By: Russ Kamp, CEO, Ryan ALM, Inc.

No, I am not referring to some A-lister’s divorce. 

Unfortunately, for many American workers, inflation and a lack of real wage growth is killing the “American Dream”. Recent increases in consumer inflation, no matter how you measure it, has forced the average worker to cut back on consumption. But is this really a tale of recent inflation eclipsing wages or is there something more earth shattering that has created this situation?

The answer just may be productivity. As a reminder, productivity measures how much output a worker produces per hour worked. Economists generally expect that if workers produce more value, workers should receive a corresponding increase in compensation. From 1948 to 1973, productivity and worker compensation moved nearly in lockstep. This is the era when workers benefitted from greater unionization, healthcare and retirement coverage (DB pension plans) was expanding, and as a result, median household incomes rose rapidly.

Unfortunately, something dramatic occurred during the mid-1970s that broke down this correlation. There was a “great decoupling”, in which productivity rose dramatically while median wage growth failed to keep pace. The exact numbers vary depending on methodology, but virtually every major study finds a significant gap between productivity gains and compensation/wages. As an example:

Since 1973	Increase
Productivity	+80% to +90%
Median hourly compensation	+15% to +30%
Median wages	Even less

Given this reality, who benefitted from these productivity gains?

It appears that a larger share of economic output now goes to corporate profits, shareholders, and business owners instead of workers. This is particularly important because not surprisingly stock ownership is concentrated among higher-income households. Furthermore, CEO pay increased dramatically relative to average worker pay. For instance, in the 1960s CEO pay was roughly 20–30 times worker pay. Today, a CEO’s pay can exceed 300 times worker compensation at large corporations.

The effects of globalization and technology have also impacted wage gains. American workers have been asked to increasingly compete with lower-cost foreign workers which has weakened their bargaining power in many sectors/industries. Technology has certainly increased productivity, but it has a tendency to tamp labor demand thus increasing shareholder value. Lastly, I believe that the fall in union membership from roughly 25% in the 19702 to around 6% today has had a profound impact on real wage growth, as workers generally have less collective bargaining power than in earlier decades.

Why this matters for retirement/retirees

A worker in 1965 had a pretty good chance of participating in a defined benefit pension plan, while also getting employer-paid healthcare, and possibly education support. A worker today is living with slower wage growth concurrent with being asked to fund a “retirement” through a defined contribution account with little disposable income, no investment acumen, and no crystal ball. Today’s workers own all the investment and longevity risk!

As a result, even though the economy is vastly more productive, many (most?) workers do not feel that they are sharing proportionally in that increased prosperity. Yes, the stock market may be at or near all-time highs, but that alone won’t make most Americans feel prosperous until wages truly reflect the output being produced by the average American worker.