What was the net result of all the forces—decreases in the share of manufacturing, immigration, changes in labor force participation, and so on—operating on the labor market? Figure 29.3 shows what happened to the productivity of labor, to total compensation per hour, and to real earnings per hour from 1965 to 2011. Compensation per hour looks at things from the employer’s point of view and includes employer contributions to medical and life insurance, unemployment insurance, and workmen’s compensation— expenditures that benefit workers, but that workers do not see in their paycheck. Real earnings per hour looks at things from the worker’s point of view—what does the paycheck show. As you can see, real output per hour and real compensation per hour moved together until the 1980s, and then diverged. Real output per hour rose faster than real compensation per hour. Real earnings per hour diverged from the beginning, and remarkably have shown no tendency to increase since 1980. For low skilled workers the paycheck experience has been even worse, real earnings have actually declined.
What explains the stagnation in real-wage growth despite greater overall productivity? Many conjectures about the causes of the slowdown have been put forward, each of which can probably account for some part of the phenomenon. First, some economists argued that the data are misleading. The price indexes used to measure real wages have been criticized for not properly accounting for the quality improvements in electronics,
FIGURE 29.3
Productivity, Compensation, and Earnings, 1965-2011.
Note: Real compensation per hour and real earnings per hour grew much slower than real output per hour in the latter part of the twentieth and first decade of the twenty first centuries.
Source: Economic Report of the President, 2012, table B49.
Medicine, and other areas. Although this criticism undoubtedly holds some truth, it appears that there is nonetheless a real difference in real wage growth between the years from the end of World War II to the 1970s and the years that followed. Second, some economists accepted the data but claimed that the early postwar decades were exceptional. After all, the U. S. economy then enjoyed a unique position as the only industrial economy that had escaped the destructive effects of World War II. Perhaps the rates of productivity growth and real wage growth since the 1970s are more typical of what to expect in the long run. Third, after the 1970s, the savings rate was relatively low, holding down increases in the capital-to-labor ratio. Fourth, changes in the labor market, such as increases in immigration and in the labor force participation rate of women, also held down increases in the capital-to-labor ratio. Fifth, the shift toward the service sector, the energy crisis, and, perhaps the cost of complying with government regulations also reduced productivity. Outsourcing of jobs also affected wages. Many Americans benefitted from the lower prices of goods produced with outsourced labor, but workers competing directly with workers based in foreign countries, found it harder to find jobs or secure increased wages.
Inevitably, stagnant real wage growth produces demands that the government do something. There have been repeated calls in recent years for taxes on the wealthy to provide larger government benefits for the poor and middle class, increases in minimum wages, limits on immigration, limits on foreign trade, and so on. But with the exception of recent legislation to enlarge government provision of health care, these demands have not been met. To an economic historian the beginning of the twenty-first century looks very much like the beginning of the twentieth century. Then as now, slow growth in real wages produced demands from “progressives” that the government break up large corporations, limit immigration, and protect the wages of American workers from foreign competition.
World History
