How Much are Workers to Blame for Income Inequality?

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A common refrain in conversations about poverty—and unemployment and income inequality—is that more education will lead people to better-paying jobs and higher living standards. I certainly don’t want to make an argument against education, but recent research from MIT economist Frank Levy and business professor Tom Kochan provides an especially sharp illustration of why just focusing on the worker side of the equation probably won’t get us too far.

In this white paper, Levy and Kochan look at how wages have fared over the past 30 years. The benchmark is growth in labor productivity, a measure of the usefulness a firm derives from a worker. Since 1980, labor productivity has risen by 78%, but compensation for full-time workers, including fringe benefits, has grown by just about half of that. Less-educated workers—those most prone to poverty—have fared the worst. Looking at the pay of 35-to-44-year-old men, the researchers found that real wages have actually decreased by 10% for high-school graduates, while rising by 32% for college grads—still, at just half the rate of productivity growth. Wages for people with graduate degrees kept up with productivity gains until about a decade ago, but have lagged since then, as well.

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Even if we assume that some subset of workers is more valuable to firms (and driving labor productivity growth), we’re still left with the question of why no group of workers is reaping the benefit.

Levy and Kochan spend the bulk of that paper talking about the primary reason for this disconnect: the demise of what they call “the post-World War II Social Compact” between business, government, and unions that “helped to propagate wage norms throughout the economy.” What’s so interesting about Levy and Kochan’s account is that it’s full of self-interested economic actors. Old-line manufacturing firms like Ford and General Motors started the notion of wage growth moving in line with productivity, thanks in part to union influence, but largely non-unionized firms like Hewlett-Packard, Intel, and IBM followed the same path.  Levy and Kochan explain the decline of productivity-linked wage norms with a long list of changes, from the inflation shock of the 1970s to the financialization of the economy and ascendency of the shareholder as most important stakeholder.

University of Michigan sociologist Mark Mizruchi tells much of the same story in this working paper, but adds in another layer: the decline of a coordinated corporate elite. It’s a counterintuitive point, but a compelling one. When a small group of executives held the power, they could establish norms that benefited the economy as a whole, like Henry Ford’s famous belief in paying his workers well so that they could afford to buy his cars. As Mizruchi tells it, this coordination waned with the weakening of union and regulatory power (business elites had less reason to coordinate), and the rise of shareholder-centric capitalism and corporate take-overs (business elites had less ability to do so).

Where to from here? I recently discussed potential answers to that question with Paul Osterman, MIT professor of human resources and management, and co-author of the new Russell Sage book Good Jobs America: Making Work Better for Everyone. Osterman, like many thinkers in this space, is all for using government authority to try to reinstate some of the norms that have gone by the wayside. Minimum wage laws, the earned-income tax credit, living-wage pay in government contracts—these are all things Osterman believes in. But he is also very quick to point out that companies aren’t the enemy, and that policy should embrace a “dual-client approach.”

Osterman gives as an example a collaboration between a group of New York City restaurants and the advocacy organization Restaurant Opportunities Center. The restaurants, which voluntarily pay their workers higher wages and offer chances for advancement, helped develop a manual of industry best practices, which is now given to restaurants applying for a license with the City’s Department of Consumer Affairs. The restaurants’ motivation is clear: they don’t want to be undercut by competitors squeezing their workers. But the ultimate effect could be to establish the sort of social norm characteristic of the economy a generation ago, at least in one small slice of the business universe. The insight is a powerful one. If we’re interested in tackling poverty, inequality, and unemployment, it may be just as important to think the givers of wages as it is the receivers.

This is a guest post by former TIME staff writer Barbara Kiviat. Kiviat recently wrote a story in TIME magazine on poverty.