People need to understand that the economy since 1975 has been very different than the economy before 1975

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The wedges between productivity and median compensation growth | Economic Policy Institute
[Via Economic Policy Institute]

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.


Here is one of the important graphs in this publication:


This is simply another representation of data I have discussed before.

But here we have a little more dissection of what has been going on. Until 1975 or so, compensation for those in the middle class rose in lock step with productivity.

Essentially, the increased economic value from doing more with less resulted in increased money for the people doing the work. But since 1975, productivity continued to increase but little of the increase in economic value found its way to those doing the work.

In fact, the vast majority of that economic value went to the top 1%, something that did not occur in the years before 1975.

Looking at the more recent time frame, we get this figure:

graph 2

The share of productivity increases that resulted in income increase for labor decreased a lot. The median compensation was only 10.7% with male compensation being essentially zero.

If you look at the period between 1973 and 1995, there is no change in median hourly compensation, while productivity increases 30%. From 1995 to 2000, there was a 7% change in income. This was close to the 10% increase in productivity in that period. From 2001 to 2011, the increase in compensation was 4%, with most of that change coming in the early years of that period.

Those 6 years from 1995 to 2000 saw more income growth for most people than the other 32 years combined. I wonder what happened during those times?

The increasing divergence of productivity and compensation is actually increasing. The annual gap between productivity and compensation for the entire period (1973-2011) is 1.3. From 1973 to 1970, the annual gap change was 0.52. From 1979-1995, the change in 1.46. From 1995-2000, it was 1.21 and from 2000-2011 the gap increased annually by 1.53.

Some of this difference comes from the difference measure of productivity versus compensation. GDP is figured on output or production. But calculating compensation is based upon what consumers purchase.

Essentially, the effects of inflation have hit consumer’s compensation harder than the measure of productivity. This explains some of the gap but only a fraction. It is about 34% of the entire gap generated between 1973 and 2011. But since 2000, only 16% of the gap is explained by this difference.

Over the last decade, the other 84% of the gap between productivity and compensation is explained by two things:

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.


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

So, the percentage of the economic largesse going to labor versus capital has decreased and those with money are making more.

Since 2000, almost 40% of the gap comes from the inequality in compensation, with the rich getting larger increases in pay and the middle-class getting little. And over 45% of the gap an increasing share of the economy going to capital and away from labor.

84% of the productivity gap comes purely from the 1% getting wealthier, either through increasing wages or by capital investments.

Over the entire period from 1973-2011, these two explanations were responsible for 2/3rds of the divergence of productivity from compensation. They were not a major part of the economy before 1973, which is why productivity and income grew together.

I would be really happy if we just returned to the economic principles of the late 90s. BUt the data do show how different the economy has been for most Americans since 1973.

Read the whole thing. If we want to return to the economic growth we had in the Post-WWII years, we must decrease the inequality of income and we must move more of the economic bounty form increased productivity from capital to labor.