The long-run growth rate of productivity has somewhat matched the same general rise in real wage rates over time. Economists are concerned that this relationship may be breaking down. The concern is the increase in income inequality is a contributing factor. What can be said about this relationship? Has wage growth become disconnected from productivity or is the current shift only temporary?

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The general argument that real wages have stagnated since the 1970s despite major worker productivity growth may be somewhat misleading. If we define wages more broadly to include total benefits, wage and output growth will come back into alignment from 1970 to 2000. However much overall compensation and output have remained in alignment, the wages of blue-collar workers have been stagnating relative to the wages of the more skilled and educated workers that have made up an increasing share of aggregate wage growth, especially since 2000.

It is important to compensate for the different price measures used on the goods and services consumers produce and those they consume. By measuring real product compensation, we find that worker compensation reflected worker productivity until around 2000, when labor’s share of income began to decline.

By comparing real product compensation to net income per hour instead of gross income per hour (the former includes a more realistic, rapid depreciation of modern capital goods), we also get a more realistic basis for measuring income shares. Yet even once all these corrections are made, we still find a drop in the relative share of the wages of low-skilled workers since 2000.

New research from the National Bureau of Economic Research and advances in international trade theory suggest that the globalization of production and trade can have significant and lasting adverse effects on the wages of low-skilled workers as they are now competing globally with the workforces of China, Vietnam, and other centers of low-cost production. As globalization ebbs and flows based on domestic politics, it remains to be seen whether the losers of globalization will have the political clout to offset the winners and moderate those economic forces that have negatively impacted them.

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