Wages, surplus, and inequality

Posted: 25 February 2019 in Uncategorized
Tags: , , , , , ,


Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili:

Firms cannot afford a misalignment of their workers’ pay and productivity increases—the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the folks at the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

So, no, there is no necessary or automatic link between productivity and wages within the U.S. economy. There may have been such a relationship after World War II, during the so-called Golden Age of American capitalism, but not in recent decades.*

A natural question that arises is just where did the excess productivity—the extra surplus U.S. employers appropriated from their workers—go? A significant proportion, as I showed last year, went to higher corporate profits. Another large portion went to those at the very top of the wage distribution.


As is clear in the chart above, the top 1 percent of earners saw cumulative gains in annual wages of 157.3 percent between 1979 and 2017—far in excess of economy-wide productivity growth and nearly four times faster than average wage growth (40.1 percent). Over the same period, top 0.1 percent earnings grew 343.2 percent, with the latest spike reflecting the sharp increase in executive compensation.

In other words, corporate executives—on both Main Street and Wall Street—have been able to share in the extra booty captured from American workers, who were forced to have the freedom to sell their ability to work for wages that have barely increased in recent decades.

That combination of stagnant wages for most workers and the ability of those at the top to capture a large portion of the extra surplus is therefore at the root of increasing inequality in the United States.


*Even then, as I explained back in 2017:

The fact is, the supposed Golden Age of American capitalism was based on a set of institutions that allowed the boards of directors of large corporations to appropriate a growing surplus and to distribute it as they wished. At first, during the immediate postwar period, that meant growing incomes for those in the bottom 90 percent. But, even then, the mechanisms for distributing income remained in the hands of a very small group at the top. And they had both the interest and the means to stop the growth of wages, get even more surplus (from U.S. workers and, increasingly, workers around the globe), and distribute a greater share of that surplus to a tiny group at the very top of the distribution of income.

  1. antireifier says:

    A clear illustration of The Neoliberal Age of Austerity. The Trilateralists met under the chair of David Rockefeller in 1973 and said that there was an excess of democracy and people were too well educated causing expectations to be too high. In 1974, The Fraser Insitute was established in Canada as a Libertarian, so-called “think tank” funded in part by the Koch brothers (and connected to the world-wide Atlas Group established by the Koch bros). The media lapped up their plausible-sounding spin thereby manufacturing the consent of people to adopt neoliberal notions and accept lower expectations. It would be interesting to track the denigrating articles about politicians, civil servants, alleged government waste from 1946 to the present to see if there was an uptick in the 70s and a qualitative shift in their content. A quantitative illustration of Chomsky’s Manufacturing Consent. Is the growing power of the 1% correlated with the media articles designed to shape a negative view of government and the data in this chart of who benefited from productivity gains. As Mark Blyth called it, the Trumpet effect.

    The sixth extinction now under way demands we abandon the GDP as a measure of economic progress and adopt a new measure such as the GPI – Genuine Progress Indicator. This article is an illustration of one strategy used to lower expectations and the GDP is used to reassure investors that their expectations for never ending growth are correct. The power that these changes and the resulting inequality gave to the 1% is the greatest argument for marginal tax rates to be restored to the 90% range. Without the associated tax breaks for the wealthy and increased number of mainstream media columns denigrating politicians and civil servants (see James McGill Buchanan) that accompanied this loss in the worker share of the growth in productivity, the economic power of the Atlas Group and other Libertarian think tanks would have been greatly diminished. Their extreme wealth allows them to distort our societies’ values by bribing politicians, controlling the media spin and buying University departments while laughing all the way to the banks they own. The chart also illustrates the socialist views that worker value added is being appropriated by the owners which accounts in part for the success of AOC’s Green New Deal in the mind of the public.

  2. […] **The missing piece in the story told by Price and Edwards has to do with the mechanism of the massive transfer from the bottom 90 percent to those at the top. I have tried to fill in that missing piece, most recently in 2019 (e.g., here and here). […]

  3. […] **The missing piece in the story told by Price and Edwards has to do with the mechanism of the massive transfer from the bottom 90 percent to those at the top. I have tried to fill in that missing piece, most recently in 2019 (e.g., here and here). […]

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