The Real Root of America’s Wage Problem

December 14, 2014

Earlier this year, Thomas Piketty’s Capital in the Twenty-First Century inspired a boomlet of interest in the growth of American inequality. More recently, many economic observers have noticed that wage growth remains flat in recent years, despite slow-but-steady job growth. This is being appropriately interpreted as a sign that, despite the falling unemployment rate, we are far from full employment. 

Today’s crisis of American pay is not just the legacy of an incomplete recovery from the Great Recession. Since the late 1970s, wages for the bottom 90 percent of American workers have lagged far behind economy-wide productivity growth (a commonly accepted benchmark for wage growth). The bottom 70 percent of wages have actually been essentially stagnant. Strikingly, this lack of wage growth explains essentially the entire rise in income inequality over the past generation of American life highlighted by Piketty. 

Related: S&P—Income Inequality Threatens Long-Term Economic Growth 

This dismal wage growth is not just a sad but inevitable outcome of an efficient economy. Instead, it’s the result of a bundle of intentional policy decisions that were made precisely to shift economic power away from low- and middle-wage workers and towards corporate owners and managers. 

Anybody who has taken an introductory economics class knows that textbooks start with models of perfect competition among powerless buyers, sellers, employers and workers. But in the real world labor markets are full of frictions that make bargaining power matter. How do we know this? Take the case of the minimum wage. 

There was once near-unanimity among economists—based on textbook models of powerless employers and workers—that raising the minimum wage would cause job loss among precisely the group you were trying to help. If wages simply reflect the productivity of workers, raising the legal wage floor just means lots of workers will become too expensive to profitably employ. 

But if wages lag behind workers’ productivity because of asymmetric bargaining power, there is room to raise wages without causing job loss. And, indeed, a growing body of research looking at real-world data has shown that minimum wage increases boost living standards at the bottom without reducing employment. 

Related: Income Inequality Greatest in Democratic States 

The problems of eroded bargaining power and stagnant wages are not just low-wage problems. Wages for 70 percent of 4-year college graduates have been flat since 2000, and even most STEM occupations (science, technology, engineering and math) have seen anemic wage growth over the past decade. 

So, what can be done in addition to boosting minimum wages to rebalance economic power to the broad middle-class? Plenty, it turns out. 

The most powerful policy shift would be to restore full-employment as the nation’s primary economic policy goal. Nothing boosts bargaining power at the middle and bottom like genuinely full employment—the last time we saw genuine full employment (the late 1990s) was also the last episode of across-the-board wage growth. 

Next, we should restore workers’ rights of association and collective bargaining, a key source of economic and bargaining for power workers, which has been severely restricted. The sweep of research on the effect of unionization shows it does not harm economic efficiency but does lead to increases in income shares of low- and moderate-workers relative to corporate owners and managers—again, a sign that wages are influenced strongly by bargaining power. 

Related: Brookings Study Downplays Income Inequality Gap 

Additionally, a large number of smaller changes could boost economic and bargaining power for middle class workers, and some don’t even need congressional action. Taken in isolation, they’re small, but enact enough of them together and they’d make a real difference. 

Start with two changes: restoring overtime protections and providing legal status to many of today’s unauthorized workers. 

  1. Rules regarding who is eligible for overtime pay have been allowed to atrophy—including a salary threshold test that has not even been updated for inflation for decades at a time. Restoring these overtime protections would provide extra time or money to millions of workers. 
  2. Extending basic labor standards and protections to undocumented immigrant workers would boost their own bargaining power, as well as erode employers’ ability to leverage the low wages of the undocumented to extract wage concessions from other workers. 

The president has the authority to enact both of these policies which, combined with a minimum wage increase, would constitute the beginnings of a genuine wage policy for the middle class. 

The central role that economic power plays in the way wages are set, and the dizzying number of things that influence how this power is distributed, is actually good news. While Piketty called for an ambitious global wealth tax, we don’t need wait for the day when that’s possible to make real progress in fighting inequality. Opportunities to boost low- and middle-wage workers’ economic power, and hence their wages, are all around us, all the time. 

Josh Bivens is Research and Policy Director of the Economic Policy Institute 

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