Causes of Wage Stagnation

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http://www.epi.org/publication/causes-of-wage-stagnation/

The abandonment of full employment
The failure of macroeconomic policymakers to seek full employment for most of the past 35 years, out of fear that low unemployment rates would spark accelerating inflation, has had profoundly destructive effects on wage growth for the vast majority. It has been a key cause of wage inequality, since research shows that high rates of unemployment dampen wage growth more for workers at the bottom of the wage ladder than at the middle, and more at the middle than at the top.1 Since the official end of the Great Recession in mid-2009, the most glaring policy choices that worsened unemployment, and therefore contributed to wage stagnation, are Congress’s embrace of fiscal austerity and state and local governments’ spending cutbacks.

When job opportunities are as weak as they have been in the current recovery, it is not just job seekers who suffer; workers with jobs see their paycheck and benefits falter. That there are far more jobless workers than available jobs means employers can get and retain workers without offering significant wage increases.

The importance of unemployment to wage stagnation and inequality is demonstrated by the trends in the 1995–2000 period: The last time we saw persistently low unemployment (the late 1990s) was also the last episode of across-the-board wage growth and a time when low-wage workers’ wages fared better than those in the middle. The most important policy decisions affecting wage growth over the next few years will be made by the Federal Reserve Board about when, and to what degree, to raise interest rates in an effort to slow the recovery. It is critically important that monetary policy seek to restore full employment that brings unemployment down in all communities and facilitates inflation-adjusted wage growth that matches (or even exceeds for a time) productivity growth.

Declining union density

Research shows that unionization does not harm economic efficiency but does lead to higher wages, and does more to lift wages of low- and middle-wage workers than of high-wage workers. Collective bargaining also leads to a larger share of corporate income going to wages rather than profits; the fact that corporate profits are at historic highs is a reflection, in part, of the current weakness of collective bargaining and the heightened power of corporate owners and managers.

A significant portion of the rise of wage inequality between high earners and middle earners is clearly associated with the ongoing erosion of unionization—which leads not just to reduced union bargaining power, but also weakens unions’ ability to set norms and wage standards that raise the wages of comparable nonunion workers. The decline of unions can explain about a third of the entire growth of wage inequality among men and around a fifth of the growth among women from 1973 to 2007.2 Reversing these destructive trends requires better, fairer labor laws, which have not come close to keeping pace with dramatically increased employer aggressiveness in fighting workers’ efforts to choose to bargain collectively. We should restore workers’ rights to bargain collectively, to strike, to boycott, and to use strategies that increase the economic leverage of workers to shape their pay and working conditions.