Why? Why, for so many for middle-class and working-class Americans has “economic growth become a spectator sport”, as the liberal economist Jared Bernstein memorably put it.
There are two competing explanations for what happened to tear the connective tissue between growth and wages: the Productivity Story and the Power Story. The productivity story goes as follows: wages reflect the productivity of the worker; the modern economy rewards skills more than in the past; and lots of people have not upskilled quickly enough. Under the wonky label “skills-biased technological change”, this view prevailed across most of the political spectrum well into this century. Free markets could deliver fair-enough outcomes, so long as everyone got the education and training they needed. “Lifelong learning” became the mantra of all, and the cliched answer from politicians and scholars to the deepening problem of inequality.
There are two problems with this story. First, the necessary investments in education and training were never actually made. Community colleges, the most common post-secondary destination for students from families in the bottom 80% of the income distribution, are underfunded, overstretched and largely ignored by the policy elite. Lifelong learning never made it from the thinktank policy briefs and Davos panels to the real lives of real people.
The second problem is that productivity turns out to be only part of the story – and perhaps not even the most important part. It is certainly wrong to claim that there is no relationship at all between productivity growth and wage growth. But the connection has certainly become less clear over time, and harder to square with the trends in wage inequality.
Even the strongest and most thoughtful proponents of the Productivity Story, such as Michael Strain, director of economic policy studies at the American Enterprise Institute, concede that it is but one element. As Strain writes, “it is most useful to think of wages as being determined by a combination of competitive market forces, bargaining power, and institutions”.
The Power Story is that wages do not reflect the productivity of the worker, but their power. Lower wages are a reflection of growing powerlessness, the result of four intersecting trends. First, unions have become almost mythical creatures, unicorns of the labor market. Just one in 20 workers in the US private sector are members of a trade union, down from more than one in four in the 1950s. Sometime around 1980, US businesses declared war on unions, and won.
Second, the wage gap between similarly qualified workers in different companies has widened. One widely cited study finds that one-third of the increase in the earnings gap from 1978 to 2013 occurred within firms, while two-thirds of the rise occurred between firms. It is the market power of one firm versus another that determines wages, rather than the power of a particular employer versus its workers. Even if workers can get organized, they cannot force a completely different employer to share more of their surplus with them. (Now that would be socialism.)
Third, market power has become increasingly concentrated into fewer, larger companies, especially in terms of power in the labor market. The dangers of monopoly power in market economies are well known, and the push for strong anti-trust laws has historically united the pro-market right and the progressive left. In recent years the threat of monopsony power (ie a dominant single buyer), not least in employment, has risen. Amazon is the poster child of monopsony power. But in many towns, a single hospital might be the biggest employer, and the sole employer of nurses, for example. Hard in these circumstances for workers to negotiate better pay and conditions
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