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