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Mind the gap

| Tuesday, November 18, 2014

Since the mid 1970s there has been a widening gap in American society. This gap is the disparity between the growth in wages and the growth in productivity in the United States. The divergence occurred after a sustained period when the two statistics tracked each other in the decades following WWII. As productivity has increased, naturally so have corporate profits. Since the early 1980s corporate profits have reached new highs year after year. Despite this growth in productivity and profits, wages for the average worker have largely stagnated. Even upper class white-collar workers have not seen the type of percentage spike in income that the rise in productivity would seem to indicate. The people who have benefitted from the increases in productivity are the corporate executives and financial managers. Due to the way the stagnation hit and the timing of the wages plateau, executives have reaped the lion’s share of income gains over the last few decades while the typical American household fell behind.

Before exploring compensation inequality, the shift in productivity and wages must be examined. From 1948 until 2010, wage compensation increased by 113.1 percent. This rise seems impressive until compared to the percentage growth of productivity during the same period: 254.3 percent.  The two measurements grew at similar paces until the 1970s, each doubling their 1948 totals. It was then that the growth rates diverged. After that decade, wages only gained an additional 13.1 percent. Productivity, on the other hand, went on to increase another 150 percent. No longer did productivity and average wage tack each other closely. The gap now widens year after year as wage growth remains flat and productivity increases steadily.

As productivity and profits grow, the excess capital must be distributed. Not all of the profits can be poured back into a company, and one group has been especially adept at collecting the dividends from increased production. Corporate executives have seen an astronomical increase in compensation over the last 40 years. In 1965 a company CEO earned about 24 times what the average employee made. By 2007, the typical worker was receiving 300 times less than the CEO. How could this go unnoticed?

First, workers were not directly hurt by these extravagant payouts. Their potential for growth was hampered, but there was no direct loss taken because the manager received a bonus.  Instead, average compensation in today’s dollars was stifled at roughly $40,000 per person — and has been since. The modest gains made in income earnings barely outstrip the rate of inflation. However, in the 1970s and 1980s the United States boasted one of — if not the — highest standard of living in the industrialized world. Per-capita GDP, life expectancy, average height and other factors were on the rise, and the U.S. was enjoying its most dominant years on the world economy. Having reached such a lofty place at that time, it may be reasonable that families grew content with their station. When increasing the standard of living was no longer a necessity for the average American household, the dampening of wages in relation to productivity received less resistance from the working and middle classes.

Between the rapid rise of executive pay and the lack of growth in worker compensation, income inequality has risen to levels not seen since the 1920s. The top .1 percent of income earners accounted for 20 percemt of all income between 1979 and 2005. This disparity — as an effect of the gap between productivity and wages — implies larger problems for the U.S. economy than just stagnant income. It harkens back to the conditions that sparked the first Great Depression. Without wages tracking closely to productivity, executives gain from the increased profits while worker compensation remains unmoved. As the profit gap widens, so does income inequality. Income inequality was a key feature in the U.S. economy that collapsed so catastrophically in the late 1920s/early 1930s. The gap in productivity and wage growth must be studied to better understand the predicament that we face today, and may face tomorrow. Mind the Gap.

The views expressed in this column are those of the author and not necessarily those of The Observer.

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