There is a well know graph, that shows a tight link between productivity and wages, until the 70s, and a break of the link since: productivity and wages

There's a lot of possible explanations for this, I keep hearing more of them:

  • Tax cuts to corporations, that changed the profits distribution

  • detachment from the gold standard

  • Rise in global trade and the consequential drop in the US industry power in the economy

  • The loss of power of labour unions

There is a good article here

I actually thought of a possible reason myself: the decrease of competitiveness of the labor market as a result of mergers and acquisitions or the drop in power of labour unions, as said

High wages in today's hi tech industry can support this explanation in the opposite way

Is there any empirical evidence to support any of these theories?


This is sort of my field, tough I focus more on education. One explanation that seems to fit the data is that the american labor market now is incorporating benefits and variable pay, so wages should decouple from productivity if total compensation doesn't - and voi lá, that's whats happening.

One reason, perhaps, is that the character of the productivity acceleration changed circa 2000. Prior to that date, studies have suggested that the more important effect was an increasing ratio of capital to labor (capital deepening) as businesses substituted relatively less expensive information technology and communication equipment for labor. Since 2000, some studies suggest that the more important factor has been a re-engineering of business practices, which has increased the “skill bias” in the labor market, that is, the premium paid for higher levels of technical, professional, and managerial education and experience. For employers, variable pay solves, in part, the problem of monitoring the performance of such workers: Unlike traditional factory and retail service workers, whose hours at work are relatively easily monitored, many skilled professionals work at varied locations and times of day. Finally, increasing reliance on variable pay also perhaps is a type of risksharing arrangement between businesses and workers. If the recent productivity trend slows, reducing or curtailing variable pay may be less offensive to professional workers than reductions in base salaries.

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  • $\begingroup$ Thank you. can you elaborate please a little bit on the graph? Is the difference between hourly earnings and compensation is the variable pay? $\endgroup$ – Guy Louzon Sep 16 '18 at 5:10
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    $\begingroup$ Hourly earnings only counts wages. Total compensation should also count health and life insurance, and pretty much any benefit - which includes variable pay. $\endgroup$ – Pedro Cavalcante Sep 16 '18 at 5:12

Is there any empirical evidence to support any of these theories?

I doubt that there is data which thoroughly decouples the set of possible explanations (some of which you listed in your question). Many of these factors are so interrelated that attempting to decouple them in order to identify "the one root-cause" seems futile.

This circular dynamic illustrates some of these interrelations:

  • Technology has undeniably boosted workers' productivity and contributed to globalization.

  • That creates an oversupply of goods and services, which translates to oversupply in the labor market.

  • Both globalization and labor oversupply drive wages down in the U.S. (the weakening of U.S. labor unions is just another facet of oversupply and the ability to "consume" labor from overseas).

  • And these circumstances of unemployment foster fiercer competition among labor suppliers, which leads to further specialization and technological improvements.

Similar chains of reasoning can be developed if instead of technology one takes globalization or a fiscal/financial cojuncture as starting point. Either way, economic agents will seek to maximize profits, which in an open economy can only be attained by competition and innovation. That inevitably leads to lower wages and higher productivity, respectively.

An economist's efforts to solve this chicken-and-egg dilemma would be uninteresting, more so where other real and emerging problems are not even marginally captured in the aforementioned circular dynamics.

Although there has been so much outcry about wage stagnation in the U.S. (and other countries), no one can reasonably refute that even with today's "stagnated wages" people in these economies have access to many more goods and services than with the growing wages in the first decades following World War II.

  • $\begingroup$ Ok, so the question that remains to complete the picture, is how come it pretty much happened at once...? what was the trigger? $\endgroup$ – Guy Louzon Sep 15 '18 at 19:31
  • $\begingroup$ @GuyL "how come it pretty much happened at once...? what was the trigger?" It did not happen at once. For instance, international relations steadily evolved into trade agreements while developments in labor unions took place in parallel. And the fact that one can select one out of 'n' options as starting point for the aforementioned rationale reflects the impossibility to identify a trigger (or what I call in the answer "the one root-cause"). $\endgroup$ – Iñaki Viggers Sep 15 '18 at 19:56
  • $\begingroup$ maybe this is an optical illusion, but the detachment of relationships seems almost immediate not gradual, all of what you said, should have happened in parallel and in a short period of time, by coincidence , with no mutual root cause... $\endgroup$ – Guy Louzon Sep 15 '18 at 20:03
  • $\begingroup$ "access to many more goods and services" So they should stop complaining. What's really important is Jeff Bezos' and Bill Gates' ability import cheaper humans. This lets them privatize the profit while socializing the costs. If you are 56 years old with an American mortgage and kids in college, you are going to be way too expensive. Of COURSE Bill Gates is going to replace you with the 22-year-old from India. Way cheaper, AND he gets to hold onto the dude's visa, so cheaper AND more pliant. AND he gets to offer the chance to live in America as a perk! Only a horrible racist would complain. $\endgroup$ – CWill Sep 15 '18 at 21:11
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    $\begingroup$ @GuyL These processes do not happen overnight or in a short period. Think of all the lobbyists, the negotiations with labor unions, negotiations with other countries, legislators going back and forth with drafts, etc. each country experiencing these events at different paces, all while market forces try to stay up-to-date with (or even trying to anticipate) the ramifications of continuous improvements of technology. $\endgroup$ – Iñaki Viggers Sep 15 '18 at 21:30

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