Mar 18, 2011

The Great Decoupling

Peter Drucker believed that increasing the productivity of knowledge workers (and service workers) is the most crucial challenge of the 21st century, if our living standards are to keep climbing.

The reason: “People can only get paid in accordance with their productivity,” Drucker declared in his 1993 book Post-Capitalist Society. “Their productivity creates the pool of wealth from which wages and salaries are then paid.”

But what happens if productivity rises and wages don’t follow suit? That, a new study notes, is precisely the situation in which we find ourselves today—or at least most people (save for the very wealthiest among us) find themselves.

Springing off the highly charged battle over the bargaining power of government workers in states such as Wisconsin, the report from the Economic Policy Institute asserts: “Recent debates about whether public- or private-sector workers earn more have obscured a larger truth: all workers have suffered from decades of stagnating wages despite large gains in productivity. The current public discussion illogically pits state and local government employees against private workers, when both groups have failed to sufficiently benefit from the economic fruits of their labors.”

The bottom line, according to the analysis: U.S. productivity swelled by 62.5% from 1989 to 2010, far more than real hourly wages for both private-sector and state/local government workers, which grew 12% over the same period.

This pattern, it should be noted, is a sharp break from what happened in the U.S. historically. From 1947 through 1973, productivity and real hourly compensation rose pretty much in lockstep (as the chart below illustrates).

Economists have explored any number of possible explanations for this decoupling of higher productivity and higher income, including changes in tax policy, immigration, education, technology, the power of unions and international trade. But there is no agreement on a definitive cause.

Whatever the reason, the consequences are painfully real. Ezra Klein points out in the latest issue of Democracy that “if median household incomes had risen between 1974 and 2008 by as much as they rose between 1949 and 1973, the median family would be making well over $100,000 a year by now.” (Instead that figure is stuck at about $65,000.)

Drucker, for his part, all but assumed that higher productivity would automatically generate higher wages. Nevertheless, in his book Managing in Turbulent Times (certainly an apt name for the era in which we now find ourselves), there is the acknowledgement that “low wages in the presence of productivity harm economy and community.”

What do you think: Why does increasing productivity no longer seem to lift most people’s wages—and what, if anything, can be done about it?

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