The poor performance of American workers’ wages in recent decades—particularly their failure to grow at anywhere near the pace of overall productivity—is the country’s central economic challenge. Indeed, it’s hard to think of a more important economic development in recent decades. It is at the root of the large rise in overall income inequality that has attracted so much attention in recent years. A range of other economic challenges—reducing poverty, increasing mobility, and spurring a more complete recovery from the Great Recession—also rely largely on boosting hourly wage growth for the vast majority.
Key findings include:
- The vast majority of Americans have experienced disappointing living standards growth in the last generation—largely due to rising inequality.
- Between 1979 and 2007, more than 90 percent of American households saw their incomes grow more slowly than average income growth (which was pulled up by extraordinarily fast growth at the top).
- By 2007, the growing wedge between economy-wide average income growth and income growth of the broad middle class (households between the 20th and 80th percentiles) reduced middle-class incomes by nearly $18,000 annually. In other words, if inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.
- The large increase in income inequality that has blocked living standards growth for the vast majority has been driven by the failure of hourly wages for the vast majority to rise in line with overall productivity after 1979.
- Between 1979 and 2013, productivity grew 64.9 percent, while hourly compensation of production and nonsupervisory workers, who comprise over 80 percent of the private-sector workforce, grew just 8.0 percent. Productivity thus grew eight times faster than typical worker compensation.
- Between 1979 and 2013, median real hourly wages rose just 6.1 percent (or 0.2 percent annually), compared with a decline of 5.3 percent (or -0.2 percent annually) for the 10th percentile worker (i.e., the worker who earns more than only 10 percent of workers). Over the same period, the 95th percentile worker saw growth of 40.6 percent, for an annual gain of 1.0 percent. The tight labor market of the late 1990s was the only period when hourly wages increased across the wage distribution, with the strongest growth occurring at the bottom.
- From the first half of 2013 to the first half of 2014, real hourly wages fell for all deciles, except for a miniscule two-cent increase at the 10th percentile. Underlying this exception to the general trend at the 10th percentile is a set of state-level minimum-wage increases in the first half of 2014 in states where 40 percent of U.S. workers reside.
- There is no evidence of upward pressure on wages—let alone acceleration of wages—that would signal that the Federal Reserve Board should worry about incipient inflation and raise interest rates in an effort to slow down the economy.
- Various wage gaps (particularly the wage gap between the middle and bottom of the wage distribution, between the top and the middle, and between the very top and everyone else) reflect the relative strength of policy changes in affecting Americans’ wages, as compared with other influences (such as the interaction of technology and education).
- The timing of changes in the gap between wages at the middle and bottom suggests that changes in the minimum wage and the unemployment rate explain most of its evolution. Increased trade, declining unionization, and excessive unemployment are at the root of the growing gap between the top and the middle. The growth of the gap between the very top and everyone else is driven in large part by developments in corporate governance and financial regulation that have given those at the very top the bargaining power to claim economic rents.
- Labor market policies and business practices have large, though often underappreciated, potential impacts on wages. While this set of policies and practices includes many discrete parts, the common thread of the past generation is that practices, institutions, and standards that have boosted bargaining power for low- and moderate-wage workers have been targeted for weakening—and have been replaced by policies that put more power in the hands of corporations and their CEOs.
- Policies that rebuild institutions to provide bargaining power to these workers should hence be a top priority for those looking for better wage outcomes. These policies include raising the minimum wage, strengthening unions, reducing wage theft, updating overtime protections, and correcting worker misclassification.