What happened in 1971? Sure, Elon was born, Nixon was president and Jennifer was the most popular name. But a puzzling economic phenomenon occurred that still affects our weekly paycheck.
For decades, productivity and wage growth had moved in unison. For every 10% increase in productivity, wages would rise by 10%. Work hard, do more, get paid for it. Just like that it carried on, and all was fine, and good everyone thought.
And then that stopped. Wages and productivity* diverged and the gap shows no signs of slowing down. From 1950 to 2015, productivity grew 259% while wages only grew 129%. A more startling stat? Since 1979, compensation is only up 18% compared to a 72% bump in output. Here’s one of the multiple graphs that shows the exact same thing.
How is productivity measured? It’s simply the GDP produced per hour of work in a country.
Sure, it makes sense that productivity would start to outpace wage growth. Workers are now plugged into the priceless resource that is the internet. Processes have had decades to be optimised. Machines mean tasks are less labour intensive and quicker. The economy is booming but the profits are sitting at the top. Countries like the United States, Australia and Japan are some of the worst hit. Countries like New Zealand are in a better position.
So why did this happen and why did the split specifically occur?
Wage stagnation is caused by a few things. It’s a symptom of a failure for revenues to “trickle down”. The Economic Policy Institute argues that policy has enabled the excess returns of increased productivity delivers to sit on balance sheets or executive bonuses rather than make their way to workers. For example, low minimum wages levels.
Linked to this, globalisation has created a larger, more homogenous worker pool. Employers have more bargaining power as they can outsource work to any part of the world. Moreover, lower wages occurred as employers started to offer non-cash benefits like health insurance or some bonuses which aren’t measured.
Now, to answer the final question. Why did this occur so suddenly in the early 1970s?
Well, the Bretton Woods system ended of course. Let’s look back in time with an economic history lesson. The Bretton Woods agreement allowed for US$1 to be converted to exactly US$1 of gold. It was a modified form of the gold standard. Once it was abolished by Nixon, fiat currency came into existence. In a simplified form, this allowed for countries around the world to have greater control of their exchange rates, make their goods and labour more competitive and ultimately lead to rampant globalisation: one of the potential causes of the wage/productivity divergence.