Behind the Gap Between Productivity and Wage Growth.pdfVIP

Issue Brief • February 2007 Behind the Gap between Productivity and Wage Growth BY DEAN BAKER Introduction The basic numbers on wage and productivity growth in the current business cycle tell a striking story. In the five and one quarter years from the peak of the last cycle in the first quarter of 2001 to the second quarter of 2006, productivity increased by an impressive 17.9 percent, an average growth rate of 3.2 percent per year.1 By contrast, real wages have barely moved over this period, with the average hourly wage for production and nonsupervisory workers increasing by just 1.2 percent, an average annual growth rate of just over 0.2 percent. This extraordinary gap between wage and productivity growth demands an explanation. The simplest and most obvious explanation is that there has been redistribution from wages to capital income (primarily profits plus interest). While this is in partly true, the story is a bit more complicated. To date, it appears that the redistribution from wages to capital income is typical for the early stages of a business cycle and does not suggest a structural break with the patterns from past cycles. The current cycle may not have yet reached its profit peak,