The Wage-Productivity gap is an ongoing phenomenon of almost 50 years with no reversal or end in sight.
Understanding the root cause of this gap turns out to be tricky to grasp properly because there are so many factors at play. Factors like general inflation, government policy, types of work performed, ways of measuring productivity, the value of non-monetary job benefits and perks all impact and warp the analysis plus they are constantly changing.
Not to mention everyone THINKS they should be getting higher wages for the work they put in each day.
To understand the idea better, its best to first define a few concepts:
Wages refer to all income and compensation made to employees for their physical work, and/or mental work. This means employer contributions to retirement, healthcare and PTO are all included as part of wages.
Productivity is calculated as a ratio of gross domestic product per hour worked, and is a measure of output per unit of input
Why did the gap emerge
Most sources and textbooks point to at least 3 reasons for the gap emerging (and many other more partisan examples can be cited as well)
1)Technological Change
New technologies and the type of jobs that arose with it caused a shift in the ratio of productivity to wages along multiple dimensions including educational requirements, automation, and relative labor availability.
2)Globalization Trends
The globalization movements, which started post WW2, really gained momentum by the 1970s. An infusion of new workers from emerging markets like China arrived on the scene depressing wages but still maintaining a reasonable productivity level due to lower trade barriers and rebuilt infrastructure.
3)Calculation Metrics
Recall Productivity is calculated as a ratio of gross domestic product (GDP) per hour worked. A measure of output per unit of input. Ask any economics professor after they’ve had a few drinks and you’ll learn their real thoughts on the shortcomings of GDP calculations and even if working “per hour” makes sense anymore for a knowledge worker with a smart phone tied to their hip.
Closing the Gap
So if you’re a worker then what to do? Unless technology suddenly stops moving forward or corporations suddenly focus on generosity over profitability, a thumb needs to be pressed on the scale to tip the imbalance and counteract the widening gap. Some options -
We’d probably need to institute policies that firmly re-connects pay and productivity. Maybe new labor laws. Maybe a tax. Maybe a UBI. Maybe better negotiations via unions. Pick your
poisonantidote.
Another possibility is do nothing. Let the opposite effects of de-globalization, which are getting firmly into gear these days, close out the gap along with other market forces.
Unfortunately, the first option does not seem likely in the near future given the state of politics, and the second option would take decades if it works at all.
So, if the productivity-wage gap is not going to close, how best can workers best cope with the gap or create new ways of working to circumvent the gap? That’s for next week.
Interested in being on the Trader Dads Podcast in 2024? Shoot me an email! I’d love to have subscribers on to sit for a discussion
TRADERDADS MAILBAG
Thoughts? Questions? Comments?
Reach out! Maybe I’ll do a full post on the topic or as a Q&A
traderdads@substack.com
