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America’s 80:20 Divide

Faced with an increasing gap between productivity and earnings, how will Americans make up the difference?

December 7, 2006

Faced with an increasing gap between productivity and earnings, how will Americans make up the difference?

According to the U.S. Census Bureau, the real income of the typical U.S. household has been flat or has fallen in each of the past five years — the longest such stretch on record going back to the mid-1960s.

Meanwhile, productivity growth has been off the charts. In other words, the U.S. pie is growing, but many of those who've had a hand in baking it are getting smaller slices.

Policy makers, citing the truly impressive productivity trend, tirelessly tout the benefits of the new economy — yet many families feel beleaguered, as the costs of housing, health care and college grow far faster than their incomes.

And this describes only the most recent situation. The dollars chart goes back decades to show the growth in productivity and in real compensation — wages plus benefits, inflation-adjusted — of blue-collar workers in manufacturing and of non-managers in services.

Ranked by earnings, these workers represent roughly the bottom 80% of the workforce. That's important, because we're not just talking about “burger flippers” here. One can be a staff physician at a hospital and be covered in this measure, because one is not a manager.

Now, hourly compensation is the fundamental building block of living standards for working families. All the propaganda about the democratization of the stock market aside, the vast majority of non-retired families depend on earnings — not dividends.

True, half of all households hold some stock, but about two-thirds of stock market wealth is held by the top five percent of the population. The typical family's holdings are in the fives of thousands, not the tens of millions, and such families' stock holdings are mostly in retirement accounts.

The way these families get ahead is to earn more per hour or to work more hours. For decades, compensation rose in lockstep with productivity. That is, as the workforce became more productive and more efficient, living standards rose accordingly.

But starting in the mid-1970s, the compensation of workers began to diverge from their productivity, and that's pretty much been the story ever since — with one important exception.

For a few years in the latter 1990s the two grew at pretty much the same pace. Most recently, the gap has expanded to the widest on record.

Though there have been periods of real income losses, over the long term the income of the typical family has not fallen over this divergent period.

Since the mid-1970s, real median family income is up 22% — still not as high as the 80% rise in productivity, but not as bad as earnings. How have the American workers done it?

Well, it ain't rocket science. They've — we've — made up the difference by working more. Compared with the previous generation, or compared with those in most other advanced economies, we work our tails off.

The typical middle-income married-couple family spends 500 more hours per year in the paid labor market, more than three extra months of full-time work. Most of those extra hours are coming from working wives, and a good chunk of that represents progress in integrating women into the workforce.

Nonetheless, it is problematic that families are offsetting stagnant wages and income inequality by working longer.