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1973: What Happened?
Some recent posts about Chelsea Clinton’s reference to 1973 brings me back to a remarkable chart. Average real wages vs labor productivity. Since the ’40s, real wage growth was in lockstep with productivity growth. Then something changed dramatically in 1973. Starting then and ever since, real wage growth has disconnected from productivity growth.
What happened in 1973? What paradigm shifted under our feet? And it is a paradigm shift. The break from what went before is crisp and clear. But what caused it? Women entering the workforce? The dawn of computers and automation? Energy shocks? What?
Looking for ideas.
Published in General
You are assuming I remember where I found it.
I would like to agree with you but the abrupt change in the graph does suggest a single causal event. Danged if I can guess what it is . . .
The problem with this was that a labor shortage was causing under-utilization of the capital stock. Plus then, the whole mechanization thing kicking in to bump productivity.
Exactly. The so-called Greatest Generation that was born in the twenties (and slightly before) was another boom generation being born in relative good times. When they hit the labor market, it coincided with the Great Depression and into WWII. The war made a profound difference, and there were wage controls holding compensation down. This was when the whole “company-provided health benefit” thing started, to raise compensation when wages were frozen.
Similar graphs are all over the internet. The most frequently cited source appears to be the government’s Bureau of Labor Statistics. I haven’t found a nice presentation of the data on their Labor Productivity and Costs page, but there are links to the raw data there. (I haven’t looked at the data, but see little reason to doubt the accuracy of the graphs.)
Interesting post, @ekosj, and thanks for bringing it to our attention. You can make the graph larger by editing the post and clicking the picture, then clicking the little pencil button. (I think that’s right.)
https://www.epi.org/publication/charting-wage-stagnation/
The graphic comes from there.
Google remembered (why it’s hired so often):
Try the link in my earlier post. Reproduced here: https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/
1973
Death of J. R. R. Tolkien, John Ford, Bruce Lee, Eddie Rickenbacker, and the Apollo space program.
The main cause was the labor market. WWII had absorbed all the excess labor and then some (Rosie the Riveter to the rescue). When the “boys” came home, most of the working women were kicked out of the market at the same time the bantam generation born in the Great Depression were coming into the market. (A bantam generation is the opposite of a boom. They tend to be a very small cohort sandwiched between two much larger cohorts, or boom generations.) If you extend this back even further, you would see a boom generation born in the 1870’s after the War of Northern Aggression. Their coming into the labor market and glutting it caused many to delay marriage and families. Why? Couldn’t get jobs and wages were flat or dropping. So, they weren’t building families until the ‘oughts and 1910’s at the same time the bantam generation after them were starting to cause a labor shortage and wages going up again. That baby boom and bad policies led to the Great Depression, which caused another bantam generation, etc. It’s a cycle that has repeated itself for a very long time.
Another part of the cycle is the opening and closing of immigration. When those bantam generations come into the labor force, companies want labor and find ways to get it, even if it means looking outside the country.
Some notes. The measure is for wages, rather than compensation. It is an average, and results for the median are significantly different. It is for employees, so self-employment is excluded.
Why does the graph highlight 1973, rather than a little earlier — given that the correlation breaks down a few (or several? can’t tell) months prior to the dotted line?
Incidentally, and probably completely coincidentally, the U.S. officially went off of the gold standard on August 15, 1971 — 47 years ago yesterday….
Okay, extend it back further. What’s the graph look like between the Civil War and the Stock Market Crash?
Keep reading.
Interesting questions, but I think it’s reasonable to wonder if correlations and ratios are comparable over multiple shifts in the fundamental character of the American economy — agricultural, industrial, high innovation rates in core technologies, government participation in the economy pre- and post-FDR, etc.
I think you could go down a statistical rabbit hole pretty quickly.
Isn’t 1973 about the time that the 1970s inflation really started kicking in?
With the end of the Breton Woods agreement came the stock market crash of 1973 through 1974. What happens in the stock market has a tremendous effect on the economy. For one thing, the Federal Reserve always takes action, and its actions always have ripple effects that are felt all the way down to the local hardware store.
I too wonder if there was some large change in global trade, which opened up more competition of labor. I’m a car fan, so I put outsized importance to what I see in car culture, but 1973 was the time of the first “oil shortage,” and my impression is that was when Americans first considered “foreign” cars to be potentially mainstream (i.e., not niche products). So I wonder if people in many areas suddenly saw “foreign” products as not just either cheap trinkets or exotic luxuries, but started considering products produced by foreign labor for their everyday use.
I’m guessing it has to do with the rise of automation.
I’d like to see a graph of capital expenditures over the same period. I’m guessing they went up dramatically starting in the 70s.
@fullsizetabby is on to something. And it’s not going to make free traders happy.
I had never read this before. It’s from a paper by Nobel Laureate Paul Samuelson.
“…Act II, however, deals some weighty blows against economists’ oversimple complacencies about globalization. It shifts focus to a new and different kind of [offshore] technical innovation. In Act II, [offshore trade partner] progress takes place (by imitation or home ingenuity or . . . ) in good 1, in which the United States has previously had a comparative advantage. … What does Ricardo-Mill arithmetic tell us about realistic U.S. long-run effects from such outsourcings? In Act II, the new Ricardian productivities imply that, this invention abroad that gives to [offshore trade partner] some of the comparative advantage that had belonged to the United States can induce for the United States permanent lost per capita real income—an Act II loss even equal to all of Act I(a)’s 100 percent gain over autarky. And, mind well, this would not be a short run impact effect. Ceteris paribus it can be a permanent hurt.”
https://www.wilsoncenter.org/sites/default/files/SamuelsonJEP042.pdf
I’m certainly not an economist, or even a pseudo-economist, but it seems that (assuming the graph is an accurate depiction) it is a natural result of, mostly, automation of production; i.e., if one person is now doing the work that previously required two people, then the rate of production per labor unit has doubled. Isn’t that more or less what the graph shows?
How is “production” defined for the purpose of the graph? Is it actually goods produced, or is it “jobs” as in the administrative state?
I scanned the paper the graph was pulled from . Worth further reading? In some senses yes. It’s EPI Trumka/Reich boilerplate capital deepening/management capture interpretation but the data is solid and the further graphs based on “all hourly wages” are either a mollification or exacerbation of the problem depending on your point of view. Wasn’t able to spot any mention of effects of women and legal/illegal immigrants even though there are some pretty pat racial/misogynist angles that could be played with SJW virtue signalling.
There are a number of very fair WSJ pieces which follow up on this study and Larry Summers even pushed halfway back in a readily available piece online.
Can’t find anything which clearly answers “Why 1973?” I assume the underlying data if not the graph make a better case for the authors from that selected point (I’m an academic cynic).
Alan Greenspan happened. :-) That explains at least the right hand side of the chart.
Greenspan was appointed by Gerry Ford to head up the Council of Economic Advisers, from 1974 through 1977.
Federal Reserve policies in response to the end of the Breton Woods agreement were initially erratic, which created tremendous inflationary pressure on the economy.
But one also has to look at growing sophistication of OPEC and U.S. energy policies and prices in response to OPEC:
But as others have said, the second important factor was the entering of so many women into the work force. It lowered wages considerably. The change was dramatic:
Productivity is defined as net production divided by hours work (excluding managerial/supervisory workers).
I think I know the classic definition of productivity, but there is no indication of how the term is used in the graph. You can’t really have a fruitful discussion unless there is a common understanding of the parameters, can you?
Yes, the more I think about it the more I wonder if my knee-jerk take on it was (surprise) simplistic.
A sudden expansion of the workforce — the inclusion of women — might account for a stall or drop in wages, but it seems to me that, if that were the cause, we should see the correlation with growth re-established once a new labor equilibrium was reached: the two lines would again be increasing together, albeit at a lower average wage.
The fact that average hourly compensation stayed largely flat through the 80s suggests another, more systemic issue.
Here’s another rather sobering thing to think about. The wage graph is particularly flat through the 80s and 90s — this at a time when computer technology was entering the workplace and software people were coming into high demand. Software pays well, so it seems likely that there were quite a few high-wage people entering the workforce during those decades. Does that suggest that, for a significant number of workers, wages were actually decreasing, or at best completely flat, thus canceling the new high-wage group? Or are there perhaps not enough knowledge workers, as a portion of the workforce, to make a significant difference?
No idea. I do know that, as the issue seems less and less like a cultural one (e.g., women in the workforce) and more like a technical economic one, my interest flags. Still, a great thread.
1971
1972
1973
The point?
The first three years of the 1970s saw:
collapserealignment of North American sexual morality.I think we should also keep in mind that “Bad, Bad Leroy Brown” was topping the charts in 1973.
Economics is mysterious.
What happened? Computers became affordable, and reliable. Now instead of having a highly skilled machinist cut a part, I can have a low skilled, low pay, operator load a CNC machine and produce tens times as much. This type of change was just beginning in 1973 and continues to expand today.