Mind the Gap: the Difference Between Productivity and Income Growth in the USA 1945-2010

There is a great post by David Ruccio on the Real World Economics site at 

http://rwer.wordpress.com/2012/04/28/mind-the-gap-2/

on the massive gap between productivity and income growth in the USA in the period 1975-2010. I am sure this picture would be reflecting in other developed countries, though the gap would be smaller. The graph in particular is amazing, especially the fact that after 1975 income of those working to produce the productivity (and the income includes workers at all levels right up to CEOs, most of whom of course run small businesses, and don’t have huge incomes) failed to match the results they were achieving. No wonder the middle class feels it is losing out. It is. Some of them, as a result blame the government, or the poor, or the tax system and join the Tea Party, when the cause is more fundamental: the failure of rewards to track productivity after 1975, largely because globalization held down wages because of competition from countries with much lower wage rates. Understanding the real causes is the first step to good solutions, and also avoiding false solutions, like blaming the workforce whose productivity has grown so much.

“Mind the Gap” is the title of my presentation at the upcoming Volcano symposium. It’s also the subject of an important new piece of research by Larry Mishel and Kar-Fai Gee.

Their argument is that the key to explaining growing income inequality in the United States is the growing gap between productivity and wages. What they find is that, from the mid-1970s until 2011, productivity increased by more than 80 percent while wages (measured as real median hourly compensation) only increased by 10.7 percent.

It is important to remember that, in U.S. national income accounts, “wages” include the pay of CEOs and day laborers alike. Even then, the gap between productivity and wages continued to grow throughout the 1973-2011 period.

So, what explains the growing gap? Mishel and Gee focus on three “wedges”: (a) an overall shift from labor income to capital income, (b) increasing inequality between top income recipients (such as CEOs and top earners in finance) and everyone else, and (c) the terms of trade, i.e., the faster price growth of things workers buy relative to what they produce.

And their conclusion?

Productivity growth has frequently been labeled the source of our ability to raise living standards. This is sometimes what is meant by the call to improve our “competitiveness.” In fact, higher productivity is an important goal, but it only establishes the potential for higher living standards, as the experience of the last 30 or more years has shown. 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.

But we have to keep in mind that the conditions of the period from 1948 to 1973 created the growing gap in the following period. So, instead of attempting to recreate the link between productivity and pay in the postwar period, we can move in a different direction and not exclude those whose work leads to increased productivity from deciding what to do with what they produce.

That would be a real way of minding the gap.

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About creativeconflictwisdom

I spent 32 years in a Fortune Five company working on conflict: organizational, labor relations and senior management. I have consulted in a dozen different business sectors and the US Military. I work with a local environmental non profit. I have written a book on the neuroscience of conflict, and its implications for conflict handling called Creative Conflict Wisdom (forthcoming).
This entry was posted in Conflict History, Conflict Processes, Conflict Statistics, Economic Conflict, US Political Conflict, Ways to handle conflict and tagged , , , , , . Bookmark the permalink.

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