The Productivity-Pay Gap

What is productivity, and why did pay and productivity once climb together?

Productivity measures how much income is generated (for workers, business owners, landlords, and everyone else together) in an average hour of work in the economy. As productivity grows and each hour of work generates more and more income on average over time, it creates the potential for improving living standards for everyone.

In the figure above, pay is defined as the average compensation (wages and benefits) of production and nonsupervisory workers. This group makes up roughly 80% of the U.S workforce, but nonsupervisory workers exclude extremely highly paid managerial workers like CEOs and other corporate executives. As the figure shows, pay for these nonsupervisory workers climbed together with productivity from 1948 until the late 1970s.

What broke the link between pay and productivity?

When this intentional policy target of equitable growth was abandoned in the late 1970s and afterward, pay and productivity diverged. Relinking pay and productivity so that workers share in the fruits of their labor will require another pronounced shift in policy.

Throughout history, policy decisions have determined whether pay for most workers tracks economywide productivity growth.

If the fruits of economic growth are not going to workers, where are they going?

Starting in the late 1970s policymakers began dismantling all the policy bulwarks helping to ensure that typical workers' wages grew with productivity. Excess unemployment was tolerated to keep any chance of inflation in check. Raises in the federal minimum wage became smaller and rarer. Labor law failed to keep pace with growing employer hostility toward unions. Tax rates on top incomes were lowered.

In essence, policy choices made to suppress wage growth prevented potential pay growth fueled by rising productivity from translating into actual pay growth for most workers.

Methodology and data choices

The growing gap amid slowing productivity growth tells us that the same set of policies that suppressed pay growth for the vast majority of workers over the last 40 years were also associated with a slowdown in overall economic growth.

The growing wedge between productivity and typical workers' pay is income going everywhere but the paychecks of the bottom 80% of workers. It went into the salaries of highly paid corporate and professional employees. And it went into higher profits.

How much of the productivity–pay gap is driven by inequality?

EPI makes a series of data choices to construct the indices of productivity and pay in the chart above. Our data choices reflect our end goal: to compare growth in the typical worker's pay with the potential growth in living standards (consumption) that productivity growth represents, with an eye to identifying how much rising inequality has put a wedge between these measures. The entire gap in EPI's productivity–pay figure is associated with rising inequality—inequality among wage earners and the rising share of overall income going to owners of capital rather than to workers for their labor.

How does EPI's productivity–pay graph compare with other versions?

EPI's productivity–pay graph helps answer a crucial question: Do typical workers in the United States share in the benefits of economic growth? The big and growing gap between productivity and pay growth answers that with a resounding "no." But in order to see this clearly, all of the adjustments we have made to the data are necessary. Failing to make these data adjustments leads to incorrect conclusions about how much the rise of inequality has delinked productivity and pay for typical workers.