Why Wages Haven't Kept Pace with Economic Growth

The blog Political Calculations took on an interesting question: How can this chart, which shows the average wage falling below the level of GDP over capita over the postway period, be explained?

At first glance, this chart poses a puzzle. How could average U.S. wages start out in 1950 almost 40 percent higher than the level of per capita economic output, and then fall below that level in the last 30 years? One would expect the relationship to be relatively stable.

After considering a few different possible explanations (women entering the workforce, the baby boom, technology displacing workers, the decline of unionization, etc.), the blog's author settles on an answer: the rising portion of compensation going to health care, pensions, and government social insurance programs.

...the percentage of labor compensation represented by wages and salaries has fallen from 95% in 1951 to just over 80% in 2011. Meanwhile, the portion of labor compensation represented by employer contributions to Social Security and Medicare (or employer FICA contributions), as well as for regular pensions and health insurance has risen considerably, taking a larger and larger share of total labor compensation for U.S. workers.

And this chart gives a visual representation of what's happening:

This chart illustrates a long-term development that many analysts fail to appreciate. Over the course of several decades, compensation to U.S. workers has increasingly taken the form of benefits, instead of wages. That is a trend that is likely to continue as the cost of health care rises.