What is the Productivity–Pay Gap?

The Spotlight

1 minute read

Sep 17, 2020

Productivity-pay gap chart shows detachment of productivity from hourly pay in 1972, a year after the end of Bretton Woods

The end of Bretton Woods seems to be an essential reason behind the widening of the productivity-pay gap that reveals gold's influence as a source of stability.

The chart below was drawn from a study from the Economic Policy Institute.

Productivity-pay gap chart shows detachment of productivity from hourly pay in 1972, a year after the end of Bretton Woods.

It shows the productivity-pay gap with the growth in productivity in yellow and the growth in hourly pay in red since 1948.

The detachment of productivity from hourly pay around 1972 is pretty clear, with hourly pay increasing only 25% compared to productivity's 155% increase over 45 years.

The growth in productivity and hourly pay had been consistent since 1948. But in 1972, productivity kept growing while hourly pay almost "mysteriously" ground to a halt.

So what had happened just before 1972 that could have weighed down the growth of hourly pay?

If you've been reading our SPOTLIGHTs for a while (or if you know your History 🤓), you remember that in 1971, President Nixon unilaterally canceled the dollar's convertibility to gold, effectively ending the Bretton Woods system.

If the end of Bretton Woods is certainly not the only reason behind the gap between pay and productivity, it remains an essential one, as it ushered in an era of inflation and true globalization.

With the dollar no longer attached to gold, we entered the era of the all-powerful fiat monetary system: high inflation pushed capital towards riskier assets, which then accelerated a globalization movement where, in turn, emerging, labor-rich countries started putting pressure on American and European wages.

It is interesting to see how the end of Bretton Woods revealed gold's far-reaching influence as a source of stability for the world economy, and how its removal as the basis for worldwide exchanges has caused wages growth to decelerate to a level they still haven't recovered from today.
 

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