At the end of 2013, the Economic Policy Institute presented the “13 Most Important Charts of the Year”. One of those is below (on the left), purporting to show the “roots of American inequality”. The chart on the right hand side tells the same tale using slightly different data.

Let me make a change in the deflator of hourly compensation. Instead of using consumption prices I use producer prices. That´s not an arbitrary change. When deciding on pay, the producer takes into account the productivity of the worker relative to the price he (the producer) will receive.

The tale changes significantly.

At the end there is still a gap, but that starts in the mid-00s, not in the mid-70s!

Following the 2001 recession there was a long period that came to be called “jobless recovery”. Real wages stagnated while productivity continued to rise. As the bottom chart shows, profits rebounded strongly. The same happens (more intensely) following the 2008/09 crisis. Real compensation even drops somewhat (a “job-loss recovery”) while productivity rises.

This chart also gives a hint into the reasons for the corporate shenanigans (by the Enrons of this world) which the SEC unraveled in late 2001. Interestingly the SEC went back to 1997, which was identified as the starting point for the false income reporting by the corporations involved.

Notice, looking at the shaded area, that 1997 was the year in which real compensation began to climb strongly after spending some time stagnant while productivity rose. Profits drop. The executives whose pay was tied to stock performance ‘despaired’. Solution: cook the books to keep our pay level! Obviously most corporations had better governance than Enron et al.