Japan: $12.3 million
United States: $7.5 million
Hong Kong: $2.2 million
South Korea: $1.1 million
Mexico City: $365,000
UK: 16.3% . . .
Brazil: 22.7% . . .
Bolivia: 42.5% . . .
Indonesia: 50.6% . . .
Albania: 69.2% . . . 
Netherlands: $36 . . .
Spain: $26 . . . 
Serbia: $119 . . .
Turkey: $220 . . .
Australia: $241 . . .
Germany: $266 . . .
Portugal: $320 . . .
Greece: $718 . . . 
France:1.5% ($333) . . .
Luxembourg: 2.4% ($820) . . .
Russia: 3.5% ($280) . . .
Something happened about 30 years ago to throw a wrench into the workings of the American labor market.
This chart shows the evolution of the productivity of American workers and what they got paid for their work. The two variables tracked closely from the end of World War 2 to around 1979. But as productivity growth started accelerating in the 1980s, workers’ pay was left behind. In the last decade, productivity —the amount of stuff a worker produces in a day— grew twice as fast as what a worker earns for a day of work.
This fits other bits of data. Workers’ share of the economic pie, in the form of pay and benefits, fell from 60% of gross national income in 1980 to about 56% in 2009. 1980 is also the year income inequality started taking off —following half a century of decline. In 1980, the richest 1 % of Americans took 10% of the national income. In 2008 they took 21% of the pie.
Many factors play into these trends. One culprit is undoubtedly the IT revolution that fuelled rapid technological change —which replaced many manufacturing workers with machines. Globalization also played a part, exposing workers to competition from cheaper labor in China and other developing countries. Both trends encouraged the biggest businesses to grow way beyond their borders and capture a growing share of the world’s economic product —fuelling income concentration.
But we should not forget the role played by policy. From the Reagan Revolution of the 1980s to the financial disaster of 2008, every policy lever available to government was deployed to make life easier for business —be it by hobbling pesky labor unions or doing away with cumbersome rules segregating commercial and investment banks.
In 1980, about 22% of workers in the private sector were covered by union contracts. Today only around 7% are. The decline was due in large part to the intense competition wrought by high-tech globalization —which bankrupted unionized companies in the industrial heartland and encouraged new firms to set up in low cost union-averse states.
But stuff like this doesn’t just happen. The spread of rabid anti-union activism among Republicans from Wisconsin and Indiana to Ohio should remind us that the erosion of worker’s rights and compensation isn’t an inevitable consequence of vast economic processes. It’s also a product of specific policy choices.
Hello,
I’m not sure how I ended up here, but I was studying the compensation gap.
The main BLS report (linked in your BLS link as http://www.bls.gov/opub/mlr/2011/01/art3full.pdf), illustrated that a non-material part of the gap since 1980 is essentially an invalid data comparison, inasmuch as productivity and compensation data sets are deflated (i.e., the inflation distortion is removed) by different inflation indices that began to diverge due to different calculation methodologies. It is illustrated by comparing graph 1 with graph 4 in that link. It sounds like you didn’t even read the article? Anyway, the remaining smaller gap is shown in that article to be due to a falling labor share of output and a corresponding rise in capital’s share of output. Academics are working on explaining that; for instance, part of it is due to the ability of some classes of firms to be able to choose whether they classify their owner-take-home income as labor or capital, and since 1980 the tax rate on capital has fallen faster than the tax rate on labor, so firms have been reclassifying some owner-take-home income from labor to capital. I.e., its partially bad data. In the end, as long as labor markets are competitive, econ 101 reveals that the only way for real employee compensation to rise is for employees to become more valuable, i.e. more productive. I.e., productivity gains means compensation gains. The question is not to throw out theory and prior evidence at first hand glance of new evidence, but to question the new evidence for accuracy first.
Your stated reasons for the gap lack econ 101 knowledge like supply and demand, which is surprising since I see you authored a book seemingly about market prices (which are set by the interaction between supply and demand, of course), and edit economics-related press. Your Reagan comment is unrelated, as business regulation (such as banking across state lines, separation of investment banking, as you mentioned, much less any other) doesn’t set wages. Supply and demand do that. I.e., the productive value of workers to firms (labor demand) interacts with workers’ willingness/ability to work (labor supply), resulting in an equilibrium wage that ultimately balances both sides.
Then you mentioned unions, but that can’t be it, because, while labor unions can restrict supply of labor and drive up wages above competitive market levels in particular industries, that simply pushes the pushed-out labor supply from union-dominated industries out to non-union industries, which drives wages in those industries down, such that wage levels across a whole economy are unaffected by unions. Everyone who has taken a first year college microeconomics course knows this, because its in every econ 101 textbook.
I see you wrote a book seemingly on prices of things; some of that sounds interesting! I would agree that we don’t often think about the costs of things, and shedding light on shadowed costs can be sobering. I like it. Anyway, I said “seemingly” because I see that in many cases you actually mean the cost of things(presumably to society-at-large, or just sub-groups?), and not the price per se. I.e., the war on drugs is costly as you note, but its not as if there is a supply of and demand for that “war” that leads to an equilibrium price of it. The war is not a good but a policy. Anyway, you might want to clarify this subtle, yet fundamental, confusion that is created. “The Cost Of Everything” is likely what you meant for your book title.
It must be late, as I find myself responding to an internet post. I see why academics largely don’t respond to non-academics; they find the sea of press/commentary so fundamentally flawed/incorrect that they don’t waste their time even entering the conversations. I’d like to see a study showing what percentage of economics-related (or maybe all non-fiction) books, blogs, press articles, etc. have a main thesis that can blatantly be proven as utterly false. I would bet money that it could be close to 99% — LOL. Of course we’d need to compare that to a study of what percent of purely academic articles/books are found to be false as well…but I digress. People say that press is full of opinion-guised-as-fact, bad theory, invalid evidence, and bias; I think that critical thinkers often give it a shot, get tired of looking for a few nuggets of truth in a sea of garbage, and don’t even bother to read it anymore after the patience is whittled away. Sigh! You are left to lead the normative-thinking non-academics to error guised as insight; that has the Easy Button stamped all over it, but I would find it personally embarrassing I think.
This happened 30+ years ago but has only becomea viable economic story in the last few years. What does that say?