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    January 06, 2023 HUMAN RIGHTS

    America's Vast Pay Inequality Is a Story of Unequal Power

    by David Cooper and Lawrence Mishel

    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. 

    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.

    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.

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    Patterns of Inequality

    Three wage gaps aptly describe how pay has diverged over the last four decades: the gap between low- and middle-wage workers, the gap between middle-wage and highly paid workers, and the gap between the very highest-paid earners and everyone else.

    From 1979 to 2019, wages for the lowest wage workers—measured by the tenth percentile wage—barely budged over a 40-year stretch, rising just 3 percent after inflation. Remarkably, the bulk of this minuscule growth occurred only in the more recent past. Wages for low-wage workers fell drastically during the 1980s when the federal minimum wage was frozen amid high inflation. Since 1988, the gap between low-wage workers and middle-wage workers has shrunk somewhat but remains larger today than it was in 1979.

    As already noted, wage growth in the middle has been sluggish, with median pay rising just 13.7 percent from 1979 to 2019. In contrast, annual pay for high earners, measured as those in the 90th to 95th percentiles, rose by 51.8 percent over this same period.

    Still, this pales in comparison to pay growth for those at the top. From 1979 to 2019, the wages of the top 1 percent rose by 160 percent after inflation, while wages rose 345 percent for the highest 0.1 percent of earners. A major factor driving these changes was the astronomical growth in CEO compensation at large firms, which rose nearly 1,200 percent from 1978 to 2019. As a result of this astronomical growth, these workers’ share of the pie has doubled: the top 0.1 percent went from receiving 1.6 percent of overall earnings in 1979 to 5 percent by 2019, while the top 1 percent share rose from 7.3 percent to 13.2 percent.

    In summary, wage growth for the vast majority—those in the bottom 90 percent—has been relatively weak, while those in the top 10 percent, especially those in the top 1 percent, have done exceedingly well.

    Choices that Have Suppressed Wages and Spurred Inequality

    Our organization, the Economic Policy Institute (EPI), has rigorously documented the factors that explain the divergence between productivity and worker compensation—effectively, the choices that have suppressed wage growth for most U.S. workers.

    The largest and most obvious factor is excessive unemployment. The Federal Reserve (Fed) is charged with the dual mandate of pursuing the maximum level of employment consistent with stable inflation. However, since 1979, while the Fed has aggressively sought to tame inflation, it has been far more tolerant of high unemployment. Operating under the theory that tighter labor markets inevitably lead to higher inflation as rising wages push up consumer prices, the Fed has consistently reined in job growth by hiking interest rates whenever unemployment approached the allegedly “natural rate,” regardless of whether there was any evidence that inflation was on the rise. Congressional and state lawmakers share culpability here too—until the COVID-19 pandemic-induced recession, fiscal policies to spur recoveries were weak and sometimes sabotaged by state-level austerity, as happened in the recovery after the Great Recession.

    The result was an unemployment rate that averaged 6.3 percent from 1979 through 2017, a full percentage point higher than during the previous three decades, denying workers the opportunity to benefit from tighter labor markets. (When jobs are plentiful, workers have more leverage to demand higher pay because the implicit threat of an outside job option becomes more real.) Our research estimates that had unemployment averaged 5.5 percent (a modest goal) rather than 6.3 percent, median wages would have been 10 percent higher in 2017. Had the unemployment rate averaged 5 percent, median wages would have been 18 percent higher.

    The erosion of collective bargaining was the second most important factor. In 1979, 27 percent of U.S. workers were union members. By 2019, less than 12 percent of the workforce was unionized. This drop in unionization occurred across many industries, the result of increasingly aggressive corporate anti-union practices, weak labor laws, and the proliferation of an entire industry of union-avoidance consultants that emerged in the 1980s. EPI estimates that the drop in collective bargaining suppressed wages at the median by 7.9 percent overall and by 11.6 percent for the median male worker.

    The third most significant factor was globalization; however, it’s again critical to recognize that globalization occurred through the intentional corporate and political choices that deliberately offshored manufacturing and drove increased imports from low-wage nations. This reduced wages by roughly 5.6 percent, or about $2,000 annually, for a full-time U.S. worker earning the median wage.

    These three factors alone—excessive unemployment, eroded collective bargaining, and corporate-driven globalization—can account for more than half of the divergence between net productivity and median hourly compensation.

    Numerous other now common corporate practices are used to sap workers’ bargaining power. For instance, it has become standard practice to outsource any and all non-core functions—e.g., hotels contract out cleaning, food service, laundry, parking, etc.—a practice whose sole purpose is to lower labor costs (i.e., wages). Increasing misclassification of employees as independent contractors, the use of noncompete clauses in employment contracts, anti-poaching agreements, forced arbitration clauses, and other labor law “innovations” are all an effort to reduce workers’ bargaining power.

    Direct policy changes have assisted as well. Many states have dramatically cut and limited access to unemployment insurance benefits, housing assistance, and other safety net programs, pressuring the unemployed to take any job that might be available even if it means a pay cut. The federal minimum wage, stuck at $7.25 an hour since 2009, is worth less today, adjusted for inflation, than at any point since 1956. Similarly, neglected overtime regulations leave far more of the workforce exposed to excessive work hours with no additional compensation than was the case prior to 1980.

    The Pandemic and the Path Ahead

    The COVID-19 pandemic was an inflection point in these trends. The federal government’s unprecedented relief programs—broad expansions to unemployment insurance and direct cash assistance to households—provided millions of workers left jobless by lockdowns with a financial cushion that kept them afloat until the economy reopened. This, combined with a jobs recovery that was dramatically faster than previous ones—again, a result of strong federal relief programs—has given workers more bargaining power than they have had in decades. Ample job openings have facilitated quitting to take a new, better job.

    Consequently, wage growth since early 2021 for low-wage workers has been strong. High rates of inflation, caused by pandemic-induced supply chain snarls and exacerbated by the war in Ukraine, have moderated the impact of these gains, but not entirely. Low-wage workers have experienced real wage growth over the past year, narrowing slightly the gap between those in the middle and those at the bottom of the pay distribution. However, the high inflationary period has been a boon for corporate profits—meaning those at the top have pulled even further away from everyone else.

    Reversing the United States’ seemingly unstoppable growth in inequality will require doing more to empower America’s workers. The pandemic recovery illustrates what is possible: a tight labor market, precipitated by strong government protections against financial hardship, and greater public salience around adjacent aspects of job quality—e.g., access to paid sick leave, childcare, remote work—have spurred greater worker organizing, interest in unions, and measurable wage gains in many sectors. Whether this momentum will be sustained remains to be seen; without reforming weak and outdated labor laws, America’s working class still faces an uphill battle.

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    David Cooper

    Senior Researcher, Economic Policy Institute; Director, Economic Analysis and Research Network

    David Cooper is a senior researcher at the Economic Policy Institute and director of the Economic Analysis and Research Network (EARN). He has written extensively on labor markets, inequality, and the challenges facing U.S. workers.

    Lawrence Mishel

    Former President, Economic Policy Institute

    Lawrence Mishel is the former president of the Economic Policy Institute (2002–17) and retired as a distinguished fellow. He directed the Unequal Bargaining Power initiative from 2019 to 2022. He has a Ph.D. in economics from the University of Wisconsin–Madison.