I think everyone’s seen the famous graph from the Economic Policy Institute, that show that while Productivity has been growing in a steady and linear fashion decades after decades, wage began to stagnate in the 70s.
Since the 70s, wage have grown about +0.6% per year, while productivity has grown at an average of 1.4% per year. That gap is enormous and it is compounding over time.
Can someone me why it’s happened?
In: Economics
Nixon > Reagan, then the result of Jack Welch destroying how businesses are run (which has the downstream effect of killing most of your institutional businesses in order to turn a small profit for shareholders).
I blame Reaganomics and trickle down economics but watch a bunch of people defend wealth redistribution to the rich below.
Computers. Once we started making software and using computers, we could rapidly take advantage of automation. Software can be copied and sold eternally at very low cost per multiple. Software as service replaces entire workforces. The average employee does not get to see the benefits of this huge increase in productivity, the company owners do. Productivity increased with computers, simple as that.
Wages are not tied to productivity. Wages are tied to the labor market.
To Capitalists, labor is a commodity that can be bought in the market. The capitalist wants to purchase labor for as little as possible in order to maximize profits. If there is a shortage of labor in the market then that means laborers can be picky and demand more in wages and benefits.
Conversely, if there is an excess of labor in the market then laborers will have to accept lower wages and benefits as they have to compete with other laborers for less positions.
Add to this the fact that capital is being concentrated into fewer and fewer hands over time leading to larger businesses in effect becoming monopsolies. A monopsoly is similar in concept to a monopoly but essentially means they have too much leverage when buying a commodity, in this case labor.
We developed computers. And the economy began shifting away from heavy industry s in which computers matter.
Productivity includes the output of machines, and there’s much more automation per worker now. It’s not a measure of human productivity vs. human wages.
1. The most important reason is they started using a different measure of inflation for productivity and wages.
2. The wages graph does not account for benefits such as medical insurance which has been an increasingly larger part of total compensation.
3. Productivity measures everyone but the wages are only measuring hourly non supervisory workers. Much of the productivity gains were from computers and globalization which benefitted salary workers more.
Productivity has gone up dramatically with new technologies (think computers and giant manufacturing arms), but the issue is that true ownership over those new technological gains that increase output is consolidated within a relatively small group of wealthy people.
Therefore, you will see productivity increasing, but most of the profits are only benefiting a small group of people at the top of the pyramid.
CEOs and wealthy shareholders are rapidly getting to the point of trying to replace everyone with automation and increasing the “productivity” of the few people who still have jobs, while paying themselves insanely high wages.
Ultimately, if there is not some sort of technology tax, we will just have 90% of people out of work and poor in the future. You can already start to see this happening again in larger numbers with AI.
Before AI, it was assembly lines and other new machines putting people out of work. Now it will firmly be a problem for just about anyone who isn’t able to afford the extremely expensive equipment that makes our world turn.
Anyone that tells you it was just one thing is lying to you – there’s a vast network of interrelated issues that led to the decoupling. Here are some of the major ones:
The collapse of the Bretton Woods system of capital controls. Prior to this, no one person could take more than $10k out of the country per day. After the collapse, there were no more limits on transfer of capital overseas. Investments then went from domestic business to overseas as well.
Nixon Shock
The advent of electronic banking
In the late 60s, Congress began learning about and getting on board with the concept of “free market” capitalism.
The collapse of union membership
The realignment of the US economy from a labor economy to a shareholder economy. At the end of the day, the productivity gains and profits are still there – it’s just now they’re all going to business owners and shareholders instead of to the workers.
Finally, you’ll probably hear some folks talk about healthcare and whatnot, and that employees are still making just as much total compensation, but healthcare only makes up a minority percentage of the total delta. In short, the rising costs of healthcare helped exacerbate the problem and certainly played a part, but it didn’t cause it the initial separation.
Very simple: the productivity gains went to the CEOs and shareholders. The stronghold of the shareholders on the economy started in the 80s. Thank you Ronald Reagan. And still there are many people who think he was a great president.
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