Why wages aren’t growing in America

Editor's note:

This article originally appeared in the Harvard Business Review on October 24, 2017.

The majority of Americans share in economic growth through the wages they receive for their labor, rather than through investment income. Unfortunately, many of these workers have fared poorly in recent decades. Since the early 1970s, the hourly inflation-adjusted wages received by the typical worker have barely risen, growing only 0.2 percent per year. In other words, though the economy has been growing, the primary way most people benefit from that growth has almost completely stalled.

Understanding how and why this stagnation occurred is not just an academic question — it is essential to redesigning public policies so that more Americans share in the benefits of economic growth. In a recent Hamilton Project at Brookings report, we highlight what we believe are some of the most critical developments over the last few decades and consider what is necessary for the typical American to get a raise.

For wages to grow on a sustained basis, workers’ productivity must rise, meaning they must steadily produce more per hour, often with the help of new technology or capital. Further, workers must receive a consistent share of those productivity gains, rather than seeing their share decline. Finally, for the typical worker to see a raise, it is important that workers’ gains are spread across the income distribution. If wages are rising but the increases are all going to the best-paid workers, the typical worker doesn’t see a gain. Two of these conditions have not been met, which explains the fact that productivity has risen while the median wage has barely changed.

Since the early 1970s, the hourly inflation-adjusted wages received by the typical worker have barely risen, growing only 0.2 percent per year.

In a notable shift from earlier decades, labor’s share of income is no longer constant, but has fallen from nearly 65 percent in the mid-1970s to below 57 percent in 2017. Though some of this decline reflects measurement limitations, much of the decline is plausibly due to shifts in technology and market structure that have disadvantaged workers. Even as the share of income channeled to labor has declined, the distribution of income has become more unequal. Since the late 1970s, large wage gains have accrued to workers at the top of the distribution, and wages have been declining or stagnant for the bottom half of the income distribution.

Assigning relative responsibility to the policies and economic forces that underlie rising inequality or declining labor share is a challenge. International trade and technological progress have played significant roles, putting downward pressure on the wages of low-skilled workers. For example, as imports from low-wage countries made inroads into the manufacturing sector, job losses in the United States were substantial in some areas. At the same time, U.S. manufacturing has learned to produce more with fewer workers. Both developments generated widely shared benefits in the form of new products and lower prices, but also led to dislocation of some workers and downward pressure on less-skilled workers’ wages.

We also know that educated workers have fared better; the wages received by those who finished their education with a four-year college degree grew from 134 percent of high school graduates’ wages to 168 percent. While increasing educational attainment has helped to raise wages for many workers, it remains the case that the majority of Americans have not completed a four-year degree.

Domestic policy choices have mattered, too, especially because they have affected workers’ bargaining power and the allocation of wages across different workers. For example, the deteriorating value of the inflation-adjusted minimum wage, along with declining union membership, have lowered wages for many in the bottom and middle of the wage distribution.

The wage stagnation of the past 40 years is also linked to some developments that may have suppressed productivity growth, which has slowed since 1973, with an exception of a surge from 1995 to 2004. Some of the most disturbing trends can be loosely grouped under the heading of declining “dynamism.” Workers are less likely to move across states than they once were (fewer than 2 percent of workers do so today, as compared with about 3 percent who did 40 years ago). They are also less likely to switch jobs than they once were. These changes may reflect a diminished ability to find the places and jobs that are most conducive to upward mobility.

Business dynamism also fell. In the late 1970s, 14 percent of firms were under a year old; that figure has fallen to 8 percent in the most recent data. Because young, fast-expanding firms have historically been an important driver of wage growth, the increasing age of firms may be contributing to lackluster worker gains.

Since the global financial crisis, wage growth (without adjusting for inflation) has continued to be slow. In part, this represents low inflation — real wage growth in recent years has actually surpassed the rates in the 1980s, 1990s, and 2000s, but is still low — and it may also represent the hangover from a severe recession. Labor market slack has been one reason for low wage growth earlier in the recovery and may still have some impact recently; the more available workers are out there, the less ability workers have to demand higher wages. The reintegration of unemployed or new workers into the workforce after a recession can also lead to slower wage growth, given that their wages are generally lower than those of already-employed workers. However, particularly slow productivity growth in the last decade, combined with the long-run forces mentioned above, is also crucial to explaining sluggish wage growth.

It took many factors — some the result of deliberate policy choices, some the outcome of broad economic processes — to produce decades of wage stagnation for the typical worker. Similarly, it will take many incremental reforms and new policies to reestablish the conditions that support robust, broadly shared wage growth. There is no single wage growth panacea, but many policies would help, including: raising the minimum wage; increasing worker bargaining power (including by reducing noncompete contracts or collusion among firms); ensuring adequate labor demand through looser fiscal or monetary policy; increasing dynamism through pro-mobility or entrepreneurship policies; and making broad improvements to education or productivity policies. Given the longstanding trends and limited improvements in living standards for many workers, taking action to increase wage growth is one of the most important policy imperatives we face.