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.