The defining challenge of our time is flat or falling wages for the vast majority of workers, which is a root cause of many of the problems facing the U.S. economy. Our most urgent economic priority is increasing wages and incomes for everyone, not just for some.
Specifically, America’s economic policies need to focus on restoring the link between productivity and wage growth. For three decades after the second World War, a wise set of economic policies allowed workers to reap the fruits of their labor, workers’ wages rose in tandem with their productivity and the American middle class flourished. Since 1979, by contrast, hourly wages for the vast majority of America’s workers have stagnated or declined, and wage growth has become delinked from productivity. The productivity of America’s workers has increased 64.9% since 1979, but real hourly compensation has risen only 8.2%.
The standard by which economic policy proposals should be judged is whether they aim to achieve broad-based wage growth and restore the link between productivity and wages. Policies that aim to increase wages for just some workers—or increase economic mobility or opportunity for just some workers—are welcome but inadequate.
If we really want to increase economic opportunity, we need to restore broad-based wage growth. Rising inequality in recent decades has given more and more Americans a sense that the rules of the game are rigged and we do not all have an equal chance to get ahead. They are right, of course, and the evidence is all around us. Racial and ethnic wage gaps have not been narrowed; the gender pay gap has not been closed; manufacturing workers see their benefits cut while failed CEOs are rewarded with multimillion-dollar golden parachutes; the ratio of CEO pay to average worker pay has grown from 46–1 in 1983 to 331–1 in 2013; the share of income going to wages and salaries has fallen to its lowest level since World War II; and the share of income going to interest, dividends, profits and rents has risen to its highest level in nearly 70 years. We need broad-based wage growth to increase the opportunities for all workers to get ahead and provide for their families.
Likewise, if we really want to increase upward mobility, we have to restore broad-based wage growth. Countries with more inequality tend to have less upward mobility, which suggests that high levels of inequality tend to hinder upward mobility. The United States, for example, has more inequality and less upward mobility than many other countries, including Pakistan, Spain, Germany, Japan, Finland, Sweden, Canada, France and Denmark.
One lesson we should have learned from recent experience is that U.S. economic policy no longer can focus exclusively on growth in the expectation that the benefits of growth will trickle down to working people, since virtually all the gains from growth have been flowing to the wealthiest Americans. From 2009 to 2013, real wages fell for the entire bottom 90% of the wage distribution, while almost all (95%) of the income gains during this period went to the richest 1% of Americans.
Instead, our economic policies now must focus explicitly on higher pay for the vast majority of workers. A growing number of studies show that such policies would have no negative impact on growth, meaning they would raise living standards significantly for the vast majority of workers in America.
In fact, a growing body of evidence points to an even more profound conclusion: economic policies focusing explicitly on increasing pay for the vast majority of workers are actually necessary to generate robust economic growth. The U.S. economy clearly is suffering from a persistent shortfall of aggregate demand, which can hold back economic growth. A growing chorus of economists is warning that this shortfall threatens to depress economic growth for decades to come—a problem known as “secular stagnation.” Inequality and the upward redistribution of income make this problem worse, while increasing workers’ pay would help close the shortfall of aggregate demand.
So how do we go about achieving broad-based wage growth and restoring the link between productivity and wage growth? First we have to understand that wage stagnation over the past 35 years was not accidental or inevitable, and was not the product of exogenous forces such as “globalization” or “technological progress.” Rather, it resulted from the suppression of workers’ pay over a period of decades through deliberate policy choices by people who benefited from those choices. In short, the wealthy rigged the rules of the game to benefit themselves. Now we have to change the rules of the game and correct their policy mistakes.
One of those mistakes was to abandon full employment as our overriding economic policy objective and to allow hypersensitivity to inflation to take precedence over raising wages. A clear lesson from the past 35 years of economic history is the importance of full employment and the effectiveness of tight labor markets in achieving broad-based wage growth. Between 1995 and 2000, unemployment was at its lowest levels in generations, and we saw the only period of broad-based wage growth in the past four decades. Wages grew for workers at every income level, but grew fastest for workers in the bottom 40% of the wage distribution.
Yet even in the absence of full employment and tight labor markets, we must pursue policies that increase hourly wages by strengthening workers’ individual and collective bargaining power. Two important causes of the broad-based wage stagnation of recent decades were the declining percentage of workers represented by unions and the erosion in the purchasing power of the minimum wage. These things didn’t just happen by themselves; they happened, as President Obama has said, because “businesses lobbied Washington to weaken unions and the value of the minimum wage.” We have to fix those mistakes by reforming our labor laws to restore workers’ bargaining power and by restoring the purchasing power of the minimum wage (with no sub-minimum wage for tipped workers or trainees unless they are protected by a collective bargaining agreement). Together these policy changes would have a significant impact on wage growth across the spectrum.
Another cause of broad-based wage stagnation has been the erosion of U.S. labor standards, which are in urgent need of repair. For example, we need to stop businesses from misclassifying their employees as independent contractors; crack down on outright wage theft by employers; restore workers’ overtime protections; and provide the enforcement resources necessary to make sure our labor standards are respected.
In many situations, increasing workers’ hourly compensation may not be enough. As the percentage of workers represented by unions has fallen, more and more businesses have gotten away with replacing full-time positions with part-time work. In these situations, what’s really needed is full-time employment—or at least adequate hours—and restoring workers’ ability to bargain collectively is the best way to achieve this goal. In this vein, we wholeheartedly support the demand of workers at Walmart, the nation’s largest private employer, for minimum annual pay of $25,000.
Broad-based wage stagnation poses an enormous challenge for lawmakers. They face a growing demand for policies to arrest the downward spiral of middle-class living standards. Yet lawmakers no longer can get away with pretending that faster economic growth will lift all boats, or that championing the economic interests of Wall Street is consistent with the economic well-being of working people. Focusing on policies that explicitly aim to increase pay for the vast majority of workers and restore the link between productivity and wage growth means taking sides for working people.