The Real Root of America’s Wage Problem
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.