The Wage Standard: What's Wrong in the Labor Market and How to Fix It

MEASURING INEQUALITIES

Was there something peculiar about retail jobs that could explain why wages at the checkout counter diverged so sharply from overall productivity gains? Not really. In fact, wages for middle-and low-income workers across many industries failed to keep pace with the growth in economy-wide productivity. To get a clearer view, we can again turn to CPS data and examine wage trends across the distribution. (Diagram not shown)

For context, the 10th percentile wage is what 10 percent of workers earn less than, while the 90th percentile wage is what 90 percent of workers earn less than. If economic gains are broadly shared, these percentiles would grow at similar rates. But if gains are concentrated at the top, we will see widening gaps. And keep in mind that a real wage growth of zero means nominal wages rose just enough to match inflation. (The glossary in appendix A goes more deeply into how real wages are constructed.)

Between 1980 and 2019, real wages at the 90th percentile rose by 53 percent—an impressive gain, though still below the growth in overall productivity. But the picture looks far worse for workers at the middle and bottom. Over the same period, median wages rose by just 23 percent, while wages at the 10th percentile grew only 17 percent. These modest gains resemble the sluggish growth seen in retail wages and fall well short of both productivity growth and the pay increases at the top. In short, while top earners surged ahead, workers at the bottom barely kept up with the rising cost of living until very recently. As recently as 2014, real wages at the 10th percentile were still hovering near their 1980 level.

The divergence in wages began in the early 1980s, when pay at the bottom actually fell in real terms. Strikingly, the median hourly wage was virtually stagnant between 1980 and 1997, even as hourly productivity increased by 23 percent during that period. Wages for the middle and lower percentiles only ticked upward during select years, such as the late 1990s and late 2010s, driven by tight labor markets and supportive economic policies—topics we'll explore in this book. Even with those sporadic gains, by 2019, average wages for the bottom 90 percent of earners were just 29 percent higher than in 1980, while productivity had grown by 73 percent. As the economist Lawrence Mishel has pointed out, this disconnect meant that most workers' pay lagged well behind their potential during the post-1980 era.

A big reason behind this gap between median wages and overall productivity is that wages in America have become more unequal over the last half century. While average (mean) wages grew by 42 percent over this period, both the median wage and the 10th percentile wage trailed well behind. This happens because average wage growth is pulled upward by large gains at the top, whereas the median wage reflects what's happening at the middle. A second factor is the declining share of income going to labor, which has fallen, especially since 2000. As wages claim a smaller slice of the economic pie, it boosts the share going to capital owners, further dampening the gains most workers see in their paychecks. All in all, less than 10 percent of salary earners saw their wages keep pace with productivity growth.

You may wonder whether these figures depend on how we measure inflation. In short, yes, different inflation measures can shift the wage numbers somewhat. Yet because I used the same measure to adjust both wages and productivity, the key comparisons still hold, and the overall story remains much the same. The gap between middle—and low-income wages relative to overall productivity persists, as does the disparity between top and bottom wages. No matter which inflation measure you use, it's clear that since 1980, most Americans—particularly those near the bottom—have gained relatively little from the nation's growing prosperity. Many even saw their real wages decline in the 1980s and early 1990s.

Household surveys don't allow us to peer into the upper echelons of earners—like those in the top 1 percent—because of issues like limited sample sizes, confidentiality constraints, and low response rates to surveys from high-income households. To fill that gap, researchers use administrative data (for example, from the Social Security Administration) that covers nearly all U.S. earners. Analyses of these more comprehensive data confirm that the concentration of earnings at the top is even more extreme than household surveys suggest. Real annual earnings for the bottom 90 percent rose by 40 percent between 1980 and 2019, whereas for the top 1 percent they soared, increasing by 169 percent. Looking further up the pay ladder only reinforces how dramatically inequality has climbed since the 1980s.

As its title suggests, The Wage Standard focuses on money that workers earn. For most households—especially those below the top tier—wages also constitute the largest share of their total income. Nevertheless, once we factor in other income sources such as business earnings, investments, and government transfers, additional trends and complexities appear that wage data alone can't show. There is also the role of taxes: In theory, a progressive tax system reduces inequality, but how well it has done so in recent decades is another question.