One of the more persuasive recent explanations of what happened comes from Thomas Piketty. He argues that since the 1970s the rate of return on capital (i.e., securities, real estate, plants, machinery) has outstripped the overall rate of economic growth, leading to increasing inequality in the US and other Western countries.

Why? He claims that this form of inequality is a built-in feature of capitalism. Without some kind of state intervention, capital will seek greater returns and the rich will find ways to get richer. During much of the 20th century, this tendency was thwarted by the Great Depression (which destroyed vast amounts of wealth and pushed governments to pursue redistributive policies) and warfare (which states to become more interventionist in the economy, while providing their citizens with cradle-to-grave welfare as a reward for their wartime sacrifices).

Since the 1970s, however, governments have rolled back these policies, allowing the holders of capital to consolidate their wealth by seeking better returns on their investments, and by lobbying for policies that reduce taxes and regulations.

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

Look at your graph. See how the left axis says "index related to 1970"? That's why it looks like all the lines are together in 1970. If your based it off 1500, all the lines would be together then.

You may want to direct the question toward /r/economics...

Maybe I'm speaking out of turn here... But it seems to me this whole thread is a good example of how historians have a difficult time speaking authoritatively about economics, most especially modern economics.

Perhaps this question would be better posed to r/AskEconomists or some equivalent? Although that would be no guarantee of better answers.

Lots of people are talking about supply and demand, and I agree. The amount of women working outside of the home rose dramatically from the 1950s to 2000. The available workforce (supply of workers) increased while the demand for employees remained the same. When there are more people that want jobs than there are people who are hiring, wages stagnate or decrease.

Additionally, the Civil Rights Act opened up job opportunities to blacks that they previously were "unqualified" for.

I believe that the addition of women and blacks to the pool of potential employees led to wage stagnation. Reason being, there were more people available to fill positions, but those people had already been consumers, so while the demand for jobs increased, the demand for the goods and services being produced did not. Employers could be pickier in their hiring practices and they no longer had to offer competitive salaries and benefits to lure in desirable candidates.

One thing that no one has mentioned is the oil crisis of 1973. This was a giant shock to the world economy, which was one of many in the period. David Harvey writes in his A Brief History of Neoliberalism:

By the end of the 1960s embedded liberalism began to break down, both internationally and within domestic economies. Signs of a serious crisis of capital accumulation were everywhere appar- ent. Unemployment and inflation were both surging everywhere, ushering in a global phase of ‘stagflation’ that lasted throughout much of the 1970s. Fiscal crises of various states (Britain, for example, had to be bailed out by the IMF in 1975–6) resulted as tax revenues plunged and social expenditures soared. Keynesian policies were no longer working. Even before the Arab-Israeli War and the OPEC oil embargo of 1973, the Bretton Woods system of fixed exchange rates backed by gold reserves had fallen into dis- array. The porosity of state boundaries with respect to capital flows put stress on the system of fixed exchange rates. US dollars had flooded the world and escaped US controls by being deposited in European banks. Fixed exchange rates were therefore abandoned in 1971. Gold could no longer function as the metallic base of international money; exchange rates were allowed to float, and attempts to control the float were soon abandoned. The embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and was no longer working. Some alternative was called for if the crisis was to be overcome.

This crisis, Harvey argues, is the modern "neoliberal" system. Harvey defines neoliberalism as:

Neoliberalism is in the first instance a theory of political eco- nomic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade. The role of the state is to create and preserve an institutional framework appropriate to such practices. The state has to guarantee, for example, the quality and integrity of money. It must also set up those military, defence, police, and legal structures and functions required to secure private property rights and to guarantee, by force if need be, the proper functioning of markets. Furthermore, if markets do not exist (in areas such as land, water, education, health care, social security, or environmental pollution) then they must be created, by state action if necessary. But beyond these tasks the state should not venture. State interventions in markets (once created) must be kept to a bare minimum because, according to the theory, the state cannot possibly possess enough information to second-guess market signals (prices) and because powerful interest groups will inevitably distort and bias state interventions (particularly in democracies) for their own benefit.

So in the period since the 1970's we've seen extensive deregulation, deunionization, privatization, but increasingly free trade which meant the massive increase in "off-shoring" manufacturing, often to the "Global South" (less developed countries), often in special "free trade zones" where taxes and labor laws are applied differently from the rest of the country. This has been a massive changed in the global economy.

Harvey emphasizes the newness of neoliberalism, its "creative destruction" (he borrows Schumpeter's term) where not only are old frameworks destroyed (like the Fordist ideal of "What's good for GM is good for the country"), but new ones are put in their place ("Public corporations must be primarily concerned with shareholder value"). However, if I can articulate just one criticism of Harvey's book (and I think I could articulate several more), it is that he seems to almost take "Fordism"(the idea that workers should be able to afford the widgets they're producing) of the Post-War era to be the natural state of things. Obviously, he doesn't actually, but he doesn't spend much time on how the Fordist system was set up, only how its "creative destruction" for neoliberlaism. One part of Piketty's book that most people don't emphasize, or one thing that I got from it, is that it seems like in many ways the prosperous post-War years (for industrialized workers) are in many ways the outlier, rather than the post-1970's neoliberal system.

Anyway, I think you seem like someone who would really enjoy reading Harvey's book, and maybe Piketty's as well. Harvey's book can be found freely online in many places (just google A Brief History of Neoliberalism pdf) if you want to see if it's worth buying. You can look at the slides for the slideshow Piketty gave when he was hocking his ideas, including not only r>g but his proposal for a global wealth tax, on the academic circuit (his book explains all of this--this was his presentation to social scientists so several the slide might not make sense to you without further context).

After all my studying of financial history, I always knew the dropping of the gold standard (and the introduction of fiat currency) has always been the cause of both a) our rampant inequality and b) real wages stagnating.

Only until recently did I come across an article from The Economist (1988 issue) that encapsulated the dynamics of this in a single elegantly phrased sentence:

The biggest change in the world economy since the early 1970’s is that flows of money have replaced trade in goods as the force that drives exchange rates.

This is quite a powerful and true statement. Prior to the 1970's, the competitiveness of a country was tied to its goods and services that were exported and imported, determining the demand/supply for its currency (driving the exchange rate). The amount of workers and the workers' wages were in direct proportion to the growth in products and services sold.

After central banks finally dropped the gold standard, and were able to freely print money (as much as their exchange rates would support), GDP growth (a.k.a productivity) became a function of how much fiat money flowed into an economy (driving revenues and prices up). I haven't read Piketty, but in this very thread someone mentioned how securities and some assets became in favor for use of capital, and the subsequent increases in asset prices had little to do with what the underlying workers were getting paid in an economy.

A quick FRED chart gives us a picture of what happened to money paid out as wages/salaries, versus money flowing into the US economy through financial instruments and speculation with fiat currency.

https://research.stlouisfed.org/fred2/graph/?g=1WEi