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Addressing the Problem of Stagnant Wages

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Abstract

From the mid-1940s through the 1970s, median wages and productivity growth rose in tandem. Since the 1980s productivity continued to grow steadily while wages stagnated. In this paper we document these trends, explore the reasons for these divergent trends, and outline a mix of policy, institutional, and organizational changes needed to restore wage growth and improved living standards for the American workforce.

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Notes

  1. Compensation numbers are deflated by the GDP deflator rather than the Consumer Price Index to eliminate productivity-compensation differences caused by differences between GDP inflation and consumer price inflation.

  2. See, for example, Luce (2010).

  3. On family formation, in 1970, the marriage rate among white men, ages 25–39 was 0.85 for high school graduates – four points higher than the 0.81 for men with more than a high school education. By 2008 the marriage rate for white male high school graduates was 0.48, 10 points lower than the 0.58 for men with more than a high school education. Similarly, in 1970, 0.91 of children who lived with a high school educated mother lived with both parents. By 2008, the corresponding proportion had fallen to 0.70. Among children who lived with a college educated mother, 0.91 lived with both parents in 1970 and 0.89 lived with both parents in 2008 (Autor, 2010a, National Marriage Project).

  4. On the history of the Treaty of Detroit, see Lichtenstein (1995) and Levy and Temin (2009).

  5. Mills and Friesen (1996) report that IBM's employment grew from 133,000 in 1963, the year the IBM 360 computer was introduced, to a peak of 41,500 in 1985. See Foulkes (1980) for a discussion of the personnel practices of other large non-union companies over the 1960 to 1980 time period.

  6. For a historical timeline on wage price policies see http://www.google.com/search?q=wage+price+guidelines&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a#q=wage+price+guidelines&hl=en&client=firefox-a&sa=X&rls=org.mozilla:en-US:official&}.

  7. See Autor et al. (2003) and Autor (2010b) for further discussion.

  8. For example, Lawrence and Slaughter (1993).

  9. This is no accident. The same ‘step-by-step’ procedures that make a job easy to computerize make it easy to explain to someone 6,000 miles away. For example, call center work can be sent to India using heavily scripted interactions (step-by-step procedures) or it can be computerized using speech recognition software. See Levy and Murnane (2004) for further discussion.

  10. See White (1985).

  11. On the propagation of wage norms, see Western and Rosenfeld (October 2010). On the role of unions in shaping pro-worker national policy, see Hacker and Pierson (2010).

  12. See Kochan et al. (1986), Mitchell (1985).

  13. Kochan et al. (1986), Black and Lynch (2001), Appelbaum et al. (2008).

  14. See Batt and Appelbaum (2010) for a fuller discussion.

  15. Jacoby (2005) documented the significant differences in salaries of top financial and human resource executives in the United States in contrast to their relatively equal value in Japan.

  16. US institutional investors in 1960 owned 12% of US equities; by 1990 they owned 45% and the share rose to 61% in 2005. Institutions today own 68% of the 1,000 largest US public corporations (Jacoby, 2009).

  17. See Philippon (2007). In National Income and Product Accounts, there is no independent output measure for the finance and insurance industries. The industry's share of GDP is largely determined by its compensation, which is predicated on the theory that an employee's compensation represents his or her marginal product.

  18. Davis (2009). From a shareholder's perspective, incentives should reward executives for share performance above average share performance in the industry. In practice, executives were often rewarded for all share price increases even if competitors’ shares increased faster.

  19. Data downloaded from Emmanuel Saez website: http://www.econ.berkeley.edu/~saez/. These data are updated from Piketty and Saez (2003). The numbers in question come from Table A3 and represent income including capital gains.

  20. An example is Senator Charles Schumer, former chair of the Democratic Senatorial Campaign Committee, who speaks out often on income inequality but was unwilling to deal with the ‘carried interest’ provisions that allowed hedge fund and private equity managers’ incomes to be taxed as capital gains, at particularly low rates. Hedge funds and private equity have been significant contributors to the Democratic Party. See Levy and Temin (2009) for additional examples.

  21. See, for example, Oreopoulos et al. (under revision).

  22. Bernhardt et al. (2001).

  23. Sum and McLaughlin (2010).

  24. See Heckman and LaFontaine (2010). This calculation treats GED recipients as high school dropouts.

  25. See Autor (2010a). Note that the slow growth of the fraction of young men with college diplomas is true in many OECD countries.

  26. Kruse et al. (2010).

  27. Freeman, Blasi and Kruse are preparing a policy initiative based on this idea.

  28. For evidence on the effects of transformed labor management relations, see Kochan et al. (1986), Black and Lynch (2001), Cutcher-Gershenfeld and Kochan (2004), and Appelbaum et al. (2008). For evidence on the need for labor law reform, see Ferguson (2008), Freeman (2011), and Kochan (2011).

  29. For a recent review of these studies, see Kochan et al. (2009).

  30. See Bernhardt et al. (2009).

  31. See Levine and Lewin (2006), Lewin (2011).

  32. Council members clearly have the expertise needed to analyze these issues since the present Chair Alan Krueger and member Katharine Abraham are both labor economists.

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Acknowledgements

An earlier version of this paper was prepared for the Employment Policy Research Network http://www.employmentpolicy.org/topic/12/research/addressing-problem-stagnant-wages. We thank Alan Benson for his research assistance and Joseph Blasi, Jerry Davis, Richard Freeman, Doug Kruse, Ruth Milkman, Daniel J. Mitchell, Richard J. Murnane, Paul Osterman, Jeffrey Pfeffer, and Michael Piore for their comments.

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  1. Sloan School, Massachusetts Institute of Technology, 100 Main St, Cambridge, 02139, MA, USA

    Frank Levy & Thomas Kochan

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Levy, F., Kochan, T. Addressing the Problem of Stagnant Wages. Comp Econ Stud 54, 739–764 (2012). https://doi.org/10.1057/ces.2012.28

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