Springer Nature is making SARS-CoV-2 and COVID-19 research free. View research | View latest news | Sign up for updates

Addressing the Problem of Stagnant Wages

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.

This is a preview of subscription content, log in to check access.

Figure 1
Figure 2

Notes

  1. 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. 2.

    See, for example, Luce (2010).

  3. 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. 4.

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

  5. 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. 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. 7.

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

  8. 8.

    For example, Lawrence and Slaughter (1993).

  9. 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. 10.

    See White (1985).

  11. 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. 12.

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

  13. 13.

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

  14. 14.

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

  15. 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. 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. 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. 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. 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. 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. 21.

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

  22. 22.

    Bernhardt et al. (2001).

  23. 23.

    Sum and McLaughlin (2010).

  24. 24.

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

  25. 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. 26.

    Kruse et al. (2010).

  27. 27.

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

  28. 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. 29.

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

  30. 30.

    See Bernhardt et al. (2009).

  31. 31.

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

  32. 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.

References

  1. Appelbaum, E, Gittell, JH and Leana, C . 2008: High performance work practices and economic recovery, www.lerablog.org.

  2. Autor, D. 2010a: U.S. labor market challenges over the longer term. Working Paper, Department of Economics, MIT, 5 October.

  3. Autor, D . 2010b: The polarization of job opportunities in the U.S. labor market: Implications for employment and earnings. The Center for American Progress and The Hamilton Project of the Brookings Institution: Washington DC.

  4. Autor, D, Dorn, D and Hanson, GH . 2011: The China syndrome: Local labor market effects of import competition in the U.S., Working paper, Department of Economics, MIT, February.

  5. Autor, D, Levy, F and Murnane, RJ . 2003: The skill content of recent technological change: An empirical exploration. Quarterly Journal of Economics 118 (4): 1279–1333.

  6. Bailey, MJ and Dynarski, SM . 2010: Growing inequality in post-secondary education. Mimeograph, Department of Economics, University of Michigan.

  7. Barley, S . 2010: Building an institutional field to corral a government: A case to set an agenda for organization studies. Organization Studies 31 (6): 777–805.

  8. Batt, R and Appelbaum, E . 2010: Globalization, new financial actors, and institutional change: Reflections on the legacy of LEST. Paper presented at the Colloquium: Travail, Emploi et Competence dans la Mondialisation, LEST, Université de la Méditerranée, 27–28 May.

  9. Bernhardt, A, Milkman, R, Theodore, N, Heckathorn, D, Auer, M, DeFilippis, J, Luz González, A, Narro, V, Perelshteyn, J, Polson, D and Spiller, M . 2009: Broken laws, unprotected workers: Violations of labor and employment laws in America's cities. National Employment Law Project: New York.

  10. Bernhardt, A, Morriss, M, Handwork, MS and Scott, M . 2001: Divergent paths: Economic mobility in the new labor market. Russell Sage: New York.

  11. Black, SE and Lynch, LM . 2001: How to compete: The impact of workplace practices and information technology on productivity. The Review of Economics and Statistics 83 (3): 434–445.

  12. Bluestone, B and Kochan, T . 2012: Toward a new grand bargain: Collaborative approaches to labor-management reform in Massachusetts. The Boston Foundation: Boston.

  13. Blair, M . 2010: Financial innovation and the distribution of wealth and income. Working Paper, Vanderbilt University School of Law.

  14. Cutcher-Gershenfeld, J and Kochan, T . 2004: Taking stock: Collective bargaining at the turn of the century. Industrial and Labor Relations Review 58 (1): 3–26.

  15. Davis, GF . 2009: Managed by the markets: How finance re-shaped America. Oxford University Press: New York.

  16. Dew-Becker, I and Gordon, RJ . 2005: Where did the productivity growth go? Inflation dynamics and the distribution of income. Brookings Papers Economic Activity 2: 67–127.

  17. DiNardo, J, Fortin, NM and Lemieux, T . 1996: Labor market institutions and the distribution of wages, 1973–1992: A semiparametric approach. Econometrica 64 (2): 1001–1046.

  18. Dobbin, F . 2009: Inventing equal opportunity. Princeton University Press: Princeton.

  19. Ferguson, J-P . 2008: The eyes of the needle: A sequential model of union organizing drives, 1999–2004. Industrial and Labor Relations Review 62 (1): 3–21.

  20. Foulkes, F . 1980: Personnel practices of large non-union firms. Prentice-Hall: Englewood Cliffs.

  21. Freeman, RB . 2011: What can we learn from NLRA to create labor law for the 21st century? ABA Journal on Labor and Employment Law 26 (2): 327–344.

  22. Hacker, JS and Pierson, P . 2010: Winner-take-all politics. Simon and Schuster: New York.

  23. Heckman, JJ and LaFontaine, PA . 2010: The American high school graduation rate: Trends and levels. The Review of Economics and Statistics 92 (2): 244–262.

  24. Jacoby, S . 2005: The embedded corporation: Corporate governance and human resource management in Japan and the United States. Princeton University Press: Princeton.

  25. Jacoby, S . 2009: Finance and labor: Perspectives on risk, inequality, and democracy. In: Brown, C, Eichengreen, B and Reich, M (eds). Labor in the Era of Globalization. Cambridge University Press: Cambridge.

  26. Kochan, TA . 2011: Rethinking and reframing U.S. policy on worker voice and representation. ABA Journal of Labor and Employment Law 26 (2): 231–249.

  27. Kochan, TA, Eaton, A, McKersie, RB and Adler, P . 2009: Healing together: The Kaiser permanente labor management partnership. Cornell University/ILR Press: Ithaca.

  28. Kochan, TA, Katz, HC and McKersie, RB . 1986: The transformation of American industrial relations. Basic Books: New York.

  29. Kruse, D, Freeman, R and Blasi, J (eds). 2010: Shared capitalism at work: Employee ownership, profit and gain sharing, and broad-based stock options. University of Chicago Press: Chicago.

  30. Lawrence, RZ and Slaughter, MJ . 1993: Trade and U.S. wages: Giant sucking sound or small hiccup? Brookings Papers on Economic Activity 2: 161–210.

  31. Lazonick, W . 2009: Sustainable prosperity in the new economy. W.E. Upjohn Institute: Kalamazoo, MI.

  32. Leonard, J . 1984: Employment and occupational advance under affirmative action. Review of Economics and Statistics 66 (3): 377–385.

  33. Lee, DS . 1999: Wage inequality in the United States during the 1980s: Rising dispersion or falling minimum wage. Quarterly Journal of Economics 114 (3): 977–1023.

  34. Lemeiux, T . 2008: The changing nature of wage inequality. Journal of Population Economics 21 (1): 21–48.

  35. Levine, DI and Lewin, D . 2006: The new ‘managerial misclassification’ challenge to old wage and hour law; or, what is managerial work. In: Lewin, D (ed). Contemporary Issues in Employment Relations. Labor and Employment Relations Association: Champaign, IL, pp. 189–222.

  36. Levy, F and Murnane, RJ . 2004: The new division of labor: How computers are creating the next job market. Princeton University Press: Princeton.

  37. Levy, F and Temin, P . 2009: Institutions and wages in post-world war II America. In: Brown, C, Eichengreen, B and Reich, M (eds). Labor in the Era of Globalization, Chapter 1. Cambridge University Press: Cambridge.

  38. Lewin, D . 2011: Resolving employment disputes through the courts: Recent evidence from managerial misclassification and independent contractor vs. employee status litigation. Paper presented to the 63rd annual meeting, Labor and Employment Relations Association, Denver, CO, January.

  39. Lichtenstein, N . 1995: The most dangerous man in Detroit. Basic Books: New York.

  40. Luce, E . 2010: The crisis of middle class America. Financial Times, 30 July. http://www.ft.com/cms/s/2/1a8a5cb2-9ab2-11df-87e6-00144feab49a.html.

  41. Mills, DQ and Friesen, GB . 1996: Broken promises: An unconventional view of what went wrong at IBM. Harvard Business School Press: Boston.

  42. Mitchell, DJP . 1985: Shifting norms in wage determination. Brookings Papers on Economic Activity 2: 575–599.

  43. National Marriage Project. 2010: When marriage disappears: Marriage in America 2010. Institute of American Values, University of Virginia: Charlottesville, Virginia.

  44. Oreopoulos, P, Von Wachter, T and Heisz, A . (under revision): The short- and long-term career effects of graduating in a recession: Hysteresis and heterogeneity in the market for college graduates. IZA Discussion Paper No. 3578, Available at SSRN: http://ssrn.com/abstract=1158975 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x.

  45. Osterman, P and Shulman, B . 2012: Good jobs America. Russell Sage: New York.

  46. ‘Palley, T . 2007: Financialization: What it is and why it matters Levy Economics Institute. Working Paper No. 525.

  47. Philippon, T . 2007: Why has the U.S. financial sector grown so much? The role of corporate finance, NBER Working paper 13405.

  48. Piketty, T and Saez, E . 2003: Income inequality in the United States, 1913–1998. Quarterly Journal of Economics 118 (1): 1–39.

  49. Rubinstein, SA and McCarthy, J . 2011: Reforming public school systems through sustain union-management collaboration, http://www.americanprogress.org.

  50. Sum, A and McLaughlin, J . 2010: The massive shedding of jobs in America. Challenge, November–December: 56–76.

  51. Taylor, G . 1948: Government regulation of industrial relations. Holt: New York.

  52. Von Wachter, T, Song, J and Manchester, J . 2007: Long-term earnings losses due to job separation during the 1982 recession: An analysis using longitudinal administrative data from 1974 to 2004. Department of Economics, Columbia University, Discussion Paper No. 0708-16.

  53. Weil, D . 2010: Fissured employment. Working paper, Boston University, 24 November.

  54. Western, B and Rosenfeld, J . 2010: Unions, norms, and the rise in American wage inequality. Working Paper, Department of Sociology, Harvard University.

  55. White, TH . 1985: The danger from Japan. New York Times Sunday Magazine, 28 July.

Download references

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.

Author information

Rights and permissions

Reprints and Permissions

About this article

Cite this article

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

Download citation

Keywords

  • wages
  • labor policy
  • productivity

JEL Classifications

  • Jo8
  • Labor Economics Policies