The Mythological Machinations of The Compensation/Productivity Gap

According to the BLS’s Labor Productivity and Costs series, since 1947, Real Compensation Per Hour is up 212%, while Real Output Per Hour is up almost 392%.

You know this chart. From 1947 through 1970, productivity and real compensation ran neck and neck. Then, according to the commonly accepted narrative, supply side policies enriched corporations and the very wealthy, suppressed labour bargaining power, and crushed their wage growth relative to the growth in real hourly output.

If you were to believe this narrative, corporations have captured an additional 180% of the surplus value of productivity growth, instead of it accruing to labour. What is right: individual members of the labour force have not received real hourly compensation growth at the same rate as productivity growth. But there is a massive misunderstanding around where this surplus value has flowed to.

The most immediate problem with this thesis is that the fraction that profits represent of GDP is almost identical, between now and 1947.

Even if you pick the 1970 low of 4.6%, the additional 4.3% in profit level equates to about $349 billion. That might sound like a lot, but that means that if all of that profit level was fed back to workers, it’d only increase wages by 4.3% — a far cry from the 180% gap.

By taking the ratio between Real Hourly Output and Real Hourly Compensation, we find that the Compensation/Productivity Gap actually begins in the early 1960s, accelerating particularly quickly in the middle of decade.

We already know that this uncompensated productivity didn’t accrue to the corporate sector. Where did it go? Did the government confiscate it? Did it flow out the foreign sector?

It turns out that all of that surplus productivity growth somehow stayed right within the household sector. How did that happen?

The answer is social programmes. After being introduced in 1935, the laws surrounding Social Security have been amended a number of times, with major expansions in 1954, 1956, 1961, 1962, 1965, and 1972. Medicare and Medicaid were added in 1965, and expanded many times.

We in fact find that the surplus productivity growth that did not flow to the corporate sector, or even to the very rich, but in fact flowed to the very poor.

Indeed, the gap between hourly output and earnings grows at the same pace as Real Government Social Payments:

The next time someone pulls the chart showing the gap between real hourly compensation and real hourly output, you will know why this gap exists. Practically everyone gets it wrong.