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Revitalizing wage growth: Policies to get American workers a raise



One simple question—are wages rising?—is as central to the health of our democracy as it is to the health of our economy. Without rising wages, the dreams of American families to live in good homes, to support their families, to retire comfortably, and to see their children do better—what we call the American Dream—simply cannot be realized.

One of the best measures economists use to determine Americans’ ability to achieve this dream is whether wages are rising, broadly and consistently. For the last few decades, and for too many workers, they have not. The U.S. economy has experienced long-term real wage stagnation and a persistent lack of economic progress for many workers. The median worker in 2017, for instance, earned only slightly more than in 1979.

Over the long arc of U.S. history wages have fluctuated along with the economy. Real wages are affected by inflation and by the supply and demand for labor. They can move depending on the progress of technological advances, the strength or weakness of capital investment, the size of workers’ nonwage benefits, or conditions that affect labor’s share of economic output.

What makes the past forty years different from earlier U.S. history are the new and more-stubborn factors contributing to the stagnation of a typical worker’s pay. Wages have risen for those in the top of the distribution, but—with the exception of brief periods like the latter half of the 1990s—they have been stagnant for those in the bottom and middle. Wages have grown for women and fallen for men, while remaining much lower for people of color. Globalization and technological change are exerting downward pressure on the wages of some less-educated workers. Declines in the real minimum wage and union membership have also lowered wage growth.

Wage growth now also varies significantly by location, with wages in poor areas increasingly less likely to catch up to those in rich areas. Households have become less mobile: today’s workers are less likely to move to a different state or to a different job, which intensifies the disparities among regions (Ganong and Shoag 2017). The fact that business start-ups and closings have also declined—a signal of decreased firm dynamism—has in turn likely lowered productivity growth and disrupted wage ladders in ways that have been particularly deleterious for wage growth. Even if incumbent firms increased their innovative activity, removing one concern regarding the decrease in start-ups, the smaller number of new firms reduces job switching opportunities for workers and puts downward pressure on wage growth.

Wage stagnation does more than constrain family budgets: it also leaves workers and families feeling discouraged, even disenfranchised. Working year after year without a meaningful rise in wages weakens workers’ confidence in the economic system. Even more, it undermines their faith in democratic institutions to make the necessary changes in public policy to deliver a robust improvement in their standards of living. As former Treasury Secretary Lawrence Summers, a member of our advisory council, wrote in September 2017, “The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children. As long as a substantial majority of American adults believe that their children will not live as well as they did, our politics will remain bitter and divisive” (Summers 2017). Stagnant wages divide us not only by income, but also by our understanding of what it means to be an American and to have our own shot at the American Dream. For this reason, with so much at stake, the task of restarting wage growth has taken on great urgency.

Hence, the decision to publish this volume. For more than a decade The Hamilton Project has offered proposals and analyses aimed at promoting economic growth, broad-based participation in growth, and economic security. Here we have assembled the evidence and analysis that detail why wages have been stagnant for so many workers, and identified public policies that could effectively contribute to the growth in productivity and wages that are core parts of improving living standards for all Americans.

Slow productivity growth and stagnant wages are complex puzzles, but are not insoluble. In the following chapters, our experts offer evidence-based policy proposals to support wage growth through increased productivity. These proposals include greater support for policies that increase human capital (education and training policies), boost worker mobility, and sustain robust labor demand.

Other experts featured in this volume propose raising wage growth by strengthening worker bargaining power. Enhanced wage transparency, modernized labor market standards and institutions, and more-competitive labor markets can all play important roles in helping workers share in the benefits of economic growth. When these policies help match workers to more productive jobs, they can raise economic growth as well.

The goal shared by each proposal is raising productivity growth and wages as engines for creating a faster-growing and more-dynamic economy that will benefit all workers over the long term. We offer the proposals with the conviction that forty years of stagnation need not presage forty more. If we are able to put in place a policy regime to reverse these long-term trends, we can restore Americans’ confidence in the economy and in the American Dream.

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Wages have stagnated in recent decades for typical workers. While a number of economic, policy, and technological developments bear some responsibility, economists have grown increasingly concerned that declining dynamism is an important cause. The decline in dynamism encompasses the various ways in which workers and entrepreneurs have become less likely to explore new patterns of economic activity: starting new, fast-growing businesses; switching jobs; and moving across the country. As these activities diminish, both productivity growth and worker bargaining power suffer, limiting workers’ opportunities and damaging wage growth. Improving the ability of workers to switch jobs could thus improve both their wages and their productivity. Declining dynamism may suggest a role for public policy in establishing the conditions for workers to successfully climb the job ladder.

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Human capital is central to raising wages. This framing paper describes trends in human capital investment and educational attainment, and reviews the evidence of wage returns to educational attainment and to early childhood education, K-12 education, postseconday education, and workforce development policies and programs. Finally, this paper synthesizes a decade of Hamilton Project policy proposals on education and human capital around a framework of access, affordability, and quality.

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Lifetime incomes have stagnated for the majority of American men since the cohort of workers that entered the labor market in the late 1960s. The evidence shows that those who turned age 25 after the 1960s have experienced a large decline in their starting wages relative to earlier cohorts, and did not experience faster growth in their wages over the life cycle to make up for those earlier losses, resulting in lower lifetime incomes. These trends coincided with a stagnation of educational attainment for men, as well as rising income disparities among workers with some college experience. In light of these facts, this paper presents some design considerations for human capital policies that aim to boost wage growth for younger workers.

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Geography is an important part of economic opportunity—but due to monetary and nonmonetary costs of migration, college attendance is less likely for those who live farther from postsecondary institutions. The college educated have also become increasingly concentrated in larger labor markets, while at the same time mobility across markets is falling. Abbie Wozniak proposes two modifications to the existing Federal Student Aid programs to level the playing field on these dimensions.

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By conventional measures, the U.S. job market has suffered some degree of slack for about 70 percent of the time since 1980. The absence of persistent, strong labor market demand has a significant negative impact on wages and incomes, with these costs falling disproportionately on the least advantaged. In this paper, Jared Bernstein offers a four-part proposal to increase labor demand along with earnings and employment opportunities.

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Firms use non-competes widely in order to minimize recruiting costs, safeguard investments, and protect intellectual property more easily than is achieved via non-disclosure agreements. But these benefits come at a cost to workers, whose career flexibility is compromised—often without their informed consent. In this paper, Matt Marx describes evidence from empirical research on non-compete agreements and recommends policies to balance the interests of firms and workers.

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Labor market collusion or monopsonization—the exercise of employer market power in labor markets—may contribute to wage stagnation, rising inequality, and declining productivity in the American economy, trends which have hit low-income workers especially hard. To address these problems, Alan Krueger and Eric Posner propose three reforms. First, the federal government should enhance scrutiny of mergers for adverse labor market effects. Second, state governments should ban non-compete covenants that bind low-wage workers. Third, no-poaching arrangements among establishments that belong to a single franchise company should be prohibited.

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One component of the challenge of wage stagnation is asymmetric information on wages, whereby employers have superior knowledge of the distribution of wages relative to workers. This asymmetry of information is potentially suppressing wage growth as it limits workers’ ability and inclination to negotiate for higher pay. In this paper, Ben Harris advances a five-part proposal to improve wage transparency as a strategy for improving worker bargaining power, and ultimately, raising wages across the income distribution.

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For most of the period since the 1970s the United States has suffered from two trends: stagnant wages for most workers and rising inequality. In this paper, Heidi Shierholz focuses on the erosion of labor standards, institutions, and norms that has reduced the bargaining power of low- and moderate-wage workers. She proposes a suite of remedies to help strengthen worker bargaining power and increase wages, including increasing the minimum wage and the overtime salary threshold, passing fair scheduling laws, boosting unionization, passing paycheck transparency laws, restricting employer tactics to keep wages low and reduce worker leverage, ensuring immigrant workers have full labor rights, and boosting both enforcement of and compliance with labor regulations.

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