Reports from the Economic Front

a blog by Marty Hart-Landsberg

Not A Happy Labor Day

Sadly most working people in the U.S. continue to lose ground despite overall economic growth.  As an Economic Policy Institute report makes clear, wage stagnation has deep roots in the workings of the economy and policies simply designed to spur growth are unlikely to change things.

Figure A from the report shows trends in economy wide net productivity and average hourly compensation for production/non-supervisory workers over the period 1948-2014.

Figure A

Productivity is a measure of the national output produced by an average hour of work.  Its increase over time highlights the potential for raising majority living standards.  Here, and in the following figure, we are actually looking at net productivity, which shows output after subtracting depreciation of plant and equipment.  The “typical” worker is represented by production/non-supervisory workers who comprise approximately 80 percent of the U.S. labor force.  Their real hourly compensation includes wages and employer-paid benefits.

The trends in Figure A show that over the period 1948 to 1973 the typical worker enjoyed gains in real compensation commensurate with the increase in productivity.  However, the situation from 1973 to 2014 is far different. In this latter period, the typical worker received little if any benefit from their contribution to increased net output.  Said differently, they suffered from wage stagnation despite a growing economy.

We can learn more about why from Figure B, which covers only the latter period.

Figure B

While Figure B has the same measure of productivity as Figure A it includes two different measures of compensation: the real average hourly and the real median hourly compensation for all workers.

Median hourly compensation is probably the variable that best captures the “typical” worker’s earnings.  It was not used in Figure A because data for this variable only dates to 1973.  Figure B shows that real median compensation for all workers has actually been trending down over the last few years of our so-called expansion.

Growing income inequality is one reason for this wage stagnation.  As we can see, there is an ever larger gap between hourly average and median compensation.  This gap reflects the fact that a growing share of labor compensation is going to a small percentage of the labor force, thus driving the average up but not the median.  This divergence between the two compensation series is not surprising since we are looking at wage trends for all workers, which means we are including the salaries paid to managers and CEOs and their earnings from stock options and bonus pay.

But, as we can also see, there still remains a widening gap between compensation and productivity even accounting for the explosion in compensation inequality.  This remaining gap is explained by two developments.  The first is that there has been a change in power relations between owners of capital and workers, which has enabled the former to shift the distribution of national income to their favor at the expense of the latter. In other words, corporations are now keeping a larger share of national income for their own use, increasingly to fund mergers, stock buy-backs, and dividend payments.

The second is the divergence between consumer and output prices.  Real labor compensation is measured relative to the prices of consumer goods and services.  Real output, the basis for the productivity calculation, is measured relative to the prices of all goods and services produced, consumer and non-consumer.  Since consumer goods prices have been rising faster than overall prices, real labor compensation grows more slowly than productivity.

The authors of the Economic Policy Institute report estimate the relative importance of these three factors in explaining the overall gap between median labor compensation and net productivity.  Over the entire 1973–2014 period, 58.9 percent of the gap was due to compensation inequality, 11.5 percent to the loss of labor’s share of income, and 29.6 percent to the price divergence.  Looking just at the period 2000-2014, the totals were 45.2 percent, 38.8 percent, and 16 percent, respectively.  The results for the latter period make clear that wage stagnation is increasingly caused by the growing strength of corporate power.

The takeaway: an end to wage stagnation will require worker organizing aimed at curtailing the power of corporations and those at the top of the income scale, who of course largely represent business interests.  The increasingly successful struggles across the country to win $15 an hour minimum wages and new rulings by the National Labor Relations Board that strengthen worker and union rights are important steps in the right direction.

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