You see this thing around a lot, paraded around by the right and the left. It recently made an appearance in the comment thread of the illustrious Dr. Robert Murphy.
I just don't understand it myself.
Real wages decoupled from productivity sometime in the seventies (some graphs make it look like it really came apart in the early seventies, other graphs make it look like it happened in the early eighties). The change is abrupt and persistent. Two series that used to follow each other closely don't anymore. That's not random - that needs an explanatoin of what changed.
You hear two explanations: the weakening of unions and the end of Bretton Woods. I'm personally not sure how either is sufficient. Weakened unions makes some sense but (1.) that doesn't seem to affect enough of the labor market to do this, (2.) that didn't happen until the early eighties allegedly and clearly the seeds of this decoupling were planted before then, and (3.) you would think the weakening of unions would show the opposite of this graph: real wages higher than productivity switching to real wages that converged closer to productivity. So that's not entirely satisfactory.
I don't get the Bretton woods thing either. OK, so there's some kind of inflationary free hand after Nixon closed the gold window, but so what? A money illusion would explain short run departures from productivity but why would you expect decades of lag below it? That doesn't sound like something money illusion would do.
I'm guessing the answer lies somewhere in open economy macro, mobility of capital but not labor, and in that sense Bretton Woods is part of the answer. That's my suspicion, but my open economy macro intuitions are too blunt to figure exactly what's going on. But I don't think that the union ramblings of the Robert Reichs of the world or the inflation ramblings of the Ron Pauls of the world quite provide the anwer.
This is a stark decoupling, which makes me think the answer has to be spelled out clearly out there somewhere.