"This Divergence Is At The Root Of Most American Economic Problems"

Tyler Durden's picture

Some critical observations on changes in the US economy over the past two generations, which are certainly not for the benefit of the American middle-class worker, courtesy of the Economic Policy Institute.

Unpaid Productivity

Since 1979, hourly pay for the vast majority of American workers has not only lagged behind growth at the very top of the distribution and thus behind average wage growth, but has also diverged from economy-wide productivity, as shown in Figure M. This divergence is at the root of numerous American economic challenges (Bivens et al. 2014).

Labor productivity is a measure of the value of goods and services produced in the economy in an average hour of work. It rises steadily over time (except possibly during some recessionary years) as technology, capital intensity, and the educational attainment of the U.S. workforce increase. When labor markets are tight and/or policy provides bargaining power to workers through labor market institutions such as a protected right to unionize and robust minimum wages, productivity increases usually generate corresponding wage increases. From 1948 to 1979, this combination of healthy labor markets and institutional support of workers’ bargaining power was sufficient to keep wage growth for the majority of U.S. workers tracking productivity growth. Over this period, net productivity (productivity after accounting for depreciation of capital) grew by 108.1 percent, and the compensation of nonsupervisory production workers (who comprise roughly 80 percent of the private-sector workforce) grew by a comparable 93.4 percent. Thus, the typical worker shared in the economic spoils of increased productivity.

However, between 1979 and 2013, there was a marked decoupling of productivity and typical workers’ compensation. Over this span, productivity grew 63.5 percent, while hourly compensation of production and nonsupervisory workers grew just 7.7 percent. Productivity thus grew eight times faster than typical worker compensation, which means the prosperity created over this time period did not result in broad-based wage gains.

* * *

So where did the prosperity come from, and who did it go to?

As noted above, wage growth from the 1940s to the early 1970s almost exclusively benefited the "90%" bucket of American workers. In other words, this is how the great American middle class was born. And, as both charts above and below shows, ever since the 1980s, the only group that has benefited from the increase in US labor productivity in the form of skyrocketing income growth, is the "1%."

We don't know what may have caused this dramatic divergence in the 1970s... but we have a good idea, one which we showed three months ago.

In retrospect, we find it so very ironic that gold is allegedly (if one listens to the media of course) one of the most hated substances among "respected" economists, and yet it is the destruction of the gold standard that enabled the serf-ization of US society, which has culminated with a record class disparity between the rich and poor unseen at any one time in human history, surpassing the Gilded Age, and going all the way back to the French revolution.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Jim in MN's picture

The peak years for the American middle class coincided with.......All in the Family.  

Right when folks bitched about it the most.

Don't it just figure.

Pool Shark's picture

 

 

The reasons for falling wages are really quite simple:

Since the 70's, the US has had to compete in a global economy.

American workers no longer compete with the guy down the street, or across town, or even across the nation.

Now American workers have to compete with workers who earn slave wages in countries like China, India, Bangladesh, etc.

It's gotten so bad that even countries like China are outsourcing.

You can thank 'Free Trade' advocates and the Congress-Critters who sold America down the river for this.

 

Welcome to the age of global wage parity...

 

NoDebt's picture

Only Nixon could go to China.

And we should have known what would happen next.

NoPension's picture

Oh, it's even better. Americans have to compete with workers earning " slave" wages... Right Here in Merica. You know, doing those jobs lazy native born won't do, cut grass, slaughterhouse, construction, nursing, fast food, computer code and IT, and just about anything a human can be paid to do if the fuckers can find an immigrant to do it cheaper.
Then, these " new" workers, live 10 to a house, like animals to a native born, but four stars compared to home. And home ain't here sweet pea.
Home is where they send 1/2 their wages to. Yeah baby, steal my fucking job, and send the money out of the country.
And politicians clawing each other's eyes out, trying to get to the front of the line to provide .gov sanctioned and paid for help.
Que Martin O' fucking Malley. You have been duly warned about this pointy eared guitar playing cunt. We can only hope he inadvertanly steps into the path of a bus, or better yet,--redacted--.

The problems are obvious. The solutions are simple. The will is weak. We are fucked.

LetThemEatRand's picture

"However, between 1979 and 2013, there was a marked decoupling of productivity and typical workers’ compensation."

While the abandonment of the gold standard played a significant role, 1980 was -- not coincidentally -- also the beginning of the wholesale adoption by the U.S. of trickle down economics, which remains the fundamental economic model to this day, including being the entire rationale for QE.

tarsubil's picture

Trickle down wouldn't have worked on the gold standard. They would have just called it what it is: serfdom.

duo's picture

It corresponded to the rise of financialization.  A parasite that consumed maybe 10% of the economy in 1960, but 40% today.  All of those salaries had to come from someone, and that was the productive class.  Finance does not produce wealth, only inflation and misery.

LetThemEatRand's picture

And I wonder who came up with the idea of trickle down and sold it to the American public.  https://www.youtube.com/watch?v=QTcL6Xc_eMM.

 

Not My Real Name's picture

Randy: It's no surprise that liberals such as you and the Economic Policy Institute sees the "divergence" occurring around the time when your chief nemisis, Ronald Reagan, took office -- even though when looking at the graph it is painfully obvious to most people who aren't blinded by their ideology that the divergence started around the time Nixon closed the gold window in 1971.

You guys really do live in an alternate universe.

Whoa Dammit's picture

OT: Take a look at the display of guns seized in Waco. All rifles. Ahem. When was the last time (other than a Hollywood movie) that you saw a biker riding around with a rifle? 

http://i.dailymail.co.uk/i/pix/2015/05/19/20/28DCB0B500000578-3088301-De...

MrTouchdown's picture

Bolt action rifles at that! And a plaque!

"Hey Red - did you remember bring the plaque? We got a bar to go to, man."

black rifles are cool's picture

I always wondered if I could fit a Mosin Nagant in my side saddle bag.  Now I know !!!

BoPeople's picture
BoPeople (not verified) May 20, 2015 8:26 PM

Not sure why the author picked 1979. It looks as if the divergence started in 1971.

NoDebt's picture

You're not supposed to notice stuff like that.

The US was already effectively off the gold standard by the late 60s.  We had printed FAR too many paper dollars to ever be able to repay them at the stated gold conversion rate.  Nixon closing the gold window was widely expected and little more than a formality.  The old school version of front-running.

 

CPL's picture

There is an excellent book called how to lie with math, it's got a couple of chapters in it that discuss 'how to present best case'. The reality is the bullion has nothing to do with income disparity, printing money from thin air does along with inflation. The article is a weak argument that gold is money and somehow things were better with a gold standard. Point of fact, the 70's weren't that great in terms of jobs, it was the start of the exodus of offshoring work, most notibly the auto industry.  Now to give perspective on the value of gold in real terms.  The total amount of gold in existence could fit into a cube with sides of just 20m (67ft), it would weigh 171,300 tonnes. Essentially a small office.  In terms of relative value.

  • Total value of all the gold in the world... $7,065,298,336,137...7 trillion dollars.  Nothing to sneeze at
  • Total WORLD debt... 200 Trillion including public and private...ummm, fuck, bank of the world just busted.
  • Total derivative debt...$1.2 quadrillion derivatives market, essentially junk bonds because there is no amount of capital available to ever pay it. (people stopped counting in 2010 btw, then just started lying about it after because that's how they 'run' things.)...the bank of the world just blew up.

7 trillion as an asset means sweet fuck all.  Point blank...everyone is broke and the fact is no one has to listen to anyone in 'charge' because they actually aren't paying anything, nor were any prior financial obligations going to be honoured anyways.  Even the worlds 'richest' man is flat assed broke. 

 

(btw the divergence started in the mid 60's the entire US economy is based on bubbles and collapses since 1910)

NoPension's picture

It's a place holder slick. It's not " worth" anything. Or, it's worth everything. It's a casino chip, that cannot be counterfeited.
Gold DOES NOT have value in dollars. It's the other way around.

Open top of head. Remove brain. Scrub vigorously. Replace into cavity.

All the gold is worth 7 trillion dollars!!! Keep thinking on that until you realize how fucking stupid it is.

CPL's picture

Its only worth something to the people that provide the valuation, offer the market and allow the trade to happen.  To anyone holding it, they are just another useful idiot acting as a profitable off-site safety deposit box. 

In fact I would counter that Gold and silver are a personal liability in times of collapse.  While your neighbours might not know you have it.  All those forms you filled out with your address, name, SSN with the recipt with the fine print stating that you've only leased the gold or silver is proof enough that 'your' pm's aren't 'your's'.  Guaranteed the same people that provide the valuation, offer the market and allow the trade to happen will eventually come sniffing around when times are hard...for them...not for you.  They don't give a fuck about you if the situation isn't clear enough, they do like your gold and silver though.  Which is the reason all of those PM sale's slips have the conditions in tiny print that 'you're a renter' of their PM's.  Not an owner.

 

Demonoid's picture

You're right, that book is a classic, filled with wit and perennial wisdom.

The actual title is How to Lie with Statistics, by Darrell Huff.

It can be downloaded here: https://archive.org/details/HowToLieWithStatistics

Select the format you want in the column on the right side of the page.

MATA HAIRY's picture

the divergence began with racial integration....divide et impera... multiculturalism/feminism/racial integration combined with mass immigration is a growth strategy--they grow the supply of labor faster than the demand for labor.... wages are depressed...why am I the only person in the world to see this???

wareco's picture

1948-1979 Productivity should be shown as 120.5, not 108.1, and vice versa for deflated productivity. 

BlowsAgainsttheEmpire's picture

That divergence has a name . . . neoliberalism.  

 

And here's another way to look at it:

 

http://research.stlouisfed.org/fred2/graph/?g=1c0b

dude59's picture

'Free trade' (Nafta) sent the jobs that paid elsewhere.

dude59's picture

'Free trade' (Nafta) sent the jobs that paid elsewhere.

MajorFall's picture

globalization followed by financialization

carlnpa's picture

The reason for falling wages was the H1B progam kicking into gear around 1990.

 

https://www.numbersusa.com/content/nusablog/cbreiter2/october-16-2009/hi...

 

As of 1990, the original (1952) definition read something like this:

nonimmigrant temporary worker "an alienhaving a residence in a foreign country which he has no intention of abandoning (i) who is of distinguished merit and ability and who is coming temporarily to the United States to perform temporary services of an exceptional nature requiring such merit and ability."

Fast forward to November, 2002 and the 21st Century Department of Justice Appropriations Authorization Act, H.R. 2215. There is a provision in the bill dubbed the "7th Year Extension". It allows H-1B visa holders to extend their stay past the 6th year if a labor certification has been pending for at least 365 days. Furthermore, they can request this extension on a yearly basis until they get a green card. Of the 400 members of the House who voted in favor of this bill, 206 were Republicans and 193 were Democrats.

Totentänzerlied's picture

Causality fail.

Look at this little gem: " It rises steadily over time (except possibly during some recessionary years) as technology, capital intensity, and the educational attainment of the U.S. workforce increase." So spake the Lord God Almighty! Ye shall not contract! Go forth at maintain 2-4% GDP growth forever!

Productivity growth is not an inevitable law. Wage growth is not an inevitable law. Earth does not the middle class anything. Pay no attention to the one-time-only (per nation) industrial revolution behind the curtain! It's called catch-up and it's happened in just about every country in the world except some of those in Africa. You can only do it once (per civilizational paradigm).

Now thenm where oh where was the top tick in US crude production??? Presto! http://en.wikipedia.org/wiki/Hubbert_peak_theory#/media/File:Hubbert_US_...

Yes it excludes shale and other unconventionals (and no I won't condescend to explain why).

"Mystery" solved.

 

NoPension's picture

Lack of cheap oil. Availability of cheap labor, measured in billions.

I Write Code's picture

I question the data, such a divergence was not acknowledged in any numbers I've seen before 1990, and modern "productivity" must include stuff like investment banking that has huge numbers and hardly any workers.  I believe the conclusion (assertion) but that chart needs several kinds of revision.

q99x2's picture

Move Nixon's grave to Somalia.

laomei's picture

Duh, no shit... there has been at best, zero actual growth for decades.  In reality it has been negative.  You see it is very true when you are an expat.  Over the past 20 years I have seen the dollar go from king to crap.  Local wages here have grown exponentially while US wages really have not much changed at all.  $100k was considered "making it" back in the 70s.  It's still held in that same regard, ignoring for the fact that $100k in the 70s is closer to $500k nowadays.  Here in Beijing.. in less than 10 years, wages have more than tripled for the average worker.  For anyone with skills it has been more like 5x+ or more.  Back in the day, 100 RMB would buy a top notch high end meal for 2 (or 3) and it was all of $12.50.  Now, that 100RMB is ~$16 but it won't get you all that much at all, 2 people eating semi-decent food will be around 200 RMB.  No one really considers it excessive.  Prices have gone up, but nothing really too out of line with global prices for similar or same.  Wages have gone up much faster.

 

The maids... 10 years ago a monthly wage of 500 RMB was considered very good.  Now it's ~4000.  That's an 800% growth

 

Now the fucked thing is that over here, talking about $50k is petty bullshit.  Consider what you could do with that much in the US.  Chinese have a savings rate over 50%.  Most in the US don't save shit, and of the ones who WANT to save, most are incapable of saving at all due to debt slavery and other obligations that will never actually go away.  I buy a new car here, spend twice what it would cost in the US, drop $60k in CASH, and that means a 400k RMB car.  And compared to the rest of the parking lot, it is below average.  It's "acceptable" but no much more than that.  It's not considered luxury.  Most of the $150k cars in the lot are also so commonplace now that they are not really luxury either.  In my old hometown, driving what I drive now would attract disdain for "showing off".  Driving what many here are driving rather casually would be "midlife crisis" or "asshole" territory.  

 

That's the true difference.  The difference is a combination of actual wage growth combined with savings ability.  Housing prices in China are still very high, but it's just a sign of efficient markets.  Prices vs. rentals reflect around a 2~3% ROI with rent for decent places being paid at least 12 months in advance.  The lower ROI is made up for with investment opportunities on the advance cash.  Most already own at least one home and bought in when housing was cheap, a fall in prices doesnt mean much and flipping is difficult/expensive.  US wages are fucked, expenses are too high in relation, and no one can save much of anything.  The only options are financing and borrowing from the future.  If you bring in $20k a year and only spend $5k of it you are doing far better than someone who brings $100k and pisses away $95k of it.

SelfGov's picture

The divergence began when U.S. Oil production peaked. Interesting.

vaft's picture

I didn't realize staring out of a window and clicking like buttons on facebook constituted productivity.

 

Raoul_Luke's picture

Certainly fiat money and the financialization of our economy that it engendered has played a role in this, but it's really the story of a bifurcated economy.  If you work in a knowledge job, your pay has increased much faster than those who work in the labor economy.  In the labor economy there's only so much you can do to increase productivity but there's a physical limit to how many beds a chamber maid can change and how fast a janitor can mop a floor.  If you use a computer in your job there's almost no limit to how much more you can do in a day.

Billy Bob101's picture

The precipitating event to elimination of the international gold standard was Johnson's "Guns and Butter" policy with regard to Viet Nam and domestic spending for the "Great Society"/"War on Poverty".  (Interesting how many of the negative trends began with the Kennedy thing.)  The mantra in those days was "we owe it to ourselves," as if "we" are a "we."  But this defused the argument that we could not afford the war.  The truth was that some of us owe it to others of us.  The French broke the bank when they demanded gold to balance their account.

Billy Bob101's picture

Please excuse me, my previous post got me started on a trip down memory lane.  I was in high school when Kennedy was "outed" and I was a senior in college when Nixon took the US off the international gold standard.  One would think, from reading the article that this happened in a vaccuum, but it did not.

When the election in 1964 came around, most people had confidence that the Warren Commission would answer the question of "who killed Kennedy?"  (The Warren Commission report was not public until 1965.)  Looking back, I am convinced Goldwater was a "ringer" to insure that Johnson, an obvious participant, (by virtue of the fact that he was the primary beneficiary and the famous "wink,") was elected.  Goldwater, an AF reserve general, was painted as a warmonger, a charge he made no real effort to refute.  The assasination was never mentioned in the campaign.

Immediately after the election, Johnson claimed a mandate to reshape life in America.  We got the "Great Society", the welfare state, and a whole series of other extremely expensive domestic programs that I hesitate to even mention because of political correctness.  Johnson accelerated the war, based on the "domino" theory, that if Viet Nam went communist, all of Asia would follow.  The "domino theory" was, as usual, a bunch of crap. 55,000 American soldiers died in this misadventure.  These ideas sounded good then, just as they sound good now, the problem being that they were not successful.  For example, before Medicare (1965), healthcare was extremely affordable.  Now it is not.  Similarly, the "War on Poverty" was a spectacular failure. Who doesn't want to end poverty?  Not only are all of these programs still with us, they have "gone to seed."

Because of the huge amount of spending, which was sold to the American people as "we owe it to ourselves" there was not enough gold to cover the deficit and the French broke the bank when they demanded payment in gold and sent a warship to collect. 

 

 

gcjohns1971's picture

Actually, if you chart the creation of Welfare with the decline in hourly compensation you will get a perfect match.

 

The reason is simple.

Money gets diverted from the Labor budget to Government for the purpose of welfare.

What?

Did you think employers got the money from that stuff out of their vacation funds?  R&D? Marketing?  No.  It comes from the labor budget because it is a legally mandated labor expense.

That it is not workers, but non-workers who collect it is beside the point.

phoenixdark's picture

mission accomplished.

much obliged's picture

Quote: However, between 1979 and 2013, there was a marked decoupling of productivity and typical workers’ compensation. Over this span, productivity grew 63.5 percent, while hourly compensation of production and nonsupervisory workers grew just 7.7 percent. Productivity thus grew eight times faster than typical worker compensation, which means the prosperity created over this time period did not result in broad-based wage gains.

 

Suppose that that decoupling coincides with the increase the relative number of retired workers that can only get worse while the post World War II cohort, also known as "Boomers" go into retirement. Obviously somebody is paying for the increased number of retirees.