Contributor Post Created with Sketch. America’s Pre-Pandemic Economy Demonstrated the Power of Productivity-Driven Market Capitalism


For believers in “late capitalism” — the idea that we’ve reached the terminal phase of the planet’s dominant socio-economic system — the new Census Bureau numbers should have been unsettling. Data for 2019 show median US income rose nearly 7 percent to $68,703. “Rising employment and broad-based wage increases in 2019 helped drive that uptick” is how officials explain the increase, according to The Washington Post.

Of course, maybe the gloomers and doomers can take some bizarre comfort in the possibility that the numbers were distorted to some degree by data collection issues related to the pandemic. Even setting aside these Census numbers, there is plenty of reason that “late” makes for a poor choice of adjective when talking about American market capitalism. For starters, the story of wage growth in 2018 and 2019 is that wages were rising at a decent clip given so-so productivity growth. And that’s for workers in the top, middle, and bottom third. And that’s accounting for inflation. And that’s even separating out the minimum wage. You can mostly thank a long economic expansion.

Then again, wages have been rising for a long time, although you may have heard differently. Here’s the reality in all its nuanced splendor: The average real wages for production and nonsupervisory employees rose about by 5 percent from the early 1970s through 2018. So stagnation.

But many economists think adjusting wages using the consumer price index means overstating inflation. Using a widely accepted alternative, the personal consumption price index, real wages show a 21 percent gain from 1973 through 2018. But that’s not all. Poor wage performance in the 1970s and 1980s has been followed by much stronger growth since. As my AEI colleague Michael Strain calculates in his 2020 book, The American Dream Is Not Dead, “Over the past three decades, wages for typical workers have grown by 20 percent using the CPI. And using the PCE—the better measure of inflation—finds a one-third increase in wages.”

So as it turns out, late capitalism has been better than capitalism that was a bit earlier. But it could have been even better had productivity growth been stronger. Again, although you may have heard otherwise, pay and productivity remain strongly linked so that workers do continue to enjoy the fruits of their labors.

In a 2018 analysis looking at the period from 1975 through 2015, economists Anna Stansbury and Lawrence Summers find that a percentage-point increase in productivity growth predicts a three-quarter point increase in average and median compensation growth, and a half-point increase in compensation growth for nonsupervisory employees. They conclude: “Assuming our estimated relationship between compensation and productivity holds, if productivity growth had been as fast over 1973-2016 as it was over 1949-1973, median and mean compensation would have been around 41% higher in 2016, holding other factors constant.”

I write a lot about productivity growth on this blog, and that’s one reason why. Again, Stansbury and Summers: “This suggests that the potential effect of raising productivity growth on the average American’s pay may be as great as the effect of policies to reverse trends in income inequality – and that a continued productivity slowdown should be a major concern for those hoping for increases in real compensation for middle income workers.” So faster productivity growth, please.

Published in Economics
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  1. DonG (skeptic) Coolidge

    But folks in the middle are hit very hard by college and healthcare inflation. And lots of thinks like cars are much better quality than before, but lots of the safety improvements are mandated and those have real costs. I am sure the same happens with housing and energy efficient mandates. I was looking a manufacturing productivity and average hourly wages in manufacturing and wages have grown at half of rate of productivity. Maybe people feel less prosperous, when they are more productive (some of that working harder) and pay is about the same.


    Is it time to revisit that article on how cities and urban density are the future?

    • #1
    • September 16, 2020, at 6:25 PM PDT
    • 1 like