Two Lines Diverge in a Labor Graph

I came across this graph in a paper* the other day, and I found it rather disturbing (yeah, economists get disturbed over odd things). It shows labor productivity and real hourly compensation from 1947 to 2010.


The disturbing part is that the two lines are different. Not the same. Distinct.

In fact, starting around 1970, the real hourly compensation line increases at a slower rate than productivity, until by 2010 the two differ considerably.

This might not seem like a big deal. Why get disturbed by two lines?

The trouble is that standard labor economic theory says that these two lines should be the same. Workers are supposed to be paid, on average, their marginal product of labor. It says so in all the textbooks. I’ve taught it in economics courses.

If productivity increases, then wages should increase by the same amount. That’s how standards of living improve. Productivity increases, wages increase to match, and people’s lives improve. That how it’s supposed to work.

This graph says this isn’t happening, and not just for one or two years. Productivity and wages have been diverging for decades in the U.S. Workers have been growing more and more productive, yet haven’t been rewarded for that.

So who’s benefited from this increased productivity?

Have consumers benefited through lower prices? Possibly some. But productivity increases only get passed on to consumers if competition forces firms to lower prices. That doesn’t seem to be happening.

Instead, corporate profits have been reaching record levels. On the one hand, that’s a good thing. Profits are good, and increased profits mean increased stock prices. Anyone who own stock benefits from that.

The problem is that the stock owners are benefiting at the expense of the workers. After all, it’s the workers who are causing that increased productivity (possibly through more or improved capital, but still). By all rights, they should be compensated for it. Why aren’t they?

That’s a good question, and it’s hard to come to any firm conclusions based on one report. However, the only explanation that comes to mind is that workers simply haven’t had the leverage and clout to demand that management pay them for their increased productivity. Union membership has declined pretty steadily during the same period that productivity and wages have diverged.

If workers organize and demand increased compensation, firms simply shut the U.S. factories down and move overseas, where wages are lower. Productivity is, too, but there’s often still a net benefit to the firms.

That’s great for firms and shareholders. It’s just not that great – nor fair – to the workers.

Decreasing labor clout. It seems to have made all the difference.

*”The compensation-productivity gap: a visual essay”, Fleck, Glaser, and Sprague, Monthly Labor Review, January 2011


One response to “Two Lines Diverge in a Labor Graph

  1. Pingback: Logarchism » Wages, Productivity and Corporate Profits

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