Are American Workers’ Wages Really Lagging Productivity?

It’s become conventional wisdom in some circles that sometime in the 1970s, the link between pay and productivity broke. Workers’ productivity kept rising, but their inflation-adjusted pay did not. “The divergence between the two trends suggests that there may be forces suppressing the pay of workers relative to their productivity,” President Biden’s Council of Economic Advisers wrote in 2022.

The reality is more complicated. There is a problem in the labor market — a big one — but it’s not about employers winning against workers. It’s more about some workers winning big while most don’t. In short, it’s a problem of inequality, not subjugation by management.

I’m building this newsletter on the following two charts, which appear to contradict each another. The first, from the center-left Economic Policy Institute, shows a huge gap opening between pay growth and productivity growth. The second, from the center-right American Enterprise Institute, shows no such gap.

Both charts are correct in the sense that they are accurately plotting real data. The main source of the discrepancy is that they define pay and productivity differently, in ways that create very different impressions of economic reality. That, anyway, is what I figured out after speaking with scholars from both organizations: Josh Bivens, the chief economist at the Economic Policy Institute, and Scott Winship, a senior fellow at the American Enterprise Institute, who has a new report, “Understanding Trends in Worker Pay Over the Past Fifty Years.”