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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
Also, the effects of the 1965 Immigration And Nationality Act didn’t really start to kick in until the mid 1970s, at precisely the same moment that native-born North Americans greatly curtailed their own reproduction after Eisenstadt v. Baird (1972) and Roe v. Wade (1973) :
I think that’s one of the things I’m saying, and is also part of the fat and sloppy monopoly power gave rise to. US automakers kept producing gas guzzlers and hot cars because American consumers wanted them ( and could be convinced to want them) so they got to sell more automobile per buyer by making big expensive cars and made little effort to make fuel efficient autos. The Edsel should have been a bit of a wake up call but wasn’t. GM and Ford made them in Europe but weren’t prepared for the Japanese onslaught. The Japanese kept trying to get a foot in our market but their cars just weren’t good at first, like Korean cars at first but when oil prices went from a little over a dollar a barrel to thirty, consumers bought enough small cars for the Japanese to work out all the engineering problems. The Japanese were and remain fanatical about quality and now their cars are just better. Our trucks remain better because you can’t get a trucker or trucking company to buy something just because it’s cool or well advertised, they have to actually be superior and US trucks (Im told) are.
Exactly, everything was going up together in the post war world until it wasn’t. There was multicorrelarity not correlation. Our post war monopolies began to give way to world recuperation and change and we didn’t and still aren’t.
The abrupt change in the hourly compensation could be due to a change in the way the number was calculated.
Thinking about it. Naw, I think I’ll go with @skipsul and comment # 57 . . .
Inflation seems to have been a centuries-old mechanism for making the rich richer and the poor poorer. So I’ll put a modest amount of money on that square. I won’t risk my retirement savings on it, though.
After all my work searching three different Wikipedia pages?!
You monster.
This is a good and interesting discussion. I have a few additional ideas, though without the time to try to find evidence, so they are just hypotheses.
(1) Part of the productivity increase pre-1970s may have been from increased education, especially college education, made more effective by an educational system that did a better job of identifying and properly educating people of higher cognitive ability. You could call this the Murray-Herrnstein hypothesis.
(2) Part of the stark result of the chart may be the result of poor inflation measures, especially when applied over long periods of time. The CPI, for example, systematically overstates inflation. This is a technical issue with at least two components: (a) whether to use base year or current year quantities in computing the measure, and (b) the difficulties presented by changing product quality (for example, a TV in 1980 is very different from a TV today). This does not explain the divergence of the graph, because I think that both lines are inflation-adjusted, but if true inflation was lower than this graph indicates, the bottom line (compensation) would not look so flat.
(3) Part of the lower growth in compensation could be due to the changing nature of technological change. People tend to think that higher wages are driven by higher average productivity, but as a matter of economics, this is not correct. Wages are driven by marginal productivity, and it is possible for technological change to increase or decrease the marginal productivity of labor.
1793 Eli Whitney (1765–1825) applied for a patent of his cotton gin on October 28, 1793; the patent was granted on March 14, 1794, but was not validated until 1807, or you could say it was when the first field was plowed and planted, around 10,00/ BC I think it was. Incomes have generally increased since then but only took off after mechanization got rolling.
I’ll take a stab at it.
Automation in industry plus G.I. Bill plus women and minorities entering universities due to federal investment in state related colleges and community colleges moved people from industrial jobs to student status making less money with no loss in real production. The jobs these students worked were service sector related. That sector exploded in growth and people just liked those jobs more than factory jobs and decided to stay in that career track.
Including in ways not generally recognized. In the 40’s tires were assembled on a steel drum rotated by hand crank and each man produced about 20-25 per shift. By 2000 the machinery and process was motorized and automated to the extent that each worker produced 100+ per shift. Process before and after the assembly were also automated to varying degrees . All that translates to increased productivity per hour worked but not necessarily to increased wages. The job became less physically demanding so more desirable, meaning less wage pressure to recruit willing workers. Automation doesn’t just mean robots . Many other factors contributed to wage stagnation, of course, labor supply, container shipping, and so on.
Not to mention the positive effects of the G.I. Bill. Educating the hard-working survivors of World War II was a brilliant move. After that generation was through college, the next batch of students didn’t have nearly as much grit.
Haha! No, this was a great post . . .
Hey, me too. I don’t about you, but my wages have gone up every year since.
Anyway, your graph is wrong. According to Princess Clinton, those abortions added trillions to the economy.
Wages that go up? Would be nice for a change.
I actually looked this up recently, this article has a lot of the answers.
https://www.heritage.org/jobs-and-labor/report/productivity-and-compensation-growing-together
I had the good sense to stay in school for another four years.
This is one of the (many) things I’m unclear on. When did computing really take hold in the workplace? 1973 we’d still be talking mainframes, no? The first PCs were were later … mid to late 70’s.
Partly. The Eponymous Pony is describing effects that didn’t happen until later. The thing about automation though, it’s progressive. A 1980 computer attached to an industrial machine might have doubled it’s efficiency. A 1990 computer might have doubled it again because you can give it more complex and refined instructions.
Actually, I’d sort of expect there to be a downturn in the graph with the invention of PowerPoint.
What is ‘productivity’ in this graph? Is it labor productivity, or total-factor productivity? (the latter metric measures the productivity of capital as well as of labor)
There is a footnote to the graphic which asserts that the ‘compensation’ numbers include benefits. So that negates Heritage’s first explanation. Benefits are in there. Secondly. Speaking of apples v oranges, Heritage’s compensation numbers are nominal the graphic above is real – adjusted for inflation.
the footnote:
Note: Data are for compensation (wages and benefits) of production/nonsupervisory workers in the private sector and net productivity of the total economy. “Net productivity” is the growth of output of goods and services less depreciation per hour worked.
I agree with Heritage that productivity is notoriously hard to measure. So there is room to quibble about the productivity numbers.
Per the footnote I assume total factor productivity.
Note: Data are for compensation (wages and benefits) of production/nonsupervisory workers in the private sector and net productivity of the total economy. “Net productivity” is the growth of output of goods and services less depreciation per hour worked.
Also, per the title, I’ll offer one more explanation.
Hillary Clinton.
I believe they said that the inflation that’s being used to get the wide difference is the wrong inflation. It’s not the purchasing power inflation that’s important, it’s the inflation that businesses actually experience, which is apparently much less than retail inflation.
Sounds like most of this is causes by the technology that businesses use now, as well as something to do with import prices.
So, in a way, it may be that “what happened” was computers.
I think it all comes down to a measurement problem. Compensation is more that wages. As some have pointed out, it is also health benefits, which rose dramatically since the 70’s. Retirement plans also became more generous. And the combination also came into being; retiree health benefits. All of that stuff is possible, although challenging, to measure.
Then there is the stuff that is impossible to measure. Workplace safety has improved. Injuries, death, and disease (think black lung) in manufacturing were common. As those declined, the need for wage compensation was reduced. With the increase in office jobs there were other perks: air conditioning, coffee stations, ergonomics, flexible hours, … Even the location of work (suburbia) has value.
What has happened in the last 50 years is that compensation went from “manly” (cash for dangerous work) to “womanly” (non-cash benefits for safer work).
The other end of the measurement problem is with productivity. Now, our economy is dominated by healthcare and financial services. Productivity measurements are impossible there. Manufacturing is widgets/hour, but healthcare? There is no health unit of measure. Would you pay 1980 prices for 1980 era health care these days? Financial services is even stranger to measure production. What units are used to value currency hedging by computerized trading? It is likely that productivity growth, which has been remarkably consistent at 1.5%/year since the 1700’s is not really that consistent as we transition to a post-industrial mix.
I suspect that the chart is made from a mashup of data. They appear to be comparing productivity gains from the entire economy with wage gains from a “typical” private sector worker.
If I’m reading this right, what they are saying is that manufacturing workers salaries and benefits have not risen as fast as the growth in productivity of the entire US economy since 1973. There are a lot of reasons for that, but the problem with the chart seems to be comparing the productivity growth of the entire economy with wage and benefit growth for a shrinking sector of the economy.
Intel with the help of Ted Hoff introduced the first microprocessor, the Intel 4004 on November 15, 1971. The 4004 had 2,300 transistors, performed 60,000 operations per second (OPS), addressed 640 bytes of memory, and cost $200.00.
I apologize in advance for trivializing this discussion, which merits serious consideration but, what can be traced back to 1973 that would cause this divergence?
The same thing that can be traced back to 1973 which signals the point where civilization began its precipitous decline into chaos (i.e. the end of civilization as we know it). That scourge has a name and its name is DISCO!
Again, sorry!
No need to apologize. The truth is the truth.