4 Reasons Why Wages Haven’t Tracked with Productivity Since the 1970sGetting a Job
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In general, the American understanding of wage labor is that you’ll get paid a certain amount per hour or per week based on how productive you are. So this is the idea of trickle down economics, that we just need to stimulate economic growth and then we’ll see wages go up at all levels.
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But in this article I’m going to look at a report from the Economic Policy Institute which found that even though productivity rose by a little over 72 percent from 1973 to 2014, so 41 years, median hourly compensation only went up by just under 9 percent. In other words, workers had to produce eight extra dollars of value just to earn one extra dollar in wages. This goes against some common assumptions about market economics, so hopefully I can help explain why wage growth has slowed down over the past 50 or so years.
OK I want to start with the data, many of you may not be familiar with this study, so here’s the graph if you want to see the numbers I’m talking about. You’ll see that wages and productivity are almost the same line from 1948 to 1973, which basically means that anytime productivity went up there was a corresponding increase in wages. So as we developed more powerful technologies, more efficient work processes, things like that, workers received most of those benefits.
On the other hand, things change dramatically after the year 1973. You can see that the compensation line not only stops going up but actually decreases from 1973 until the late 1990s. Meanwhile productivity went up by almost 50 percent over the same time period. And if you calculate the total change from 1973 to 2014 the result is that productivity increased by 138.7 percent while compensation only increased by 9 percent.
Now obviously this is a controversial issue, you could ask ten different politicians why they think this trend exists and you’ll probably get ten different answers. So I’m not an economist, I’m not going to reduce this to a single issue, but I do want to cover some of the factors that could be relevant here. And when I was preparing for this piece I found a few notable trends that might account for some of this data.
1. CEO pay has increased rapidly since the 60s and 70s
Again those gains didn’t reach workers, and in fact the Economic Policy Institute also found that CEO pay went up by almost 1000 percent over a similar period of time. In 1965 the average CEO made 20 times as much as their average worker, but when this study was released in 2019 that gap had increased to 278 CEO dollars for every one worker dollar.
So there’s a very strong connection between worker wages leveling off and CEO pay going up. The money that was previously going back into working class paychecks has instead been going to CEOs for at least two generations, which is obviously going to have far-reaching effects on our economy. Of course CEOs can’t explain the entire trend on their own, but they’re certainly a key factor in this discussion.
2. We haven’t increased the minimum wage
OK I don’t want to make this about whether or not we should increase the minimum wage, but another clear contributor to stagnant wages is just the fact that our government hasn’t increased them. This has happened in some states and cities that have set up their own minimum wages, but currently the federal minimum wage is just $7.25 per hour.
The American minimum wage has a long history. It was first created in 1938, so toward the end of the Great Depression, and at that time the federal minimum wage was just 25 cents an hour. Now that sounds terrible, but 25 cents in 1938 would be worth around $4.60 today, that’s not a great wage but it’s a lot more than 25 cents.
From there the government gradually increased the minimum wage based on inflation and other factors, and it had reached one dollar per hour by the year 1956. Again you wouldn’t be happy with one dollar an hour but that dollar is equivalent to more than $9.50 today, which means that the minimum wage, at least at the federal level, has actually decreased by around 25 percent over the last 64 years. That also means that the real minimum wage more than doubled between 1938 and 1956.
Of course, many places have their own minimum wage laws that supersede the federal minimum. But the point is that from a federal perspective we haven’t used legislation to ensure that those gains reached low- and middle-income workers. The federal government has generally kept the minimum wage consistent with inflation, but it hasn’t done the same with productivity.
So in my view it’s hard to see what would change this trend other than a minimum wage law that addressed some of these inequities. If you look at the minimum wage map below, you’ll see that a lot of red states use the federal minimum wage which means there are millions of people earning $7.25 per hour right now. Obviously stagnant wages aren’t just an issue for minimum wage workers, but this is one of the most concrete steps we could take right now to fix the problem.
Now the real overarching problem here seems to be the fact that we have millions of jobs that currently need to be done by a human worker but aren’t being paid anything more than $7.25 per hour. If you’ve followed Andrew Yang you may have heard about his idea for a universal basic income or UBI, I made a video on this topic so I’ll put a link to that one in the description in case anyone wants to check it out.
Yang and some other UBI advocates think that the only sustainable way to respond to this trend is to start paying everyone enough to cover basic necessities even if they don’t work at all. And that way as automation starts to creep into more and more industries, we don’t have to worry about it driving down wages or creating an even larger gap between the executives and the workers. Of course it isn’t that simple in practice, there are a lot of good arguments on both sides, but we might need that kind of innovative solution in order to maintain a healthy middle class even as automation continues to change the way we work.
3. Low-wage workers don’t have as much bargaining power
All right I want to talk about a third issue here, this one is more of a general concern, but American workers, and particularly low-wage workers, don’t have as much bargaining power as more skilled workers.
OK that probably sounds obvious, minimum wage workers are generally replaceable, their jobs tend to be easier to automate out, and turnover is typically more common in low-wage positions compared to jobs with better pay. And when you consider the impact of all these factors it’s clear that people who are earning minimum wage or close to minimum wage won’t have much leverage when negotiating with their employer, especially if that employer is a large corporation. Something like two thirds of low-wage workers are employed by companies with more than 100 employees, and obviously a big enterprise isn’t going to have an incentive to offer raises to minimum wage workers when they could probably get someone else to fill that job for the same price.
And I think what we’re seeing here is that when you look at jobs that are in higher demand, companies have more motivation to pay their workers fairly and attract top talent from other businesses. But that kind of dynamic is essentially absent at the lower end of the wage scale, and companies don’t need to do much more than pay people enough to survive.
For example, the Economic Policy Institute found that the average Uber driver earns just over $9 per hour after deducting things like Uber fees, vehicle expenses, and payroll taxes. Of course the drivers themselves have almost no leverage here—Uber won’t have any trouble replacing them with another driver, especially right now when so many people are unemployed. Over the next decade or two we’ll probably start to see human drivers replaced by self-driving cars, and our economy is barely supporting those drivers as it is so it’s hard to say whether we’ll be able to effectively handle that shift toward automation.
Again the universal basic income is a really popular solution to this problem, and that’s something we might see in the near future. Basically the idea is that people won’t necessarily need to work in order to live, which will at least hopefully lead businesses to provide better working conditions in order to attract more workers.
But there are also some concerns with this plan, and even if it works out I’m not sure a UBI on its own will be enough to significantly shift the trend of stagnant wages. For example once we start paying out a universal basic income the government might compensate for those expenses by cutting other social programs, which would end up putting us back in the same position.
Yang’s proposal is a monthly payment of $1,000 per person, yes that would be unprecedented, but at the same time it’s going to be very difficult to live on $12,000 per year even if you’re also receiving other benefits.
Of course it’s hard to say how people will react to receiving a basic income, there have been a few small-scale trials and studies, but giving 125 people $500 per month for 18 months is very different from paying $1,000 a month to every single American. So even though I think UBI is promising, I don’t want to say it’s the perfect solution, and we might need to explore other ideas if we’re serious about bringing more of the benefits of increased productivity to low-wage workers.
4. Outsourcing puts pressure on wages
OK finally I want to talk about outsourcing, now obviously outsourcing isn’t new, it didn’t start in the 1970s, but the truth is that a reliable supply of cheap labor from other countries makes it easier for American companies to avoid paying higher wages to their American employees.
The specifics are going to vary from case to case, but for example imagine that a business can pay workers overseas $5 per hour for the same work that they would have to pay $7.25 for in the US. Now maybe there will be some extra costs associated with outsourcing, they might have to pay more for shipping or training, but if they think they can save money by shifting labor overseas then that’s what they’re going to do.
So it’s not just that American workers are competing with other American workers, they’re also competing with people in other countries that may not have the same minimum wage or the same labor protections. This isn’t to say that integrating our economy with other countries is only a bad thing, there are definitely advantages, but one disadvantage is that workers around the world are forced to undercut each other in order to compete for the same jobs.
Now another problem this could bring up is the fact that raising the minimum wage might actually backfire by giving companies even more reasons to outsource labor. So it’s intuitive that there’s a tradeoff between increasing wages and decreasing the pool of available jobs.
This is another point where there are a lot of conflicting studies, so I don’t want to say anything definitive, but the graph with wages and productivity shows that employers will generally avoid giving those gains to workers, and I don’t see any reason to think that wouldn’t apply in this situation.
Ultimately the fundamental goal of businesses in a capitalist society is to make money for the owners or the shareholders—not necessarily for the workers. And they’ll do whatever they think is the most efficient way to make that happen. So in my view it’s only through policy changes that we can hope to jump start wages, especially since we’ve seen productivity go up so much and it hasn’t led to a similar bump in wages.
All right everyone I know this is a complex topic, there’s so much to consider in that conversation, and I don’t want to say I have the perfect solution or anything like that. But from my perspective these four trends are cutting into working-class wages and it just isn’t a sustainable trend.
A recent report from the National Low-income Housing Coalition found that the average American needs to earn roughly $20 per hour in order to afford even a one-bedroom apartment, and other crucial costs like healthcare and education have become more expensive much more quickly than wages, particularly at the lowest levels.
So all things considered these aren’t signs of a healthy economy, maybe they don’t hurt the stock market quite as much but that doesn’t mean there aren’t problems. And as I said earlier I’m not claiming to be an expert, there are a lot of valid perspectives here, so make sure to leave a comment if you have any thoughts on increasing wages. As always thanks so much for reading to the end of the article, I really appreciate it, and I hope to see you next time.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.