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Source: Adapted from Figure A in Josh Bivens, Wage Growth Is Being Held Back by Political Decisions and the Trump Administration Is on the Wrong Side of Key Debates , Economic Policy Institute, August 2019. Data are from EPI analysis of unpublished Total Economy Productivity data from the Bureau of Labor Statistics (BLS) Labor Productivity and Costs program, wage data from BLS Current Employment Statistics, BLS Employment Cost Trends, BLS Consumer Price Index, Bureau of Economic Analysis National Income and Product Accounts, and BLS Current Population Survey public data.

Notes: Bars represent average annual difference between productivity growth and growth in hourly pay for typical workers for years with the highest, lowest, and medium unemployment rates from 1949 to 2017. Lowest unemployment group includes the 17 years with the lowest rates of unemployment in the 68-year sample, highest unemployment group includes the 17 years with the highest rates of unemployment in the sample, and medium unemployment group includes the 34 remaining years in the sample. The growth of the productivity–pay gap is highlighted in EPI’s Productivity–Pay Tracker ( epi.org/productivity-pay-gap ).

Notes: Bars represent average annual difference between productivity growth and growth in hourly pay for typical workers for years with the highest, lowest, and medium unemployment rates from 1949 to 2017. Lowest unemployment group includes the 17 years with the lowest rates of unemployment in the 68-year sample, highest unemployment group includes the 17 years with the highest rates of unemployment in the sample, and medium unemployment group includes the 34 remaining years in the sample.

A key reason why wage growth and productivity growth split in the late 1970s is that macroeconomic policymakers—particularly the Federal Reserve—stopped the aggressive pursuit of genuine full employment. Low unemployment helps give workers leverage when it comes to demanding wages that keep pace with the output they are helping to generate. As the figure shows, in the low unemployment years, productivity just slightly exceeded pay growth; in the medium unemployment years, the productivity–pay gap was significantly larger; and for the highest unemployment years, the gap was very large. (The lowest unemployment group includes the 17 years from 1949 to 2017 with the lowest unemployment rates, the highest unemployment group includes the years with the highest unemployment rates, and the medium unemployment group includes the remaining 34 years. For each group, we calculated the degree to which productivity exceeded pay growth, on average.)

For most of the post-1979 period, the Fed prioritized very low and falling rates of inflation over low rates of unemployment. This meant that they tolerated unemployment rates higher than were necessary to keep inflation stable, to the detriment of workers’ labor market leverage. Luckily, there are signs that the past decade has reminded the Fed of the benefits of pursuing maximum employment. Today’s low unemployment rate is essentially the continuation of a trend inherited by the Trump administration, with unemployment falling steadily in each year since 2010.

The remarkable thing about this trend is the Fed’s sharp break with past practice. Past recoveries have too often been cut short by the Fed’s excess fear of inflation: the Fed too often began raising interest rates before a sustained period of low unemployment began delivering healthy wage growth to low- and moderate-wage workers. In the current recovery, the Fed refrained from raising interest rates even when unemployment dipped far below what had been identified as the “natural rate” of unemployment that would keep inflation in check.