The Wage-Productivity Gap
Hourly compensation vs. productivity growth (1948=100)
“Wages stopped tracking productivity in 1971 when Nixon ended the gold standard.”
The divergence began in the early 1970s but accelerated in the 1980s. Multiple factors — not just monetary policy — drove the gap, including globalization, declining unions, technological change, and policy choices.
Perspectives
← Swipe between perspectives →
Multiple forces drove a real divergence
A genuine gap opened between productivity and typical worker compensation starting in the 1970s, driven by globalization, declining unions, technology, and policy choices.
The divergence is real but didn't have a single cause. It accelerated at different points: the 1970s oil shocks, 1980s deregulation, 2000s China shock. Attributing it solely to the end of the gold standard oversimplifies a complex economic transformation.
Causal Factors
Globalization & trade competition
30%Competition from lower-wage countries put downward pressure on wages, especially in manufacturing.
Declining union membership
25%Union membership fell from 35% in 1954 to 10% by 2023, reducing workers' bargaining power.
Technology & automation
20%Technology increased productivity but displaced middle-skill jobs, creating a 'hollowed out' labor market.
Policy choices (tax, minimum wage)
15%Top tax rate cuts, stagnant minimum wage, and deregulation shifted income toward capital owners.
Measurement differences
10%Some of the gap reflects using different price deflators for productivity vs. compensation.
Data Source
Key Events
Nixon ends gold standard
US suspends dollar convertibility to gold (Nixon Shock)
Oil crisis
OPEC embargo causes first oil price shock
Reagan tax cuts
Economic Recovery Tax Act significantly cuts top marginal rates
NAFTA enacted
North American Free Trade Agreement takes effect
China joins WTO
China's accession to World Trade Organization accelerates offshoring
Financial crisis
Great Recession begins, wages stagnate further