Over the past five decades, growing wage inequality has been one of the defining features of the American economy. Since the late 1970s, inflation-adjusted pay for most U.S. workers has largely stagnated, while pay for the country’s highest earners has skyrocketed. This sluggish wage growth for middle-income Americans has been widely acknowledged and recognized by economists and politicians across the political spectrum. Yet, the root causes of these trends have frequently been wrongly attributed as an unfortunate result of apolitical market forces that one neither can nor would want to alter, such as automation and globalization. In fact, disappointing wage growth for most workers in the U.S. economy was not an unintended consequence—it was the intentional outcome of legislative, regulatory, and corporate policies deliberately implemented to constrain labor costs, decisions made on behalf of the rich and corporations and validated by many economists.
Bargaining power is the central though often unspoken determinant of wage outcomes. Generations of economics students have been taught that markets efficiently set wages through supply and demand and that an individual worker’s pay reflects their productivity. This naive textbook model assumes that employees and employers have equal bargaining power, that any worker being underpaid relative to the value they produce for a firm can simply quit and find a better-paying option. But this perfect textbook market is the exception, not the rule. Employers almost always have disproportionate bargaining power, and for much of the last half-century, public policy has been shaped to ensure that outcome.
The simplest illustration of this unequal bargaining power is shown in the divergence between labor productivity and typical worker compensation. Between 1979 and 2019, economy-wide productivity (the amount of income generated in an average hour of work, net of depreciation) grew by 59.7 percent, while the compensation (wages plus benefits) of the median U.S. worker rose by only 13.7 percent—a 46 percentage point divergence between the growth in value of what American workers produced and what the typical worker was paid. During this time, the bottom 90 percent of U.S. workers experienced wage growth slower than the economy-wide average, while top wage earners (mostly in finance and corporate management) and owners of capital reaped large rewards made possible only by this anemic wage growth for the bottom 90 percent.