Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay Why It Matters and Why It’s Real

Source: Josh Bivens and Lawrence Mishel, Economic Policy Institute, Briefing Paper #406, September 2, 2015

From the press release:
In the decades following World War II, inflation-adjusted hourly compensation for the vast majority of American workers rose in line with economy-wide productivity. Since the 1970s, however, hourly compensation for the typical worker has essentially stagnated, even as net productivity continues to increase. This trend continues to present day. From 2000 to 2014, net productivity grew by 21.6 percent, while the hourly compensation of a typical worker grew by just 1.8 percent. EPI has long-documented the productivity-pay divergence in work that has been widely cited by economists and policymakers concerned with growing income inequality. In Understanding the Historic Divergence between Productivity and a Typical Worker’s Pay, EPI President Lawrence Mishel and Research and Policy Director Josh Bivens update their research and address several critiques of their analysis…. Mishel and Bivens identify three “wedges” that are responsible for the disparity between productivity and worker pay. Two are elements of income inequality: a falling share of income going to workers relative to capital owners and widening inequality of compensation. These inequality-related wedges explain more than 80 percent of the pay-productivity divergence since 2000…. The third wedge responsible for the productivity-pay gap is the difference between the rising costs of consumer goods compared to economy-wide output, sometimes referred to as the “terms of trade.” The prices of things that workers buy—as measured by consumer price indices—have risen faster than prices of economy-wide output (which includes non-consumption items like exports, government purchases and investment goods). Mishel and Bivens argue that this discrepancy, which has shrunk in the 2000-2014 period, is a reflection of actual dynamics in the economy and not simply a statistical anomaly that should be ignored by analysts….
Introduction and key findings