Wage suppression — not stagnation — is costing workers $10 an hour

Radical and rising economic inequality is no secret — and now, neither is its cause. New research from the Economic Policy Institute shows that the massive upward redistribution of income our nation has suffered these past four decades can largely be attributed to policies intentionally designed to suppress the wages of American workers. 

To be clear, wage suppression was not an unintended consequence — it was the intentional outcome of policies at the legislative, regulatory and corporate levels deliberately implemented to keep wages low. As a nation, we chose to suppress wages on behalf of the rich and corporations — and with spectacular success.

In the post-World War II boom, from 1948 to 1979, wages broadly rose across the wage scale largely in lockstep with economy-wide productivity, helping to build the largest and most prosperous middle class the world has ever seen. But after 1979, the interests of the wealthiest Americans sharply diverged from everyone else. Productivity, net of depreciation, rose by 56 percent between 1979 and 2017, a period during which the top one-tenth of 1 percent saw their earnings soar at least five times that rate, while median hourly compensation gained only 13 percent and the bottom one-third of workers actually saw their real wages fall.

We conservatively estimate that this 43-percentage point gap between productivity and median compensation — this shift of national income from labor to profits and from the bottom 90 percent of earners to the very top earners — is costing the median American worker nearly $10 an hour — almost $20,700 a year for a full-time worker.

Many have sought to blame rising inequality on structural changes in the underlying economy, but our research finds that in fact deliberate policy choices are largely at fault. How can we be so confident in assigning intent? The answer comes from the policies that have played the biggest role — excessive unemployment, eroded collective bargaining and corporate-driven globalization — three policies which are inherently focused on suppressing wages that account for more than half the productivity-wage divergence and a loss of more than $5 an hour for the typical worker.

The largest and most obvious is excessive unemployment. The Federal Reserve is charged with the dual mandate of pursuing the maximum level of employment consistent with stable inflation, but since 1979 the Fed has aggressively erred on the side of the latter. 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 actually on the rise).

The result was an unemployment rate that averaged 6.3 percent from 1979 through 2017, a full point higher than during the previous three decades, intentionally denying workers the opportunity to benefit from tighter labor markets. We find 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 18.3 percent higher — at the 10th percentile, 21.2 percent higher.

The Federal Reserve intentionally raises interest rates and slows job growth which results in the diminished power of workers to demand higher wages. This is a fact. Thus, regardless of how seriously you take the inflation threat, you cannot deny that excessive unemployment is a choice — and that wage suppression is its proximate goal. And the same holds true of the litany of other policy choices that play an empirically assessable role in suppressing wages.

For example, the primary purpose of collective bargaining is to bargain for higher compensation, thus any policy that erodes the right to unionize intentionally suppresses wages. The purpose of outsourcing, both offshore and domestically, is to reduce labor costs, and thus to suppress wages. Misclassification, non-competes, anti-poaching agreements, forced arbitration agreements and most other labor market “innovations” are all implemented in an effort to suppress wages. And then, of course, there’s the minimum wage.

Unchanged since 2009, the federal minimum wage now stands at $7.25 an hour. Had it continued to rise with productivity as it had during the post-war decades, it would be $20 an hour today. The whole purpose of the minimum wage is to lift the wages of low-paid workers. Thus, our decades-long policy of eroding the minimum wage, the overtime threshold, and other labor standards can only be understood as a deliberate choice to suppress wages.

In fact, wage suppression has become such a norm that employers appear totally flummoxed at the reluctance of some workers to come back on the job at pre-COVID wages in the midst of a deadly pandemic. It apparently never occurs to them to entice workers back by offering higher pay. Instead, they blame more generous unemployment benefits for creating a “labor shortage.” But in truth, what we have now — what we’ve long had — is a wage shortage created by decades of policies — enabled by economists and implemented on behalf of corporations and the wealthy — deliberately designed to keep wages low.

As our research reveals, our crisis of radical inequality is not an accident. It is a choice. Policy decisions are responsible for rising inequality — and policy decisions can reverse it. It appears that the Biden administration is taking this lesson to heart. The already-passed American Rescue Plan is driving us quickly to low unemployment. Some predict it will reach 3.5 percent by the end of 2022. Policies already underway include:

• Rebuilding collective bargaining, raising the minimum wage (legislatively and for contractors)
• Policing worker misclassification
• Restoring access to overtime for salaried workers
• Reinvigorating the Equal Employment Opportunities Commission

The American Jobs Plan targets good quality jobs for noncollege-educated workers. This agenda is a recipe for restoring sustained robust wage growth for the vast majority, finally.

Larry Mishel is a distinguished fellow at the Economic Policy Institute and an author with Josh Bivens of the new report, “Identifying the Policy Levers Generating Wage Suppression and Wage Inequality.” This research is part of the Unequal Bargaining Power initiative at EPI funded by the Hewlett and Spitzer foundations.

Nick Hanauer is a venture capitalist, founder of the public policy incubator Civic Ventures helped fund the report and is also the host of the podcast Pitchfork Economics.