The interesting fact is that the loss of labor's share of GDP to capital is less than you'd imagine, and a much bigger reason for stagnant real wage growth has to do with inequality regarding compensation. Automation is real and is taking jobs, but it's executives that have been soaking up the financial gains from productivity.
- The increasing share of GDP going from labor to capital
- The "terms of trade", ie, how labor's share is measured, FTA: "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)."
- a much bigger slice of the pie: inequality in compensation, ie, average compensation has risen dramatically, but median compensation has stayed flat.
Basically executives have gobbled up a healthy portion of the income.
Speaking from a historical perspective, over the last 50 years or so, almost all productivity gains have gone to capital gains not salaries, i.e. it is only the rich benefiting from productivity gains. This is in stark contrast to the time before the 1980s [1,2].
>American productivity has increased by 77 percent, while hourly pay has grown by only 12 percent
Yes but where has this happened. I suspect it's happened through automation. Meaning that the productivity gains might not be per employee and might not easily translate into the pockets of workers.
- Compensation includes benefits, and much of the increase in compensation has been eaten up by healthcare costs. This means wages haven't increased nearly as much.
- There is a growing gap in productivity inequality within labor which has led to growing income inequality. Those productivity and income increases have disproportionately gone to the upper percentiles of workers.
Beyond the obvious cherry-picking, that's some pretty serious statistical gamesmanship you're into. Maybe you should consider this little thing we call exponential growth, or "compounding" to a finance type. Let's look at the "Hourly Compensation (Output Price)" figures, which are the most favorable to your argument.
* For 1947-1972 it fell behind output by 0.2% per year, which sounds small, but that's 4.6% for the entire period.
* In 1972-1994 workers fell behind by another 4.1%
* In 1994-2005 (half the time) workers fell behind by another 2.9%
* In 2005-2014 (even less time) workers fell behind by another 4%
Over the entire span, workers' compensation has only increased 85% as much as productivity. More importantly, the gap is growing, not shrinking. Even using yearly figures to make differences look small, then grouping those numbers into oh-so-convenient unequal intervals, can't turn this into evidence of your original claim that wages have kept pace with productivity growth.
> Real compensation has tracked with productivity gains quite nicely
This goes counter to what I have read. For example:
"Net productivity grew 59.7% from 1979-2019 while a typical worker’s compensation grew by 15.8%, according to EPI data..."
Wage stagnation has a hand in productivity decreases. Wages are pretty much stagnant since 2000 even in upperclass compared to costs rising [1]. People are working harder and losing ground, that is exhausting.
The Great Recession gave companies a decade of excuses for not giving real money wage increases, not just real compensation which people can't actively spend as consumers [2]. America has efficiently worked out wage increases of real money, yes 'real compensation' has moved but people can't spend that and most of it is not used.
The velocity of money is decreasing at a scary rapid clip since 2000 [3]. More money goes to wealth as inequality has increased. Less money in lower/middle is changing hands.
All of this leads to less reason for longer term employees to innovate and increase productivity.
Wages do have an impact on productivity and the skills people bring, American businesses have efficiently worked them out for the short term gains and long term drain. Wages are a key aspect in capitalism growth that seem to be the most fought against. Companies today have forgotten that wages are as American as it comes.
Simple: A lot of the productivity gains of the last decades is thanks to globalization, automation and digitalization - basically, many high-paying manual jobs were eliminated by machines, a lot of lower-paying manual jobs (or environmentally problematic production that would have needed expensive adjustments in the US/EU) was shifted off to China, and digitalization eliminated or vastly improved paper-pusher jobs.
Additionally, the standing of unions went down over time, as a combination of legitimate unions-gone-rogue scandals, anti-union legislation being enacted and union-protection enforcement being reduced.
The result was that the capitalist owner and leadership class enjoyed absurd amounts of net worth gains, and the worker class was left unemployed or with stagnating wages at best. To prove that: CEO payments exploded 940% since 1978, S&P went up 707%, while average worker pay went up only 12% [1] in the same time frame.
The gap between productivity and wages has indeed grown, but that doesn't mean the same thing as Real Wages (adjusted for inflation) stagnating, as they have not done that.
The difference between the median and the average strikes again! The popular comparison is that median real wages have only risen slightly from the 70s while average productivity (because by definition the labor productivity numbers are averages) has risen substantially. But much of that is due to the increases in productivity from high productivity individuals, say maybe those whose job it is to tell fancy electronic machines how to do low skill repetitive tasks. Some of those people might even browse this forum!
There is actually fairly weak data to support the popular theory of a decreasing labor share of income (and thus an increasing capital share) causing more inequality and to the extent such an effect could exist its size is only a few percent of GDP over the past few decades.
> fewer and fewer people are needed to make more and more stuff.
You're arguing against yourself, here. The latter is productivity increase, the former is productivity decrease. Also, productivity growth is not new, it has been going on as long as the economy exists. Machine automation has been occurring since the industrial revolution started, it did not start in 1973.
What started in 1973 was that the high end (basically, the owners of capital) stopped sharing productivity gains - meaning that where previously, workers were able to bargain for a share of the increase, now they cannot, because of various mechanisms of taking. CEO pay did not go up 10X because CEOs were suddenly drinking tiger blood and winning the Fields medal.
My original contention was that one of these was the shift away from the Bretton Woods system, with fixed currency exchange rates based on the dollar; going from here to speculative international currency flows and floating exchange rates is one possible mechanism for making workers less able to bargain for those productivity increases.
Quite simply, "productivity" is the sum of all real goods and services produced in the economy, while "wages" are simply the share of that produce brought home by the workers who produce it. The difference is profit. If productivity increases (as it has since the 1950s) and wages flatline (as they have since the 1970s), then the result must be rising profits. You can see this graphed in the brief "The wedges between productivity and median compensation growth" at http://www.epi.org/publication/ib330-productivity-vs-compens...
The question left unanswered in this article is why are wages in the US falling relative to productivity?
Since wages are the "price" of labor, and prices are set by supply-and-demand, falling wages imply either (1) an increasing labor supply or (2) a shrinking demand for labor (or both). So here are some specific reasons for stagnating US wages:
INCREASING LABOR SUPPLY
- Slave labor, prison labor and child labor in countries like China.
- Immigration from Latin America after NAFTA.
- Liberated women entering the paid US labor force starting in the 70s.
DECREASING DEMAND FOR LABOR
- New labor-saving technology, computers and robots that work faster, better and cheaper than humans.
- Financialization: Investors can make more money from asset bubbles in housing, bonds, and dollars than they can from labor.
-- ZIRP: With real interest rates heading to zero (or less), why should I continue to pay high interest on the money I borrowed a decade ago to build this US factory? Liquidate the factory, fire the workers, and relocate somewhere cheaper; or better: simply use the money to buy bonds and bet on falling interest rates.
-- High housing prices: An employer needs to pay his workers subsistence wages, which means enough to buy a place to live, but with housing prices so high, this is impossible. Better to bet on the housing bubble than buy labor.
This is written by an advocacy group, as disclosed on the first page of the pdf.
Anyway, consider the following scenario. Bob makes $10 an hour, and produces $100 of value. Obviously, this is a great bargain for Bob's employer. So much so, that another employer should be perfectly willing to offer Bob $11 to lure him away. Another sweetens it to $12 and Bob moves again. Rinse, repeat until Bob is making $100 minus the opportunity cost.
What that suggests is that a large gap between compensation and productivity is unstable, as large forces will be at work to shrink that gap. So why is inequality happening?
I suspect that productivity simply isn't increasing for a lot of jobs. Such as janitorial services - there's no automation there, the janitor with a mop and a bucket is doing the same thing he's done for decades.
The rise of computers and the internet, on the other hand, have caused the productivity of other jobs to soar enormously. For example, slightly improving the speed of the operation of a server farm can produce millions of dollars in value. I would expect that workers who can do that will be highly compensated for such value produced.
In other words, there's a growing inequality in the productivity of different kinds of jobs.
The interesting fact is that the loss of labor's share of GDP to capital is less than you'd imagine, and a much bigger reason for stagnant real wage growth has to do with inequality regarding compensation. Automation is real and is taking jobs, but it's executives that have been soaking up the financial gains from productivity.
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