Productivity Doubled -- And The Middle Class Got Screwed. What Went Wrong?

This article originally appeared in the newsletter Too Much.


A brick factory makes 10,000 bricks a day. But then the factory happens on a new brick-making technique, reorganizes production, and starts making 15,000 bricks a day, with the same workers working the same hours.

Those workers have, in economic terms, become more “productive.” Who should benefit from this increased productivity? Should the benefits flow to the factory owner, as higher profits, or to the workers themselves, as higher wages? Or should that increased productivity translate into lower prices for consumers?

Or should all of the above — owner, workers, and consumers — benefit?

America's answer in the decades right after World War II: all of the above.

Corporations did just fine in the immediate postwar decades as the nation’s productivity rose steadily. But so did average Americans, as both workers and consumers. Over the course of the postwar years, Americans shared the wealth that higher productivity created. The nation would experience the greatest epoch of middle class prosperity the world had ever seen.

What happened next? That’s the story that Lawrence Mishel, the president of the Washington, D.C.-based Economic Policy Institute, tells in his just-released preview on productivity from the upcoming new edition of EPI’s biannual economic factbook series, The State of Working America.

Mishel tells his story with lots of useful numbers. But we can sum up his data in just three quick words. The sharing stopped. Since 1973, average Americans have realized little benefit from rising U.S. economic productivity.

Between 1973 and 2011, that productivity most certainly did rise substantially, by 80.4 percent. That increase, EPI's Mishel notes, would have easily been “enough to generate large advances in living standards and wages if productivity gains were broadly shared.”

But those gains would not be shared. Average hourly compensation in the United States increased by just 39.2 percent between 1973 and 2011, less than half the increase in productivity.

This 39.2 percent figure actually overstates the increase in compensation average Americans realized — because this hourly compensation total includes the pay of all “employees,” from CEOs to day laborers.

Median U.S. workers — the nation's most typical workers — didn’t come close to that 39.2 percent. Their pay increased only 10.7 percent from 1973 to 2011.

We have, Mishel explains, two different dynamics at play here. That “wedge” between productivity (up 80.4 percent) and overall hourly compensation (up 39.2 percent) reflects “an overall shift in how much of the income in the economy is received in wages by workers and how much is received by owners of capital.”

Between 1973 and 2011, owners clearly won. Much more of the gains from productivity went to profits and dividends than to wages and salaries.

The second wedge — the gap between “average” hourly earnings (up 39.2 percent) and median hourly earnings (up 10.7 percent) — reflects the exploding gap between executive pay and typical worker pay. Between 1973 and 2011, CEOs clearly won. Their sky-high rewards jacked up our “average” pay figures.

And what about consumers? Average Americans as consumers, like average Americans as workers, haven’t done so well since 1973. Workers have suffered, Mishel relates, as “the prices of things they buy (i.e., consumer goods and services) have risen faster than the items they produce.”

What accounts for all these “wedges” since 1973? Average American working people simply no longer have the economic and political clout they held back in the middle of the 20th century. The shrinking percentage of Americans who belong to trade unions has left collective bargaining a rarity in the private sector.

And without strong unions on the nation’s political stage, basic labor standards — like the minimum wage — have lost much of their capacity to guarantee workers a fair share of the wealth that increasing productivity creates.

So what does the future hold? Probably continued higher productivity. But that higher productivity, EPI's Mishel reminds us, won’t translate into better lives for all Americans — unless we share the wealth that higher productivity creates.

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