The Decoupling

The Decline asks how much of the product reaches labor; The Decoupling asks how much reaches the worker in the middle. These questions can have different answers. Average compensation can rise while the median scarcely moves, because the people above the middle receive much of the increase. And compensation itself includes benefits that never appear as spendable wages in the paycheck. The earlier Quantities Share brought these distinctions into the argument over the American productivity–pay gap. The question here follows them through: how can an economy produce more in an hour while the typical worker's command over goods grows much less? The American studies of the decades after 1973 describe that divergence. Their question concerns unequal growth across a defined period, rather than an assertion that every worker's real pay stopped forever. The distance between the lines has to be opened before it can be explained.

The connection between productivity and typical compensation passes through the labor share, the distribution of pay, and the prices workers face. Take a consistently defined economy and period: average nominal hourly compensation is the total labor bill divided by its hours, and labor's share is that bill divided by nominal output. Average compensation measured in output prices therefore equals real output per hour multiplied by the labor share. To reach the median, multiply again by median compensation divided by average compensation; to express purchasing power, multiply by output prices divided by consumer prices. These are accounting relationships. They identify three places where the typical worker can fall behind productivity: a smaller labor share, a smaller position within labor's own income, or a deterioration in what that income will buy relative to the price of the product. Each can move while the others stand still.¹

An invented economy makes those routes visible without treating any one of them as the whole explanation. Initially, real net output per hour is 100, labor receives 60 percent, median compensation is 80 percent of the average, and the two price indexes have the same normalized level. Average compensation is 60 and the median's purchasing power is 48. Later, productivity reaches 150, labor's share falls to 55 percent, the median-to-average ratio falls to 70 percent, and the ratio of output to consumer prices becomes 0.95. Average compensation measured in output prices is now 82.5; the median is 57.75 in those prices and 54.8625 in purchasing power. Productivity has grown 50 percent, while the median's purchasing power has grown about 14.3 percent. The numbers describe possible accounts, not American estimates. Their factors multiply; simply adding the percentage changes would give a different answer.²

Careful measurement keeps these routes separate because each answers a different question about the worker's gain. A common output deflator helps examine the division of production income; a consumer deflator asks what compensation can purchase. An adverse movement between those prices reduces purchasing power without identifying an equal sum newly paid to shareholders. Benefits belong in the employer's labor bill, although an increase in that bill need not take the form of cash at the grocery counter. Depreciation must also have a specified place: gross output includes the resources needed to replace capital used up, while net output deducts that consumption. A comparison of net productivity with total compensation asks how the income available after that deduction is divided. Changing the measure changes the question. Replacing the median with the average, in particular, removes the very distribution within labor that this plate has come to examine.³

The remaining distributional movements require an account of how people obtain their pay. Output per hour is an average over an economy's workers, equipment, organizations, and products; it supplies no direct observation of the extra output attributable to the individual at the median. A change in technology can alter which tasks employers demand. A stronger outside offer can change a worker's bargain. A firm can meet a larger payroll while directing most of the increase toward its highest-paid employees. These mechanisms reach the identity through different routes, and several can operate together. Even a constant aggregate labor share would leave room for a widening distance between the average and the middle. Bivens and Mishel's decomposition makes distribution within compensation a major part of their historical American account. The division between labor and capital remains consequential, but it cannot stand in for the division among workers.⁴

A widening historical gap can coexist with a continuing connection between faster productivity growth and faster pay growth. Stansbury and Summers examined that connection in their 2017 working paper and found substantial positive co-movement in American productivity and compensation growth, including compensation around the middle. Their results are consistent with productivity pushing pay upward while other forces restrain it. They do not turn the historical shortfall into a promise that every additional gain will arrive intact in the typical paycheck. Nor does the distance between the levels establish that productivity has ceased to matter. Two paths can separate while responding together to a change in their slope. The practical force of the distinction is considerable: slower productivity can make an unfavorable distribution harder to bear, while a larger product can remain distributed on terms that leave the middle receiving much less than its proportional increase.⁵

The typical paycheck can therefore lag a growing product because the route from production to personal purchasing power contains several divisions. Capital may receive a larger share, the upper reaches of labor's own distribution may receive more of the wage bill, and the prices or composition of compensation may change what reaches the household. Where the gains went is a question for those accounts; why they went there requires the institutions, technologies, and bargains behind them. The earlier Share was right to carry the wage's question up to the nation. Following it back to the worker requires keeping the average and the middle in view at once. More output creates room for higher pay. The terms on which that room becomes someone's income remain the contest. The next plate follows one force changing those terms: the machine taking over an old task, and the new task in which labor might return.