I found Jared Bernstein’s Washington Post column on the relationship between productivity and wages excellent:
When economists tick off the reasons for our current wage problems, we usually include “slow productivity growth†on the list. Well, somebody asked me the reasonable question: Why should that matter?
Productivity, or output per hour, is growing slowly, but it’s still up, so why should it explain stagnant real wages? And at a more intuitive level, suppose a business figures out how to produce more efficiently and its productivity goes up. Where is it written that it must share that extra income with its workforce? Isn’t a big chunk of the inequality problem precisely that it doesn’t?
because it made me think. Pay particular attention to the two graphs (gap between productivity growth and median compensation and labor share of total income). The second graph tells us something about which we might not be aware: that labor’s share of income is about what it was 60 years ago but lower than it was 40 years ago.
I have been trained to try to explain changes by first considering changes in other factors. What are the most significant changes in public policy over the period under consideration, 1958 to present? I would say that they were Medicare and greatly increased immigration. Just a thought.
The first graph made me want to know the standard deviation. Is it possible that the entirety of the gap between productivity increases and median wages can be explained by a loss in bargaining power among the least productive workers?
Whatever the factors that underpin the increasing gap between productivity and median wages, the very fact of the relationship between productivity wages means that we should want more domestic capital investment. The most important factors in productivity growth are capital investment and the nature of the work being performed. In other words merely preferring areas in which increased capital investment does not produce much more output, e.g. education, would produce the gap illustrated in Dr. Bernstein’s first chart.
A bigger factor is the end of fiscal policy for income distribution and reliance on monetary policy for economic management. Kalecki predicted this very outcome as the vengeance of capital in response to the Keynesian paradigm which had constrained their social power.
And yes, I believe the loss of bargaining power by workers has played a significant role in both the divergence between wages and productivity and fallong productive investment. If employers can’t squeeze economic concessions out of their workers, the only way to make more money is to get more stuff made per hour.
You avoided an important caveat in my post. It was a loss of bargaining power on the part of the least productive employees. I’m not convinced that wages have been flat for all workers. I think they’ve risen for the government-picked winners, e.g. education, health care, fallen for the workers shunned by the government, e.g. heavy manufacturing, while wages for some workers within the same sector have actually diverged.
Being able to bargain for higher wages for relatively unproductive workers requires a hothouse environment of the sort that prevailed in the 1950s-60s.
I don’t think the divide at the time the divergence began was income-based. Rather, it was education-based social snobbery, later exemplified by Richard Florida’s Rise of the Creative Class. When the Democrats expelled labor from its leadership position in 1972, it threw its lot in with the white-collar professionals, whether they’re a GP or a paralegal. Their economic interests became the party’s primary concern.
The divergence between productivity and wages is socially determined, not economically.