The Wage-Productivity Gap - Anger on Main Street America

Updated May 1, 2020

There is a simmering anger in America, an anger that is largely responsible for the election of the current administration in Washington.  Millions of American voters feel that they simply cannot get ahead financially no matter how hard they try or what they do, particularly since the massive economic displacement that has taken place during the COVID-19 pandemic.  In this posting, I want to look at an interesting metric that may help to explain this growing feeling of disenchantment with the Great American Dream.

In a recent analysis by the Economic Policy Institute or EPI we find the following graphic:

As you can see on the graphic, when you compare the growth in the average hourly compensation of non-management workers and the growth in net productivity (defined as the growth of output of goods and services minus depreciation per hour worked) you find the following keeping in mind that 1948 is the base year used for comparison:

1.) From 1948 to 1972 - average workers' hourly compensation rose by 92.2 percent and average net productivity rose by 92.2 percent.  Over this timeframe, workers' compensation more-or-less rose in tandem with net productivity, in fact, if we look at data during the 1950s and early 1960s, workers' compensation often rose at a faster annual rate than net productivity (i.e 1957 - compensation rose by 37.1 percent compared to a rise of 30.0 percent in net productivity).  

2.) In 1966, when compared to 1948, the growth in workers' compensation rose by 64.7 percent compared to a rise of 70.0 percent in productivity, the first year that productivity significantly outstripped growth in workers' compensation.

3.) By the mid-1970s, the growth in workers' compensation was significantly outpaced by productivity when compared to the base year.  For example, in 1976, the increase in workers' hourly compensation was 89.4 percent compared to productivity growth of 103.6 percent.

4.) This trend in lower workers' hourly compensation and higher net productivity growth has continued uninterrupted with compensation rising by 115.6 percent and net productivity growing by 252.9 percent when compared to the base year of 1948.

While this situation is bad enough, research by the Pew Research Center shows that, while American wages have risen over the past 40 years, when measured against price increases (i.e. in real terms), the purchasing power of America's working class has barely moved over the past four decades as shown here:

The economic stagnation experienced by Main Street America, particularly those who reside in the middle class, is clearly driving American voters into a search for political change.  It is the driving force behind the political right's longing for the America of the 1950s and 1960s when American workers were actually paid fairly for their productivity and the political left's moves toward implementation of the "nanny state" that uses socialist programs to answer the question of wages that are too low to get ahead.

Let's close with one final thought.  Just in case you thought that American workers were all in the same boat, these two graphics will clearly show you that a certain working Americans have benefitted significantly over the past four decades:

God bless America...well, at least a subset of America.  While we are being told that we are all in  this pandemic situation together, it's pretty clear that some of us have way more skin in the game than others. 

The Stagnant Wage - Modest Economic Growth Conundrum

A recent study, "Wage Woes" by Russ Koesterich at BlackRock examines what is missing in the post-Great Recession recovery and how this missing factor is going to impact growth rates in the economy.

Let's open with a look at two key aspects of the economy; real disposable personal income and real personal consumption expenditures.  Here is a graph showing how real (after inflation) per capita disposable personal income has changed since the Great Depression:

Notice how the curve flattens after 2007 - 2008?  Let's look at that in a bit more detail.

Here is a graph showing the year-over-year annual percentage change in real per capita disposable personal income:

Over the 85 year period, real personal disposable income grew at an average annual rate of 2.06 percent even when all recessions are included.  This growth rate dropped substantially after 1998 as shown by the red arrow; between 2008 and 2013, growth dropped to an average of 0.4 percent per year over the six year period, hitting a peak of 1.6 percent in 2011 and a low of -1.3 percent in 2008.  Even in 2013, four years after the "recovery", real per capita disposable personal income did not grow at all.

Here is a graph showing real personal consumption expenditures:

After a spending slowdown during the Great Recession, America's consumers are now spending with total real personal consumption expenditures of $10.831 trillion in the fourth quarter of 2013.  

Here is a graph showing the year-over-year growth rate of real personal consumption expenditures:

Note how the red arrow on this graph tracks the red arrow on the second graph?  The Great Recession saw the greatest contraction in personal consumption expenditures all the way back to the 1940s and since the end of the recession in mid-2009, annual growth in personal expenditures has risen at an average of 2.2 percent compared to the annual average of 3.3 percent back to the late 1940s when all recessions are included.  The graph also shows us that the latest "recovery" has been the most modest when comparing the growth rate of real consumer spending between recessions back to 1948. 

Now, let's go to the study.  The author notes that real median family incomes have been on the decline since long-before the Great Recession; in fact, the vast majority of American households have had stagnant real incomes since around the year 1998 as shown on this graph:

Obviously, when real household income drops, real disposable income drops.  Between 1973 and 2011, a median male working full-time experienced a 5 percent contraction in inflation-corrected income, dropping from $50,000 to $48,200.  This means that after adjusting for inflation, an average American male worker has not had a raise in the past 4 decades.

What will change this situation?  The author notes that the number of jobless claims is directly related to growth in real income.  Historically, when initial jobless claims around around 320,000, real income growth of between 3 percent and 3.5 percent is likely.  However, even though the economy is in that level now, there are other factors at play.  One key factor, thanks to Washington, is the continuing high level of political and policy uncertainty as measured by the Economic Policy Uncertainty Index (EPUI) as shown on this graph:

Higher levels of political and policy uncertainty leads to lower consumer and business confidence which leads to lower capital spending and lower levels of hiring.  The lack of hiring results in much lower upward pressure on wages.  The author estimates that the current high level of political and policy uncertainty alone has subtracted half a percent from annual real wage growth.  Thanks for nothing Washington!

In closing, here is a graph that shows how much of an impact consumer uncertainty has had on the percentage of consumer spending in GDP:

Between 1970 and 2010, the personal consumption component of GDP grew from 60 percent to 68 percent.  Since 2010, there has basically been no change; the very modest growth level in consumer spending simply is not contributing more to GDP which results in lower GDP growth which leads to more uncertainty which leads to less capital spending by businesses which leads to less hiring etcetera ad infinitum.

America's economy is caught in a loop from which there appears to be no easy means of extrication.  The Fed's pumping and dumping has done relatively little to prod either consumers or businesses to spend, invest and hire, resulting in a situation where there is absolutely no motive for businesses to speed up the pace of wage growth.  Without real wage growth, consumers will not spend, businesses will not invest and the economy will not grow.  It's as simple as that.

Falling Behind - Stagnant Wages in Middle Class America

Updated September 13, 2013

Many of us have suspected that the middle class has been left out of the economic benefits that have allegedly accrued over the past decade particularly when it comes to wage growth when compared to those that dwell at the top of society's heap.  A study by Lawrence Mishel and Heidi Shierholz of the Economic Policy Institute examines what has happened to wages and benefits over the past decade and how workers' real wage gains have evolved particularly since the "end" of the Great Recession.  In this posting, I will also look at one of the key measures of the perceived health of the economy, the University of Michigan Consumer Sentiment measure and how its current level is likely connected to wage growth.

The authors looked at wages from two perspectives:

1.) Using establishment data supplied by surveys that are employer-based.

2.) Using household data supplied by surveys that are household-based.

Let's open by looking at a graph that compares real average hourly compensation growth and productivity growth between 2000 and 2013:

As you can quickly see, since 2004, real growth in hourly compensation has been stagnant no matter what measure is used.  In the period between 2000 and 2007, productivity grew by 16 percent whereas compensation grew by between 5.5 percent and 7.2 percent depending on the measure used.  Since the Great Recession in the years between 2007 and 2012, productivity grew by 7.7 percent whereas real growth in compensation in the private sector "grew" by between 0 percent and -0.6 percent depending on the measure used.   

Now, let's look at the impact of educational attainment on real wage growth.  For those of us that are baby boomers, the mantra of the necessity of getting a college or university education to succeed in life was drilled into us from the early years.  While a post-secondary education does provide a wage premium, that premium has stalled at between 40 and 50 percent since the late 1990s as shown on this graph:

Both college-educated genders have seen the premium stall at about 45 to 46 percent for women and 48 to 49 percent for men since before the Great Recession.  White collar managers and professionals have seen real wage increases of 4.7 percent between 2001 and 2012.  By comparison, blue collar construction and natural resource workers have seen real wage increases of 5.9 percent and installation and maintenance workers have seen real wage increases of 5.3 percent over the same time frame.  Over the past year, all workers have seen real wage increases of only 0.3 percent with white collar managers and professionals  seeing real wage increases of 0.3 percent and blue collar construction and natural resource workers seeing real wage increases of 0.1 percent.  The minute difference in real wage growth between the two groups is rather stunning even in light of the wage premium.  It certainly makes one question the wisdom of accruing tens or hundreds of thousands in debt for a wage gain that is not growing.

So, in all of this, who is benefitting the most from real wage increases (as though you can't guess).  Here's the answer:

Since the Great Recession, all income groups under the 70th percentile (i.e the lower and middle classes) have seen a decline in real wage growth and, in the case of wage earners in the bottom 20 percent as shown in the lightest blue line, they have seen their wages shrink by 5.5 percent in real terms between 2007 and 2012.  The only wage group that saw increasing real growth in wages was the top five percent (the 95th percentile as shown in the darkest blue line).  This group has seen their real wages rise by 11 percent between 2007 and 2012 as shown on this chart:

Over the past year (2012 to 2013), wage earners in the 50th percentile and greater (excluding those in the 10th percentile) have seen real but very modest wage gains ranging from 0.6 percent to 2.0 percent.  Those on the losing end who fall in the 20th to 40th percentile saw real wage contractions ranging from -0.2 percent to -0.7 percent over the year.   

As you can imagine, a great deal of real wage growth in recent years can be attributed to very low inflation rates rather than significant increases in nominal wages.  With very low inflation, even a modest raise of three or four percent still provides the recipient with a one to two percent real wage increase.  Even modest raises like that do not appear to be prevalent in today's job marketplace.  As one would suspect, in this environment of "you're damn lucky to have a job", employers are less than motivated to actually increase wages by a significant amount.

If we link all of this data to the overall economy and how consumers are viewing things, it may explain this:

Consumer sentiment, while it is up from its 2008 - 2009 lows, is nowhere near the levels generally seen during inter-recessional periods.  In fact, during the last period of economic growth between 2003 and 2008, consumer sentiment ranged from 90 to 100 for the most part.  That compares to a level that has ranged from 70 to 80 over most of the period of time since the end of the Great Recession.

So much for shared prosperity.  It's no wonder that so many Americans are feeling poorer as the years pass.  The fact that productivity keeps growing while wages remain stagnant makes one wonder how much longer corporations will be able to squeeze more and more blood out of a stone without giving something back.  And, until consumers feel that they have sufficient credit or income to spend, the economy is likely to continue to expand at a rather tepid rate as has been typical since the end of the latest recession.