Nathan_ wrote:
I can only think of two explanations of this divergence from the average value of worker output from the average compensation. The first one I prefer because it is just funny and wonky (not because it is a correct explanation).
Wages are determined by supply and demand like many other things, and in this case it is the supply of labor that has shot way up in the past half century.
This type of analysis makes me chuckle as a grad student, so many fundamental problems/disequilibria in labor markets that simple supply and demand model cannot explain. Just FYI, Econ 101 and classical models are not how an economy actually operates
, just oversimplified abstractions. Wages should reflect productivity in a market clearing model, since the employer is paying the worker what his or her labor is worth in terms of output, and according to theory, a laborer will only accept a wage for what their labor is worth (this assumption dictates labor supply in the classical model but it is empirically false due to imperfect information, monopsony power, employer vs labor rights, and the fact that laboring is not necessarily a voluntary action). Just read Adam Smith, Wealth of Nations passages Book I Ch VIII, 11-16 if you wish for an authoritative explanation of why a simple supply and demand model does not exist/explain labor markets accurately.
Furthermore, the increased supply labor has been absorbed by an increase in the size of the economy/demand for labor (though over the past 10 years something like 50,000 net U.S. jobs have been created while the workforce grew by 3 million but that is only if my memory recalls the literature I was reading the other day accurately, so there is a "reserve army of the unemployed" pushing down wages slowly).