A recent report from the Economic Policy Institute (EPI) finds that the gap between employee’s hourly compensation and their productivity is the highest it’s been since after World War II.
According to a report from CNN Money, “this divergence is one of the major drivers of the nation’s growing income inequality.”
The EPI report found that productivity increased 80% between 1973 and 2011, compared to an 11% growth in median hourly compensation. This contrasts to the period between 1948 and 1973, when productivity and compensation grew together. This tandem growth is a main reason why the quality of life for the boom generation was higher than it is today. (Productivity is a measure of goods and services generated per hour worked.)
This data confirms an earlier study that from 1979 to 2009, productivity grew by 80%, but the average hourly wage grew by only 19%, and even then all the wage growth occurred from 1996 to 2002, reflecting the strong economic growth of the late-1990s.
According to Lawrence Mishel, president of the EPI, stagnant wage growth due to globalization, the decline in union membership, and deregulation, have all hit both college educated workers and those without degrees equally hard.
Other factors which have contributed to stagnant wages since the 1970s has been the rise of perma-temp workers, outsourcing, the rise in unpaid internships, increased technology and replacing entire job categories and the intense competition for even the most menial jobs. All this helps explain why U.S. economic activity has grown 2.5% since the recession began in late 2007, even while there are over three million less workers, according to the American Enterprise Institute.
Of course, having a financially insecure American workforce benefits employers. This is why Federal Reserve Board Chairman Alan Greenspan said in 1997 that when workers had poor job security, they would be more reluctant to ask for raises. This would eliminate a major cause of inflation, he said. It also indicates a fundamental change in the employer-employee relationship; one that clearly has winners and losers, as opposed to the “we are all in this together” theme more common in the workplace a decade ago.
Breaking the Save-and-Splurge Cycle
But there is certainly more to it than that. Stagnant real wage growth also means a stagnant savings rate and, over time, a decline in the standard of living. It also makes it near impossible to create wealth since most income is being used for essential living expenses. Without real wage growth, the last possible wealth engines available to most people are returns from the stock market and gains in home equity. But the estimated $1 trillion loss in home equity since the start of the 2007 recession take many more years to recover. Even then, those gains will be very regionalized and at least a decade in the making.
All this helps explain why Americans have again begun to rely on home equity loans to replace stagnant wages. It’s also a return to what the Washington Post described as the cycle of “save-and-splurge, building up their nest eggs to fund their spending sprees before retreating to start the cycle over again.”
This is certainly not the way to build wealth, but this save-and-splurge cycle will continue until employees get significant gains in their take-home wages.