The Productivity-Wage Split

Among the most consequential empirical facts in contemporary economics is one that receives relatively little attention in mainstream policy discourse: American workers are substantially more productive than they were forty years ago, and their wages reflect very little of this productivity growth. Economic Policy Institute analysis of Bureau of Labor Statistics data shows that net productivity rose 61.8% between 1979 and 2018, while hourly compensation for production and nonsupervisory workers rose only 17.5% over the same period. The gap between what workers produce and what they receive is large, persistent, and growing.

Before 1973, wages and productivity moved together closely. The mechanisms of this linkage -- strong unions, pattern bargaining, the implicit social contract of the postwar settlement, and a tight labor market maintained by Keynesian demand management -- ensured that productivity growth was broadly shared. After 1973, and especially after 1980, those mechanisms weakened or were deliberately dismantled, and the linkage broke. Workers continued to produce more; their wages did not rise to reflect it. The surplus between productivity and compensation accrued to shareholders, executives, and the top of the wage distribution.

The divergence is not explained by the shift to a service economy. Service sector productivity has grown substantially over this period, but service sector wages have not kept pace with that growth either. Nor is it fully explained by rising benefits costs (which are included in total compensation): even when benefits are included, the gap between productivity and compensation remains large and growing (Bivens and Mishel, 2015).

The productivity-wage gap is not a mystery to be solved -- it is a political outcome to be explained. It reflects the deliberate weakening of the institutions that once translated productivity into wages, and the deliberate strengthening of the institutions that direct productivity into profits.Josh Bivens & Lawrence Mishel, Understanding the Historic Divergence (2015)

The distributional consequence is a massive shift in the functional distribution of income -- the split between labor and capital. The labor share of national income in the United States fell from roughly 65% in the early 1970s to around 57% today. This shift represents trillions of dollars annually transferred from wages to profits -- a structural change in who receives the fruits of economic activity. The capital share increase flows disproportionately to the owners of capital: the top 1%, who hold approximately 40% of all financial wealth, benefit most.

The chart below illustrates the divergence using index numbers, with both productivity and compensation set to 100 in 1948. The two series track each other closely through the early 1970s, then diverge sharply. The visual is unambiguous: the American economy has become substantially more productive while delivering a diminishing share of that productivity to most workers. This is not a side effect of economic growth -- it is a reallocation of the gains from growth, accomplished through institutional and political change.