How Will Artificial Intelligence (AI) Impact Worker Compensation

I made a video evaluating this chart or research study by the Economic Policy Institute examining the disconnect between productivity and a typical worker's compensation from 1948 to 2015.

You can watch the video here:

This is one of the most timely discussions considering the advancement in artificial intelligence.

Productivity and Wage Growth Divergence

The EPI's analysis shows a significant divergence between productivity growth and wage growth since 1973:

1. From 1948 to 1973, prouctivity and typical worker compensation grew in tandem.
2. Between 1973 and 2014, net productivity grew 72.2%, while inflation-adjusted hourly compensation for the median worker rose only 8.7%
3. The hourly compensation of production/nonsupervisory workers, who make up 80% of the workforce, increased by just 9.2% between 1973 and 2015

Understanding the productivity percentage increase is crucial to grasping why the disconnect between productivity and wages is so significant. Let's break it down:

What is Productivity?

In economic terms, productivity typically refers to output per hour worked. It's a measure of how efficiently goods and services are produced. When productivity increases,

the economy can produce more output (goods or services) for each hour of work.

For example:

• If a worker used to produce 10 units of a product in an hour and, after new technology or more efficient processes, can now produce 15 units in the same hour, that’s an increase in productivity.

What Does a 241% Productivity Increase Mean?

The 241% increase in productivity shown in the chart (by 2015) means that the economy is producing 2.4 times more output per hour compared to the baseline year (1948). In other words, the amount of goods or services that a typical worker produces per hour has nearly tripled since 1948.

This is driven by several factors, including:

• Technological advancements (automation, better tools)
• Improved processes and efficiencies in production
• Better education and skills among workers
• Globalization and access to cheaper inputs

Why Does This Matter?

The key point of this analysis is that even though the economy’s output has nearly tripled due to productivity gains, worker compensation has not kept pace. Ideally, when productivity rises, workers should benefit from those gains through higher wages, as they are contributing to the economy’s increased output. However, the chart shows that compensation—has only risen by around 112%, which is far below the 241% productivity increase.

The Disconnect: Why Hasn’t Worker Pay Kept Up?

There are a few major reasons behind this productivity-pay gap:

1. Technological Gains Aren’t Equally Shared: Much of the productivity gain has been driven by automation, computers, and other technologies. While these have increased output, the owners of capital (investors, executives, and corporations) often reap most of the rewards because they own the machines, software, and technologies driving the increased output. Workers are producing more, but they aren’t seeing the financial benefits.
2. Wage Bargaining Power Has Declined: Since the 1970s, union membership has decreased, and globalization has created competition for jobs, which has reduced workers' bargaining power. This makes it harder for workers to negotiate higher wages even as their productivity increases.
3. Corporate Focus on Profit Maximization: Many companies focus on maximizing profits for shareholders rather than sharing gains with workers. This means that profits from increased productivity are often directed to executive compensation or stock buybacks rather than raising worker wages.
4. Automation and Job Polarization: Automation has increased productivity by making many manual, repetitive tasks more efficient. However, many of these jobs are low-skill, low-wage jobs, which have seen little wage growth. Workers in high-skilled jobs (like in tech or finance) might have seen better pay increases, but the typical worker hasn’t.

Why Has Productivity Increased So Much?

• Automation: Technologies like artificial intelligence and automation have been key drivers in increasing productivity. Machines can now perform complex tasks faster and more accurately than humans, allowing for more output in less time.
• Global Supply Chains: Advances in logistics and global trade have allowed companies to produce goods more efficiently and at lower costs, boosting productivity.
• Improved Capital: Businesses have invested in more productive capital (machinery, software, etc.), which allows workers to produce more in the same amount of time.

Since the study ended in 2015, I wanted to extrapolate the data to see what the chart would look like if the trend continued from 2015 to today, and how it might extend to 2040.

This is particularly relevant given the current discussions around the advancement of artificial intelligence and the widespread assumption that AI will drive automation. With automation, there is an assumed increase in productivity.

How Does This Impact Us In 2024?

These projections essentially carry forward the trend of disconnect between productivity and hourly compensation from 2015 to 2024, assuming that the trends in technology, automation, and especially AI, continue to drive productivity upwards while compensation remains relatively stagnant.

The numbers projected reflect what the situation could look like if this trajectory persists.

The Widening Productivity-Wage Gap: A 2024 Perspective

Productivity Surge vs. Stagnant Wages: The 2024 Reality

Current Productivity (290%) vs. Hourly Compensation (118%): This projection suggests that as of 2024, productivity has risen to 290%, while compensation has only risen to 118% since 1948.

This represents a staggering gap of 172%. If accurate, it means productivity has continued to skyrocket over the past decade without comparable wage increases.

Tech Boom and the Wage Lag: 2015-2024 Impact

Technological Advancements Impact (2015–2024): In the last decade, technological leaps have likely driven many industries to operate more efficiently, leading to these massive productivity gains.

However, with workers not seeing this reflected in their paychecks, it could explain why many feel their wages haven't kept pace with rising living costs or overall economic growth.

The Productivity-Wage Disconnect: Do We Feel It in 2024?

This is the million-dollar question: Do we actually feel this gap today in 2024? The answer is likely a resounding yes, especially for lower and middle-income workers. The notion that wages have stagnated while living costs, housing, healthcare, and education expenses have soared is a common grievance.

Key factors fueling this sentiment include:

1. Real Wage Stagnation in the Face of Productivity Boom

Wage Stagnation: Many workers sense their real wages (inflation-adjusted) haven't budged much recently. This aligns with our projection, where compensation lags far behind the sharp productivity uptick.

2. Productivity Gains, But Not for All: The Uneven Distribution

Increasing Productivity but Concentrated Gains: As AI, automation, and other tech continue to turbocharge productivity, the financial rewards often cluster in specific sectors (like tech) or among capital owners (stockholders, executives), leaving the average worker in the dust.

3. Inflation Outpacing Wage Growth: The Shrinking Paycheck

Inflation and Cost of Living: Even with slight wage increases, they're often outpaced by inflation. Recent years have seen inflation surge, particularly post-pandemic, making it tougher for workers to feel any benefits from modest pay bumps.

4. AI and Automation: Job Security in the Crosshairs

Job Displacement: AI and automation are reshaping the job landscape, particularly in manufacturing, retail, and customer service. Workers in these sectors may feel their jobs are on shaky ground, adding to the sense that they're not reaping the benefits of economic growth.

2024 Economic Sentiment: Disconnected Growth and Wages

If our projections hold true, they mirror what many workers and economists are already grappling with today.

The chasm between productivity and compensation continues to widen. Despite technological leaps, many aren't seeing fatter paychecks. This disconnect fuels ongoing debates about labor policies, minimum wage hikes, universal basic income (UBI), and the urgent need for robust worker protections in our rapidly evolving tech landscape.

How Will Different Workers Be Impacted By Increased Productivity?

The updated chart adds more nuance by splitting the compensation data into two categories: Typical Compensation and Low-Wage Compensation, allowing for a deeper exploration of wage trends across different worker groups.

Let's break down the key aspects of this chart:

Typical Compensation vs. Low-Wage Compensation

Typical Compensation (Green Line)

This line represents the wages of an average worker and shows that by 2024, typical compensation has grown to 122%, which is still far below the productivity gains of 280%. The gap between productivity and compensation for the average worker has reached 158%.

Low-Wage Compensation (Purple Line)

This line introduces a focus on low-wage workers, whose compensation has risen to 126% by 2024. The increase is slightly higher than the typical compensation, suggesting some recent improvements in low-wage earnings, but still far behind the productivity growth.

Defining Worker Categories

Typical Worker: In many economic studies, including those by the EPI, a "typical worker" often refers to the median worker. This would be the worker at the 50th percentile of the wage distribution. It's a way to represent the middle of the labor market, avoiding the skewing effects that very high earners can have on average (mean) wages.

Low-Wage Worker: The definition of a "low-wage worker" can vary, but it's often defined as workers earning wages in the bottom 10% or 20% of the wage distribution. Some studies might define it as workers earning less than two-thirds of the median wage.

Implications of the Chart: Productivity-Compensation Gap

The productivity-compensation gap, highlighted at 158% by 2024, remains a significant issue. Even though low-wage compensation has seen slight improvement, the chart still points to a disconnection between productivity gains and how these benefits are shared with workers, especially when factoring in the growing automation and AI-driven productivity boosts.

Recent Trends (2015–2024)

The data from 2015 to 2024 shows some stabilization in compensation, with slight improvements for low-wage workers. This could reflect recent minimum wage hikes or policy efforts aimed at supporting lower-income earners. However, the gap remains wide, indicating that these efforts haven't fully addressed the broader issue of wage stagnation relative to productivity.

Reflections

This exploratory chart helps paint a more detailed picture of wage inequality by breaking down how different segments of the workforce (typical vs. low-wage) are experiencing compensation in contrast to overall productivity growth.

Even though low-wage compensation has improved slightly, the fact that productivity continues to outpace both typical and low-wage compensation reinforces the ongoing discussion about wealth inequality and the need for more equitable economic policies.

Key Question: Are Workers Feeling This?

Typical Workers

Many "typical" workers might feel that their wages are not reflecting the value they are adding, especially given the widening gap between what the economy is producing and what they're being paid.

Low-Wage Workers

While low-wage workers have seen some gains, as reflected by the slight uptick, they might still be struggling as these increases may not be enough to offset rising costs of living or inflation.

The disconnect between productivity and wages isn't just a problem for average workers but affects low-wage earners as well, albeit in different ways.

The Staggering Implications of the Productivity-Wage Disconnect

Let's look at this in a simplified way:

• 1948: Worker productivity and compensation were fairly aligned. Workers were seeing the benefits of increased output reflected in their pay.
• 2024: The average worker is producing almost three times more than in 1948, but their pay has only a little more than doubled. So workers are producing much more, but they aren't being compensated for it.

If productivity has gone up by 280%, it means that today's workers are far more efficient, yet their compensation (pay) has only risen by a fraction of that, leading to this large and growing gap.

Productivity vs. Prosperity: Why Economic Growth Isn't Reaching Workers' Wallets

Many workers may "feel" this gap because:

• Stagnant Wages: Even though the economy is more productive, wages have not risen proportionally, especially for middle- and low-wage workers.
• Cost of Living Increases: Over the same period, the cost of living (housing, healthcare, education) has increased substantially, eating into any modest wage gains workers have experienced.
• Job Insecurity: Automation may make industries more productive, but it also leads to job cuts, meaning fewer people are benefiting from the productivity gains.

Rounding It Out:

• Productivity growth (280%) since 1948 represents a huge increase in economic output, driven by technological advancements.
• Compensation growth (120%-126%) for typical and low-wage workers has lagged far behind, creating a massive productivity-compensation gap.
• The disconnect reflects a fundamental inequality in how the benefits of productivity growth are shared, with capital owners reaping most of the rewards while workers see minimal wage growth.
• This gap is unsustainable and has significant social, economic, and political implications as more workers feel the economic system isn't working for them.

The core issue is that workers aren't seeing their share of the economic pie increase even though the pie itself (productivity) has grown tremendously.

What Might The Future Look Like?

The extended chart to 2040 highlights an increasingly staggering disconnect between productivity and worker compensation (both typical and low-wage), projecting a future where productivity continues to rise while compensation barely moves. Here’s a deeper look at the implications and context of this growing disparity:

Key Projections (2025–2040):

• Productivity Growth: By 2040, productivity has skyrocketed, reaching well over 350%, reflecting the assumption that technological advancements—especially in AI, automation, and other innovations—will continue driving significant increases in output per worker.
• Typical and Low-Wage Compensation: Both typical (green line) and low-wage (purple line) compensation increase very slowly, barely moving beyond the levels seen in 2024 (around 120% and 126%, respectively). By 2040, the lines for these worker groups remain essentially flat, meaning most workers see minimal or no meaningful improvement in pay over 16 years, despite the massive increases in productivity.

Staggering Implications:

1. Widening Productivity-Compensation Gap: The gap between productivity and compensation has grown alarmingly by 2040. The trend projected here leads to extreme income inequality, where workers are not seeing the financial benefits of the significant increases in the economy's output, creating a structural imbalance in wealth distribution.
2. Concentration of Wealth: This chart points to a future where profits and gains from increased productivity are likely to be concentrated in the hands of capital owners—executives, investors, and corporations. Without intervention, the majority of workers, particularly those in low-wage sectors, will continue to fall further behind, struggling to keep up with the rising cost of living.
3. Potential Social and Economic Unrest: With such stark disparities, there could be increasing frustration and disillusionment among workers, leading to calls for more drastic measures to redistribute wealth or rein in corporate profits. Growing inequality can fuel political movements advocating for higher minimum wages, stronger labor protections, universal basic income (UBI), or wealth taxes.
4. Impact of Automation and AI: If AI and automation continue driving this productivity boom without translating into wage gains, it could intensify debates about the role of technology in society. Are these advancements displacing jobs, or is the economic system simply not designed to share the benefits of technological progress with workers? The potential for large-scale job displacement could further exacerbate the pressure on workers’ wages.
5. Stagnation for Low-Wage Workers: Low-wage compensation, though slightly better than typical compensation, is still barely rising. These workers—many of whom occupy essential roles—would be among the hardest hit by the widening gap, potentially leading to worsening poverty rates, increased demand for social services, and a growing class of workers who are unable to meet basic needs despite working full time.

Comparisons to Historical Context:

• 1948–1973: During this period, productivity and compensation were closely aligned, with both increasing at similar rates. This balance reflected a more equitable distribution of economic growth between workers and capital.
• 1973–2024 (Current Trends): After the 1970s, productivity began to far outstrip wage growth, creating the significant gap that we see today. The addition of AI and automation only accelerates this divergence, driving productivity up without corresponding wage increases.

Implications for Policy and Society:

• Labor Policies: This projection makes the case for stronger labor protections, including unions, collective bargaining rights, or higher minimum wages to ensure workers can negotiate a fair share of the economic pie.
• Universal Basic Income (UBI): With such dramatic increases in productivity without compensation gains, there is an argument that redistributive policies like UBI may become necessary to support workers left behind by automation and AI-driven economies.
• Taxation and Redistribution: Wealth taxes or higher taxation on corporate profits and the ultra-wealthy could be explored as a way to address the imbalance and reinvest in social safety nets, education, healthcare, and infrastructure.
• Corporate Responsibility: Increasing corporate responsibility in redistributing wealth to employees through profit-sharing schemes or stock options may help bridge the gap between the rising fortunes of capital owners and the stagnation experienced by workers.

The projected trends on this chart are alarming, suggesting that by 2040, the divide between productivity and compensation could lead to widespread economic inequality and societal challenges.

If current policies and systems remain unchanged, workers may continue to feel the effects of wage stagnation despite record-breaking productivity, ultimately creating a more polarized society. These projections raise important questions about how we can shape the future to ensure economic growth benefits everyone, not just a select few.

Appendix

You can view the chart here:

https://mskjrwdgyso.v0.build/

Works Cited

Economic Policy Institute (EPI). (n.d.). Various analyses and reports on productivity, compensation, and CEO pay.

Bureau of Labor Statistics (BLS). (n.d.). Raw data used in EPI analyses for productivity and compensation trends.

Bureau of Economic Analysis (BEA). (n.d.). Raw data used in EPI analyses for economic indicators.

Compustat database. (n.d.). Raw data used in EPI analyses for CEO pay trends.

Macrotrends. (n.d.). Dow Jones Industrial Average - 100 Year Historical Chart. Retrieved from [https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart]

SlickCharts. (n.d.). Dow Jones Industrial Average Annual Returns. Retrieved from [https://www.slickcharts.com/dowjones/returns]

Wikipedia contributors. (n.d.). Dow Jones Industrial Average. In Wikipedia, The Free Encyclopedia. Retrieved from [https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average]

FedPrimeRate.com. (n.d.). DJIA - Dow Jones Industrial Average History. Retrieved from [https://www.fedprimerate.com/dow-jones-industrial-average-history-djia.htm]

Investing.com. (n.d.). Dow Jones Industrial Average Historical Data. Retrieved from [https://www.investing.com/indices/us-30-historical-data]