Study Shows 'Intentional Policy Decisions'--Not Abstract Market Forces--to Blame for Wage Stagnation

A new report published Thursday by the Economic Policy Institute details how wage stagnation in the U.S. is not due abstract forces like technological advances and globalization, but the result of very specific decisions made by U.S. policymakers over the past several decades.

The new analysis by the Economic Policy Institute suggests that with adequate political will, lawmakers could easily lift up workers and also close the widening wealth gap which has left just three mega-rich Americans with as much wealth as the bottom 50% of the nation's population.

According to EPI's Lawrence Mishel and Josh Bivens, who wrote the study, "intentional policy decisions designed to suppress typical workers' wage growth, the failure to improve and update existing policies, and the failure to thwart new corporate practices and structures aimed at wage suppression" have all helped create conditions in which the average workers' pay has scarcely grown in the last four decades, even as the U.S. economy has grown and productivity has increased.

The economists point to lawmakers' willingness to tolerate high unemployment rates, employers' ability to tamp down workers' attempts to unionize through intimidation campaigns and so-called "right-to-work" laws, trade deals which give American workers little leverage, and non-compete contracts which make it harder for workers to seek better jobs as examples of the policies that have contributed to the wage gap.

Mishel and Bivens summarized the study in a Twitter thread:

With employees facing increasing barriers to unionization and less individual bargaining power as they're increasingly misclassified as independent contractors or required to sign non-compete agreements, the economists said, American workers have far less recourse when they're unhappy with their employment situation than they did in the mid-20th century.

"If you think about a person who's dissatisfied with their situation, what are their options?" Mishel told the New York Times. "Almost every possibility has been foreclosed. You can't quit and get a good-quality job. If you try to organize a union, it's not so easy."

Without anti-worker policies in place, the typical U.S. worker would have made $33.10 per hour in 2017 as compensation kept up with productivity growth, instead of the $23.15 which was the average hourly wage that year.

Excessive unemployment was one factor Mishel and Bivens used to explain the majority of the divergence between wages and productivity:

Between 1979 and 2017 the cumulative difference [between the actual unemployment rate and the natural rate] was positive 35.7 percentage points, meaning that actual unemployment was persistently above the estimated natural rate. This trend was not driven only by the Great Recession: Between 1979 and 2007 the cumulative difference was a positive 15.5 percentage points. Put another way, unemployment was one percentage point higher each year in 1979-2007 than in 1949-1979. This consistent excess unemployment was deeply damaging to wage growth. Research indicates that a one percentage point drop in unemployment results in annual wage growth 0.5-1.5 percentage points faster for workers at the 10th percentile.

The report estimates that excess unemployment since the 1970s has lowered wages by about 10% in the last four decades, explaining nearly 25% of the gap between compensation and productivity growth.

The economists also highlighted the effects of the erosion of union membership and collective bargaining power:

When the share of workers who are union members is relatively high, as it was in 1979, wages of nonunion workers are higher. For example, had union density remained at its 1979 level, weekly wages of nonunion men in the private sector would have been 5% higher in 2013, equivalent to an additional $2,704 in earnings for year-round workers; among those same workers but without a college education wages would be 8% higher, or $3,016 more per year (Rosenfeld, Denice, and Laird 2016; Denice and Rosenfeld 2018). Consequently, estimates of the impact of eroded collective bargaining on wage inequality that incorporate union spillover impacts find a larger role of the impact of unions on wage inequality. For instance, Western and Rosenfeld (2011, Table 2 and analyzed in Mishel et al. 2012, Table 4.38) find that the weakening of collective bargaining explains a third of the increase in male wage inequality and a fifth of the rise of wage inequality among women over the 1973-2007 period.

"The lessons here are simple," Mishel and Bivens wrote. "Wage growth has been greatly directed by policy decisions and is a political variable. It responds--robustly--to big policy changes. But for decades these policy decisions have gone in the wrong direction. Policymakers can deliver prosperity to the vast majority of U.S. workers based on faster wage growth. Whether workers obtain a fair share of the economy's gains in the future will depend not so much on abstract forces beyond their control but on demanding that their political representatives restore bargaining power to workers, individually and collectively."