Does America need a wage rise?

As Labor Day approaches, we are likely to hear from a growing chorus of political, religious, academic, labor and business leaders who agree “America needs a raise” to reverse three decades of wage stagnation and rising income inequality.

But this consensus that something needs to be done has yet to produce a clear narrative or strategy for what to do. Getting there requires an agreement on what norms should guide wage growth, an understanding of the causes of wage stagnation and policies to address these causes in ways consistent with today’s economy and workforce.

It’s been 133 years since New York City celebrated the nation’s first Labor Day holiday in 1882 to acknowledge the role workers play in the economy. The federal government followed suit a dozen years later. As we review the suspected culprits behind wage stagnation, now is a good time to consider a new normal to ensure workers get their fair share of America’s prosperity.

The old norm dies

America once had at least an implicit norm guiding wages. As the chart below shows, from roughly the end of World War II through much of the 1970s, real (cost of living-adjusted) wages increased in tandem with gains in productivity.

That norm emerged out of negotiations from 1947 to 1950 between General Motors and the United Auto Workers. It then spread through collective bargaining with other auto companies by unions and companies that adapted it to their specific circumstances in other industries and by nonunion firms that wanted to minimize the incentive for their employees to unionize.

But something changed around 1980, as the chart shows. Since then, real wages have increased only about 8% compared with a 63% increase in productivity. This has set off a great debate among analysts searching for an explanation of what caused this wage-productivity gap to grow.

The college degree gap

The first argument that gained favor was that changes in technology were producing “skill-biased technological change” that increased demand and pushed up wages for more highly educated workers.

The growing wage gap in the 1980s between those with a college degree and those without one supported this view. If this was the primary cause, the remedy should be increased education.

However, growth in this gap eased the following decade and especially since 2000, according to Economic Policy Institute think tank. While there is little question that the long-run effects of technological change are in this upward direction and will thereby make it harder for uneducated workers to command high wages, there is also a growing awareness that increased education alone will not solve the wage stagnation problem.

Globalization’s role

The next suspect in the blame game has been globalization.

Since 1980, America has lost just over one-third of its manufacturing jobs, and it’s no question that competition from China elsewhere has held down wages.

While investment in modern manufacturing technologies might help rebuild US output, these technologies will not generate anywhere near the number of good-paying jobs that have been lost.

Moreover, the small number of manufacturing jobs being “resourced” back to the US are, in many cases, coming back at a discount from prior levels commanded by similar jobs.

The woeful minimum wage

The third culprit in the search for an explanation is the decline in purchasing power of the national minimum wage.

Today’s US$7.25 per hour minimum has a purchasing power about 25% below its peak in 1968. Raising the national minimum to $10.10, as proposed by President Obama and allies in Congress, would restore the purchasing power for those now at the bottom of the wage distribution.

But this effort has been blocked by the ongoing political gridlock in Washington. This has led to campaigns to increase the minimum wage in different cities and states, most notably the successful fight for $15 in Seattle and efforts of fast-food workers to raise or eliminate tipped wage minimums. Local innovations like this help but are not likely to spread to less hospitable communities and states across the country.

The decline of unions

More recently, analysts have begun to recognize that the long-term decline in unions and worker bargaining power accounts for a sizable portion of the problem.

It is no coincidence that the gap between wages and productivity began to expand dramatically around 1980, a turning point for collective bargaining.

That’s when union bargaining power began the three-decade-long decline that continues today. International competition was already eating away at unionized manufacturing companies in the US, but the trend was accelerated by efforts to tame rampant inflation, a deep recession and the growth of nonunion domestic competition. In addition, President Ronald Reagan’s firing of striking air traffic controllers signaled management could take a harder line again unions.

Recent estimates indicate the decline in unions accounts for as much as 20% to 30% of the rise in wage inequality. But because the 1935 labor law that supported worker rights to organize is so badly broken and outmoded, unions are not likely to rebound soon. And even if they did, the old form of collective bargaining would probably not work as well in today’s global economy.

The one period in which wages began to move in a positive direction since this period of union decline, especially for low-wage workers, was when the labor market finally tightened during the buildup of the high-tech bubble from 1994 to 1997.

Very tight labor markets would do so again, but the Fed’s worry about future inflation is likely to limit how far or how long it will promote tight labor markets.

A new national wage norm

This quick review suggests there is no single cause of wage stagnation and therefore no silver bullet for reversing it.

But what if we focused instead on reestablishing a simple norm that wages and incomes should rise in tandem with worker productivity? How might we retrofit the old policies and institutions that supported this norm to work in today’s innovation-based economy?

Such an effort has to start with education. Continual technological changes require both higher levels of skill and the ability to learn throughout one’s career. This calls for strategies that expand apprenticeship programs and technical schools that engender the skills companies will need as baby boomers retire, as well as expanding the number of college graduates with the advanced science, technical, math and problem-solving skills in high demand.

If global competition makes it difficult to sustain high wages in manufacturing or other industries under outsourcing pressure, then wage increases in these sectors will need to be tied more directly to profits, customer service or other indicators of enterprise performance. This is the approach the United Auto Workers and domestic automakers took to better align incentives of owners and workers in ways that both help drive productivity and reinstall a sense of fairness at the workplace.

While this kind of norm should emerge from the private sector, ultimately it will take a comprehensive update of labor law to provide workers the ability to bargain at the highest levels where the key decisions affecting wages are made.

The ruling last week by the National Labor Relations Board allowing subcontracted workers to negotiate with the parent firm is a step in the right direction. It may serve as a precursor to permitting fast-food workers to negotiate directly with a parent firm such as McDonald’s as opposed to only with individual restaurant franchisees.

More reforms such as this one are necessary to protect and empower low-wage workers. Such labor reforms could include creating enterprise-wide “work councils” and supporting efforts of employees and contractors at “sharing” economy companies like Uber to negotiate a fair share of the revenue they help produce. One way involves drawing on the bargaining power provided by apps that help them calculate their hourly earnings after deducting the full range of expenses they incur.

Minimum wages could also be tied to other economic indicators such as the cost of living or the ratio of the minimum to median wages and raised gradually to allow employers to make adjustments in strategy to avoid or minimize negative employment effects. That’s the strategy Seattle employed to pass its $15 minimum while easing the impact on business.

How to spread the new norm

What might replace collective bargaining as the means for diffusing this norm across the economy? Here government can learn from its historic role in spreading equal employment practices across industry when it started in 1965 requiring government contractors to take affirmative actions to eliminate discrimination in employment.

The purchasing power of government can be brought to bear by requiring employers to disclose their wage and hour compliance records. It can also give priority in awarding contracts to firms that pay above-average wages and have in place supportive productivity-enhancing work practices.

The federal government is on a course to do the first part. President Obama signed an executive order requiring companies to disclose their compliance records. Now it is time to move on to the second part of this strategy.

So this Labor Day, let’s not only chant that America needs a raise but also rally around a simple norm that all workers should share fairly in the economic growth they help produce. We need to start pursuing this norm in ways that are well-matched to the needs of an innovation- and knowledge-driven global economy.

This article is published in collaboration with The Conversation. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Thomas Kochan is a Professor of Management at MIT Sloan School of Management

Image: Morning commuters are seen outside the New York Stock Exchange. REUTERS/Brendan McDermid.