The Great Decoupling

Posted on Mar 18, 2011 | 10 Comments

Peter Drucker believed that increasing the productivity of knowledge workers (and service workers) is the most crucial challenge of the 21st century, if our living standards are to keep climbing.

The reason: “People can only get paid in accordance with their productivity,” Drucker declared in his 1993 book Post-Capitalist Society. “Their productivity creates the pool of wealth from which wages and salaries are then paid.”

But what happens if productivity rises and wages don’t follow suit? That, a new study notes, is precisely the situation in which we find ourselves today—or at least most people (save for the very wealthiest among us) find themselves.

Springing off the highly charged battle over the bargaining power of government workers in states such as Wisconsin, the report from the Economic Policy Institute asserts: “Recent debates about whether public- or private-sector workers earn more have obscured a larger truth: all workers have suffered from decades of stagnating wages despite large gains in productivity. The current public discussion illogically pits state and local government employees against private workers, when both groups have failed to sufficiently benefit from the economic fruits of their labors.”

The bottom line, according to the analysis: U.S. productivity swelled by 62.5% from 1989 to 2010, far more than real hourly wages for both private-sector and state/local government workers, which grew 12% over the same period.

This pattern, it should be noted, is a sharp break from what happened in the U.S. historically. From 1947 through 1973, productivity and real hourly compensation rose pretty much in lockstep (as the chart below illustrates).

Economists have explored any number of possible explanations for this decoupling of higher productivity and higher income, including changes in tax policy, immigration, education, technology, the power of unions and international trade. But there is no agreement on a definitive cause.

Whatever the reason, the consequences are painfully real. Ezra Klein points out in the latest issue of Democracy that “if median household incomes had risen between 1974 and 2008 by as much as they rose between 1949 and 1973, the median family would be making well over $100,000 a year by now.” (Instead that figure is stuck at about $65,000.)

Drucker, for his part, all but assumed that higher productivity would automatically generate higher wages. Nevertheless, in his book Managing in Turbulent Times (certainly an apt name for the era in which we now find ourselves), there is the acknowledgement that “low wages in the presence of productivity harm economy and community.”

What do you think: Why does increasing productivity no longer seem to lift most people’s wages—and what, if anything, can be done about it?


  1. Jeffrey Smyth
    March 18, 2011

    The executives of the me-me generation certainly lived up to their billing!

  2. Bob Jack
    March 18, 2011

    Today, the workforce is vastly oversupplied in many markets. This allows many businesses to demand and extract the most out of existing employees. The result is higher gains in output per hour without increasing wages. The marginal revenue of each hour worked therefore is contributed almost entirely to profit. To say it another way,wages are not increased in relationship to the increases in marginal revenue as production increases. In summary, the labor pools of too many labor disciplines are inflated relative to demand, thereby forcing labor to take less than its marginal contributions to revenue thereby allowing employers to retain the marginal revenue gains which are contributed by labor.

  3. Michael Heilpern
    March 18, 2011

    As a young man in the late 60s, I read Bucky Fuller’s prediction, based on early computer modeling, that within 50 years productivity will have increased to the extent that the average person would only need to work 4 hours per day — the rest of their time could be devoted to personal enrichment or community service. Fuller was a visionary, but also naive. Why would top management and major stockholders choose to share gains in productivity with workers — either by increasing wages or reducing the work week?

    The postwar gains that Ezra Klein writes about occurred during an era marked by widespread unionization and a relative absence of a highly skilled global labor market. I have pondered this question for some time and, so far, have concluded that the only way to reverse the increasing wealth gap in this country would be through reform of the tax system (raising marginal tax rates at the very high end) and increasing the social safety net. Neither idea seems to stand a snowball’s chance in hell in the current political season!

  4. Craig Lazzareschi
    March 18, 2011

    Past increases in the labor force will not continue on exponentially. It seems to me that the primary cause of the labor force increase between 1973 — ? has been the entry of women and immigrants into the workforce. Information technology has also helped to increase the number of workers who work virtually, with ease. Productivity will, hopefully, continue to increase and as it does, eventually absorb “excess” labor, thus reaching relative productivity/labor equilibrium.

  5. Donald Tilley
    March 18, 2011

    We can only hope that Craig’s prediction holds true — that increasing productivity may eventually absorb “excess” labor, thus reaching relative productivity/labor equilibrium. Unless and until this happens, I’m afraid that the standard of workers here in the United States will be inexorably drawn down to the level of the third world, even as standards of living in the third world continue to improve. Thank you, Mr. Bush (both first and second) for your stellar industrial policies (or lack thereof) that in large measure have helped to bring us to this sad state of affairs.

  6. Matthew Kirk
    March 18, 2011

    Mr Heilpern touches on an interesting point regarding the worldwide labour market. US productivity increases in the 60′s and 70′s appear to have a direct impact on US wages whereas perhaps they now impact on global wages. Increasing US productivity would then result in raising wages globally, but the effect will be greatly diluted. If one also considers the increasingly liquid nature of labour, with many service industries being entirely independent of national boundaries, then one could argue that productivity gains in, say, the US, could actually generate wage gains in a range of countries across Asia; are we actually talking about ‘The Great Coupling’?

  7. Maverick18
    March 19, 2011

    Productivity will only track with wages and saleries under full employment. Otherwise, any increase in labor efficiency will just result in less demand for labor. A big change effecting knowledge workers during the period 1989-2010 has been the universal adoption of computers in the work place. There are no longer any knowledge jobs that do not require computer literacy, and knowledge worker efficiency is aided substantially by computer proficiency. Comparing even small businesses of today with small business prior to the Clinton administration, they are likely to have less workers performing administrative tasks, but one of the administrative positions may be an IT specialist to facilitate the productivity of administrative work. Peter’s statement shold have been, “People can only get paid in accordance with their MARGINAL productivity.” First, recognize that goods and services are produced based on a particular function of labor and capital. Second, if based on the particular association of labor and capital employed, an extra labor hour has no value, there is no reason to pay for it. What US labor statistics really show is that for more than 20 years we have been allowing manufacturing jobs as well as knowledge jobs of all sorts to migrate out of the country, particularly to Asia. In doing so, we have created an underclass of the permanently unemployed. It is really important to note the current rebellions in the countries of North Africa. In each country, the rebellion is really based on economic factors more than on political facrtors. The employed and prosperous don’t rebel, the permanently unemployed and hopeless are the ones waving their Kalishnikovs. (How each of the unemployed has been able to afford a Kalishnikov is one of life’s great mysteries.) The bottom line is that political stability and economic well being are not a function of productivity alone, and substantial domestic unemployment is a big offset to productivity in many ways,

  8. EffectiveExecutive
    March 20, 2011

    US wage stagnation may be the result of increasing productivity causing an imbalance in supply and demand. Innovation enables economic fracturing, the separation of vertically integrated tasks into separate and disticnt entities requiring the development of increased knowledge for success. A gross example of this phenomenon is the transformation of the Model T produced

  9. Alba Patricia Valencia
    March 20, 2011

    The standard of living of a country depends on its ability to produce goods and services. The differences between lifting standards in different countries are varied. The fundamental relationship between productivity and living standards is simple, but its implications are transitional. Usually all discrepancies between the levels of life are attributable to differences between the levels of productivity (number of goods and services produced for each hour of work). Also, the rate of growth of productivity of a country determines the rate of growth in average income.

    The fundamental relationship between productivity and living standards is simple, but its implications are transcendentals. Experienced slow growth in income over the past years and reducing the growth of the quality of living standards due inter alia:

    Competition from other countries.
    The budget deficit, i.e., excessive public spending over State revenue, with a negative impact in the productivity.
    To finance the budget deficit as the government needs to borrow in financial markets to finance it.
    Reduction of investment in human capital (education) and physical capital (the company produces), which means lower productivity.
    Dilemma between inflation and unemployment.
    Increase the general level of prices in the economy.

    As productivity growth has been lower relative to levels of life, economic policy makers must raise productivity in the formulation of policies, ensuring an overall reduction in prices.

    El nivel de vida de un país depende de su capacidad para producir bienes y servicios. Las diferencias entre los niveles de vida de los distintos países son diferentes. Casi todas las discrepancias entre los niveles de vida son atribuibles a las diferencias existentes entre los niveles de productividad (cantidad de bienes y servicios producidos con cada hora de trabajo). Asimismo, la tasa de crecimiento de la productividad de un país determina la tasa de crecimiento de su renta media.

    La relación fundamental entre la productividad y los niveles de vida es simple, pero sus implicaciones son transcendentales. El lento crecimiento experimentado en las rentas durante los últimos anos y la reducción del crecimiento de la calidad de los niveles de vida obedece entre otros:

    A la competencia del extranjero.
    Al déficit presupuestario público, es decir, el exceso de gasto público sobre los ingresos del Estado. Con repercusión negativa en la productividad.
    Al financiamiento del déficit presupuestario, pues el gobierno necesita pedir préstamos en los mercados financieros para financiarlo.
    Reducción de la inversión en capital humano (educación) y en capital físico (fabrica de la empresa). Lo que significa una productividad menor.
    Disyuntiva entre Inflación y desempleo.
    Aumento del nivel general de precios en la economía.

    Como el aumento de la productividad ha sido menor con relación a los niveles de vida, los responsables de la política económica deben elevar la productividad en la formulación de las políticas, asegurándose de una reducción general de los precios.

  10. True Indigo
    February 10, 2013

    Very erudite forum. The rich are stealing our money. Period.


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