“The data series and methods we use to construct our graph of the growing gap between productivity and typical worker pay best capture how income generated in an average hour of work in the U.S. economy has not trickled down to raise hourly pay for typical workers.”
I researched this topic, because of a graph on my Facebook page. Why did hourly wages stop rising around 1979? It turns out, Income Inequality is caused by income inequality. see below for support. See below for support.
“There are three important “wedges,” or factors, between net productivity growth and the paychecks of typical American workers, paychecks that provide the foundation for their standards of living. As shown in Figure B, average hourly compensation—which includes the pay of CEOs and day laborers alike—grew just 42.5 percent from 1973 to 2014, lagging far behind the net productivity growth of 72.2 percent. In short, workers, on average, have not seen their pay keep up with productivity. This partly reflects the first wedge: an overall shift in how much of the income in the economy is received by workers in wages and benefits, and how much is received by owners of capital. As shown below (in Figure C), the share going to workers decreased, especially after 2000. We sometimes refer to this as the “loss in labor’s share of income” wedge.
The second wedge, shown in the gap between the bottom two lines in Figure B, is the growing inequality of compensation, reflected in the fact that the hourly compensation of the median worker grew just 8.7 percent, far less than average worker compensation. Most of the growth in median hourly compensation occurred in the short period of strong recovery in the mid- to late 1990s; excluding 1995–2000, median hourly compensation grew just 2.6 percent between 1973 and 2014.
A third wedge important to examine but not visible in Figure B is the “terms-of-trade” wedge, which concerns the faster price growth of things workers buy relative to the price of what they produce. This wedge is due to the fact that the output measure used to compute productivity and net productivity is converted to real, or constant (inflation-adjusted), dollars based on the components of national output (GDP), while the compensation measures are converted to real, or constant, dollars based on measures of price change in what consumers purchase. Prices for national output have grown more slowly than prices for consumer purchases. Therefore, the same growth in nominal, or current dollar, wages and output yields faster growth in real (inflation-adjusted) output (which is adjusted for changes in the prices of investment goods, exports, and consumer purchases) than in real wages (which is adjusted for changes in consumer purchases only). That is, workers have suffered worsening terms of trade, in which the prices of things they buy (i.e., consumer goods and services) have risen faster than the prices of items they produce (consumer goods but also capital goods). Thus, if workers consumed investment goods such as machine tools as well as groceries, their real wage growth would have been better and more in line with productivity growth. We sometimes refer to this terms-of-trade wedge as the difference between “consumer” and “producer” price trends.”