Political decisions by elected officials are largely responsible for a “collapse in pay for the bottom 90 percent” of the labor market since 1979, according to a new analysis of wage stagnation by the Economic Policy Institute, a left-leaning think tank.
While many economists pin much of the blame for wage stagnation on impersonal market forces, such as free trade and technological change, EPI’s Josh Bivens and Heidi Shierholz contend that specific policy decisions — including efforts to weaken unions, the decay of the minimum wage, and monetary policy that prioritizes low inflation over full employment — are responsible for tilting the balance of power away from workers and toward employers.
By their calculations, that shift in power cost the bottom 90 percent of wage earners $1.53 trillion in income in 2015 alone, or $10,800 for every American household.
As Bivens and Shierholz tell it, a relatively recent thread of economic research into monopsony power — which they define as “the leverage enjoyed by employers to set their workers' pay” — has helped economists explain some of the wage stagnation observed in the United States over the past 40 years. You can think of monopsony power as the flip side of monopoly power: If monopoly power lets companies charge higher prices to consumers, monopsony power lets them pay lower wages to workers.
Research into monopsony power finds that many job markets are dominated by a relatively small number of employers. If you are, say, a coal miner, there may be just one or two coal mines within 100 miles of your home. If the mine you're working at is treating you unfairly, you don't have many options for finding a new job — particularly if you already left the other mine for similar reasons. In the absence of any serious competition for the most talented workers, employers have a huge amount of leeway in setting workers' salaries, and they often set them at levels below what traditional economic theories would expect.
If rising monopsony power — that is, the increasing dominance of a small number of large firms — were fully to blame for recent wage stagnation, Bivens and Shierholz argue, you'd expect to see wages stagnating across the board. If a coal mine has the leeway to skimp on pay for its low-skill workers, in other words, it's probably skimping on pay for high-skill workers, as well.
But that's not what appears to be happening, Bivens and Shierholz say. Instead, much of the wage stagnation observed since the 1970s has occurred at the low end of the wage spectrum. Think of all the charts you've seen showing how income has exploded at the top of the wage distribution while staying flat everywhere else. Superstar managers and highly skilled employees have made out very well over the past few decades, while wages for rank-and-file, low-skill workers have hardly budged.
Bivens and Shierholz say that poor wage growth is less a function of increasing employer power and more a product of deliberate efforts to undermine worker power. Policymakers, for instance, have been reluctant to raise minimum wages, which would directly benefit workers at the bottom of the income distribution. They’ve taken steps to make it harder for workers to secure bargaining power, eroding union membership in the process. The Federal Reserve, they say, has contributed to the problem by prioritizing low inflation over high employment.
Many of these policies were put in place with good intentions — to boost productivity and the health of the economy as a whole. But the data show that productivity has actually slowed since the 1970s. "Between 1973 and 2017," Bivens and Shierholz write, "net productivity grew half as fast as it had from 1948 to 1973."
Bivens and Shierholz conclude that if policymakers are interested in boosting wages, they should work to increase the power of workers relative to employers by prioritizing strong unions, high minimum wages, and full employment. “In short, the policy movement to disempower workers not only led to less equal growth, but was also associated with significantly slower growth,” they write.
Ioana Marinescu, an economist with the University of Pennsylvania who has written extensively on the causes of wage stagnation, said she generally agrees with the paper's findings but thinks the EPI authors' emphasis on certain policy decisions is overstated. She points out that wage stagnation has happened in other wealthy countries that have pursued different economic policies. She also says that policies to reduce monopsony power have a real role to play in bringing wages up across the board.
"There is no reason not to go after abuses of dominance in the labor market if we go after abuses of dominance in the product market," Marinescu said. Hence, antitrust legislation could have the double effect of lowering consumer prices and boosting wages.