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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
Sorry, I can’t catch up with the comments right now. But, isn’t there another way to read that chart? Not so much as wage flattening, but as increased productivity per worker? Which would seem to indicate better automation and the advent of the tech age has allowed each worker to produce more than previously.
Maybe I’m oversimplifying, but I’m a simple person when it comes to economics.
I’m not sure why we assume that wages are tied to productivity if workers can produce more with the same effort. Who wrote that into economic law?
Better automation is a one way to get improved productivity. But worker productivity should be reflected in worker compensation. Said the other way, the only way to raise wages is to raise productivity.
It seems to me that automation is the most likely culprit. But that’s just a secondary effect of the cost of employing people
As a manufacturing engineer, my job was to get rid of as many employees as possible. Any worker, no matter how much they were paid, was a big cost because of medical insurance costs, social security costs, workmans’ compensation, etc. Machines don’t have those liabilities.
So, productivity soared because that was our entire focus. If the cost to employ people went down, then the productivity would go down as well. Why buy a $400,000 machine that will work for ten years if you can hire someone at a cost of less than $40k per year? The truth is that few employees at large companies will cost less than $40k per year, even at minimum wage. Getting rid of employees was a no-brainer.
Because…? If the worker is putting in less work per unit (because of automation/technology) but is producing more units, why should his compensation increase? And, does compensation on that chart include all the “benefits” of employment, like health insurance and social security?
All,
Perhaps someone has already mentioned this, but there is a difference between wages and total compensation. If in compensation we include medical benefits, company contributions to 401(k), additional personal time off, etc. does the graph change?
Frank
And I think we also have to consider it on a house hold basis. Even if wages stay flat, if you have two earners than house hold income doubles (assuming both earth the same median wage). At least for intact families. So then the problem isn’t lack of wage growth for many people it is family break up.
The footnote to the graphic asserts that ‘comprnsation’ Includes benefits.
But did that start as early as ‘73? 10-15 years later absolutely. But I’ve looked for some reference to this happening that early without success
There is a bigger problem with using household income, namely household size is quite variable, and is shrinking over time. It’s to the point where Thomas Sowell once said that if the analysis relies on household income, it isn’t serious.
What did wage growth look like between 1900 and 1940? Was it at the same pace as what it was after WWII? What about before 1900 when immigration was going strong? Were wages then also flat?
Lastly what do we think the mechanism would be? Labor competition? If so having more native born workers would have the same effect as immigrants. A person is a person. So maybe the answer to the wage stagnation is a glut of workers in the form of Baby Boomers. Who would all be starting work in the 70’s and throughout the 80’s. You can then say that was exacerbated by increased immigration, and women entering the labor force as well. Between the three things it would seem Boomers and ladies entering work would swamp the effect of immigrants as they both dwarf their numbers substantially. But on the other hand it is easier to blame immigrants. So politically more can be done with that than stopping women from working and getting rid of Baby Boomers. But then the answer to the problem seems obvious. Do nothing. Boomers will leave the job market over the next few years, and women have already been factored in.
Very good points. It should also be noted that the price of high end technology has also decreased. So even without increased monetary compensation access to goods like “entertainment” ie. TV, movies, games, etc. is now greater and cheaper than ever in real dollars. A VCR used to be several hundred dollars in the 70s and all you could do was tape lousy TV shows with all the commercials. Now you have orders of magnitude more entertainment options for access at will for nominal fees of internet connection, on TVs that that 5 times larger, with better color and resolution than anything in the 70’s. We might not get payed more but we can buy better things, and that is form of wealth, the most important form of wealth.
Been happening on a large scale for a couple hundred years now.
Productivity per unit of labor went up but hours each employee worked went down on the average. Perhaps this is part of it.
This is what I’m getting at. Does the worker merit increased pay because of increased efficiency due to automation/tech improvements? Or do we have to start compensating computers and robots?
The explanations about women entering the work force, or baby boomers, etc, or even the introduction of automation technology don’t make sense because there is a very clear, sudden inflection point in the graph, and all those explanations would be much more gradual.
A sudden change implies an event.
Two come to mind that fit that time period:
1: the oil shock
2: the closing of the gold window
And a third possibility that someone suggested: a change in the method for calculating the metric.
The worker operating and building the new machines and robots, are getting the pay increases. The production workers using old technology aren’t, which is what is being shown in the original graph. The more efficient capital and labor are seeing increased compensation.
It also mentions that it is only counting non-management wages, so no salaried positions. So it is not really representative for the economy.
Yup. An important point for those who emphasise the economy more than the people.
Who emphasizes the economy more than the people?
End of gold standard 1971
I wonder what “increased productivity” means to this graph. I’ve worked long enough in manufacturing to know that the boss gets his charts to look however he wants them to look. So, who made the chart, what do they claim they used as a source, and what are alternate entities saying?
Dollar left the gold standard in 1971. Been sinking ever since.
I’ve read that if the minimum wage had been indexed to inflation it would be over $22/hr. I think the entrance of women into the workforce and the collapse of the social paradigm of the male worker being the family breadwinner decoupled wages from the previous unstated premises.
In high school in the late seventies minimum wage was less than three dollars. That is not $22 today.
I was making $2.65 in 1978 at McDonalds.
In 1969, as a college student while a war was going on, I was making $3.25/hour at a part-time job in a meat processing plant (25-30 hrs/week). But I had to pay union dues, which cut into that pay substantially. That summer I was making about $2.75/hr as a construction laborer (no union dues, and living with Mom and Dad). Even as late as 1975 one could support a family and make house payments with a wage like that, though in a very modest style well below the median. The great inflation was already well under way by then, and things were changing rapidly.
I believe the $22 figure was if the minimum wage had been indexed from it’s inception. The chart shows something dramatically shifted at the 1973 mark. Indexing could have kept wages in line with productivity, but the social revolutions of the 60s/70s changed the trajectory.
Union wages are often tied to minimum wage. That is, when minimum wage goes up, their wages go up as well. I’m convinced that’s the real reason politicians are always pushing for increasing minimum wage.