Who Benefits From Productivity Gains? It's Not The Workers

The American workforce improved productivity by 77 percent between 1973 and 2017 — but they reaped few of the fruits of their intensified labor. Their wages rose just 12.4 percent over the same period, according to the union-backed nonprofit Economic Policy Institute.

That’s a 6.2 productivity-to-wage growth ratio, and it’s not historically normal.

In the mid-20th century, workers saw compensation grow proportionally to productivity. The metrics didn’t decouple until the 1970s — a period marked by globalization, the weakening of labor unions and policies exacerbating income inequality.

Winners From Efficiency Gains

If profits from improved productivity stopped trickling down to the workforce, who benefited? 

One study in surplus accounting by IESEG professors found that consumers celebrated gains with lower prices, which ate into margins and left diminished corporate gains.

A concurrent study by the same researchers revealed nearly half of gains over the last 25 years have gone to employees. Given the EPI’s findings, it’s likely the distribution disproportionately served corporate leaders rather than hourly workers.

That’s one theory offered by economists at the Federal Reserve Bank of Kansas City.

They found the top 5 percent of households between 1974 and 1995 experienced the strongest income growth, 1.5 percentage points higher than the bottom 60 percent. From 1996 to 2006, the top saw growth of 1.6 percent against flat rates for the bottom 20 percent of households and 0.3-percent growth for the middle 60 percent.

“A more likely explanation for the strong income growth at the top of the income distribution over the past decade is the rapid acceleration of chief executive officer compensation,” the Fed economists said in the report. 

Wage inequality between top and bottom workers continued to expand beyond the years captured in the study, suggesting that recent gains unrealized by workers have been redirected to their managers.

Other Beneficiaries

Physical capital and profits siphoned off some of the laborers’ productivity gains, according to the Fed economists. The IESEG study found 12 percent of gains went to suppliers, while 39 percent bolstered a company’s bottom line.

A review of the nation’s steadily rising corporate profits confirms the fattening of the company piggy bank.
Source: tradingeconomics.com

Buybacks and dividend trends over the last 20 years suggest investors have also profited. Both quarterly metrics in the S&P 500 have multiplied nearly five times, according to Yardeni Research.

Less For Uncle Sam

Improved productivity has marginally benefited the government, although the trend appears to be diminishing. Corporate tax revenue spiked from $36.2 billion in 1973 to $370 billion in 2007, but it dropped to $205 billion last year.

Throughout that entire stretch, corporations have contributed an increasingly smaller portion of government revenue — less than a quarter of what laborers have paid out in income tax.

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