Mind the Gap

from David Ruccio

“Mind the Gap” is the title of my presentation at the upcoming Volcano symposium. It’s also the subject of an important new piece of research by Larry Mishel and Kar-Fai Gee.

Their argument is that the key to explaining growing income inequality in the United States is the growing gap between productivity and wages. What they find is that, from the mid-1970s until 2011, productivity increased by more than 80 percent while wages (measured as real median hourly compensation) only increased by 10.7 percent.

It is important to remember that, in U.S. national income accounts, “wages” include the pay of CEOs and day laborers alike. Even then, the gap between productivity and wages continued to grow throughout the 1973-2011 period.

So, what explains the growing gap? Mishel and Gee focus on three “wedges”: (a) an overall shift from labor income to capital income, (b) increasing inequality between top income recipients (such as CEOs and top earners in finance) and everyone else, and (c) the terms of trade, i.e., the faster price growth of things workers buy relative to what they produce.

And their conclusion?

Productivity growth has frequently been labeled the source of our ability to raise living standards. This is sometimes what is meant by the call to improve our “competitiveness.” In fact, higher productivity is an important goal, but it only establishes the potential for higher living standards, as the experience of the last 30 or more years has shown. Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent, and nearly all of that growth occurred in a short window in the late 1990s. The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity. Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt.

But we have to keep in mind that the conditions of the period from 1948 to 1973 created the growing gap in the following period. So, instead of attempting to recreate the link between productivity and pay in the postwar period, we can move in a different direction and not exclude those whose work leads to increased productivity from deciding what to do with what they produce.

That would be a real way of minding the gap.