Matt Lucky reviews The Wage Standard: What’s Wrong in the Labor Market and How to Fix it by Arindrajit Dube, now out at Penguin Press.
In The Wage Standard: What’s Wrong in the Labor Market and How to Fix it, Arindrajit Dube baits readers with the enticing message that they likely deserve a raise. A key factor in this narrative is that until the 1980s, productivity and wages grew together: as workers produced more efficiently, they reaped the rewards. Alas, “between 1980 and 2019, non-managerial wages grew at roughly 0.5 percent per year, lagging far behind productivity growth of about 1.4 percent.” To put this in perspective, Lawrence Mishel calculates that if productivity and wages had remained linked, then the inflation-adjusted median hourly wage in the United States in 2019 would now be $32.71, rather than the $23.72 actually observed.
The central mystery in The Wage Standard is to account for the chasm that has opened up between productivity and take-home pay. Dube frames his approach as a detective investigating a crime scene: “first, we document the scene as precisely as possible; then we track down suspects, weigh the evidence, and figure out who’s responsible.” Two of the likely suspects, technological innovations and globalization, are partially ruled out from the outset. Dube repeatedly reminds us that other advanced nations have experienced these dynamics without suffering the magnitude of the U.S.’ growth in inequality.
He likewise contends that market forces cannot explain the whole mystery, though it is significant to the story. Workers do frequently confront a paucity of local employment options. This allows employers significant discretion in setting wages, as they have few competitors to bid up wages. Economists call this monopsony: the counterpart to monopoly, where a buyer (in this case, firms buying labor) holds the market power to dictate prices.
As evidence of monopsony power in the current U.S. economy, Dube cites his research with coauthors Ihsaan Bassier and Suresh Naidu on quit elasticities, measuring how changes in pay translate into a (un)willingness to leave a job from 2000 to 2017. Under competitive conditions, a firm underpaying workers compared to competitors ought to see workers leave for competitors. Yet, they find that quit rates were relatively unresponsive to firms paying lower wages than competitors, consistent with a monopsonistic environment. Specifically, a 5% lower wage merely increases the monthly quit rate from 6.5% to 7%.
Monopsony power matters, but Dube instructs that “what ultimately determines wages are the pressures that employers face when determining pay. Historically, forces like labor unions, tight labor markets, minimum wage laws, and societal wage norms worked together to counteract employer monopsony power.” Thus, to identify the guilty party in this case and concomitant policy remedies, Dube leads readers through an examination of these additional factors.
Central to this story is Dube’s conception of “the wage standard—the idea that there is a societally acceptable range of pay for most jobs.” In decades past, firms’ pay scales constrained disparities to preserve fairness and equity among employees. “CEOs certainly outearned janitors, but the accepted degree of inequality within a single workplace was limited by these shared notions of fairness,” Dube claims.
Normative wage standards were influenced by the zeitgeist of when a firm was founded. For instance, the big three automakers established their pay policies through tumults with organized labor resulting in the 1950 Treaty of Detroit that provided for an immediate 17.5% raise for autoworkers and ongoing cost-of-living adjustments as well as “expanded paid vacation time, employer-sponsored health insurance, and pension benefits.” Importantly, the Treaty’s terms propagated to other contracts throughout the industry as firms copied the lead of the big three, establishing a broadly applicable wage standard for automakers. In contrast, Walmart’s expansion in the 1980s and ‘90s adopted a low-road approach in a nonunion environment. Whereas the big three automakers under the Treaty of Detroit set a high wage bar for peers to imitate, Walmart ducks the competition with “wages [that] lagged by 15 percent compared to [other] large retailers.” What is more, Dube contends that Walmart spreads its low-road practices by deploying its market power to pressure suppliers into similarly suppressing wages. Opening a Walmart in a county, he reports, produces an estimated 5% loss in earnings for workers through suppressed wages and employment.
However, founding wage norms are merely quasi-durable. Dube recounts how changes in a firm’s organization eroded the sense of linked fate and a shared sense of fairness among employees. One of these organizational mechanisms was outsourcing various jobs to contractors. Dube argues that outsourcing creates social distance between workers employed directly by a firm and those retained through contracting. That social distance works against a shared sense of fairness because, Dube relates, “when everyone works for the same employer, it’s natural to compare wages within the company. However, when the cleaning staff works for an outside contractor, their reference group may shift to other workers under the same contractor.”
Another factor eroding wage standards was the shift toward preferring leadership with business degrees over internally promoting leadership that took place starting in the 1980s. Specifically, “when a company shifted to a CEO with a business degree, wages declined by about 6 percent on average…At the same time, business managers themselves enjoyed pay raises, earning 5 to 8 percent more than their nonbusiness-school peers.” I would read this as another mechanism generating social distance within firms by segregating the employment experiences of leadership from those of employees.
Dube also centers on the power of tight labor markets to decrease wage inequality. When it is relatively easy for workers to find jobs and employers are forced to compete for talent, workers are empowered to negotiate for better pay. Alas, he reports that “since 1980, we’ve spent significantly more time in periods of high unemployment than we did between 1949 and 1979. Full employment became an elusive goal starting in the 1980s, and this trend persisted for decades.” Instead, Americans have been enduring a persistently slack labor market, and the result has been stagnant real wages for the bottom half of the wage distribution. Dube estimates that prior to the 1980s, the U.S. experienced a slack labor market, defined as periods when unemployment exceeded the Congressional Budget Office’s estimated natural rate of unemployment (about 4.4%), in 31% of quarters. From 1980 to 2023, that figure leaps to 64% of the time.
Toward the end of pursuing a tighter labor market, Dube discusses a mix of fiscal and monetary policy options for stimulating the economy. He offers kind words for both the 2009 American Recovery and Reinvestment Act and the assorted Biden-Trump Covid stimulus measures. To the former, he contends that it saved around 2.6 million jobs that would have been lost in the Great Recession. Speaking to the latter, the ambitious pandemic response created a tight labor market even more quickly than the recovery from the Great Recession. Importantly, Dube claims the pandemic stimulus measures were not the primary cause driving inflation in the early 2020s. For that, he instead blames supply chain disruptions. Put differently, the upsides of running a hotter economy for workers appear clear, and the connection to inflationary harms is illusory.
On this point, Dube further contends that the Federal Reserve has been overly fearful of inflation, which has prevented conditions from favoring tighter labor markets. He relates, quoting Neel Kashkari, the president of the Minneapolis Fed, that “in recent years, we have repeatedly believed we were at or beyond maximum employment only to be surprised when many more Americans reentered the labor market or chose not to leave, increasing the productive capacity of the economy without causing high inflation.” Given this experience, Dube suggests that “perhaps the labor market could be allowed to run hotter than we had dared since the 1970s.” The implication is that the persistently timid fiscal and monetary policy stances of American political elites, both elected and technocratic, have unnecessarily inflicted broad economic deprivation over largely imagined fears.
Another major culprit for rising inequality in Dube’s mystery is the decline in the value of the federal minimum wage. He highlights that if the minimum wage had kept pace with productivity growth since 1968, then it would be roughly $25 today, rather than its current value of $7.25. Critics of minimum wage contend that a higher minimum wage will cost jobs, but Dube concludes through an extended literature review that evidence of job losses from minimum wage hikes is elusive.
For instance, he recounts some of his own research that examined paired counties along state borders to identify how changes to one state’s minimum wage impact employment. Comparing adjacent counties where one experiences a change in minimum wage allows the researchers to rule out other possible explanations, as demographics and industry are likely to be similar. He and his coauthors find that an increase in minimum wages produced minimal employment effects, though raising the minimum does produce some losers, as it “causes low-productivity companies to exit, while higher-productivity firms expand their operations.” Thus, part of the reason a higher minimum wage does not create negative employment effects is that it culls low-productivity firms to pave the way for their stronger peers. In aggregate, that outcome appears to be a good one. It produces better wages, better businesses, and maintains employment levels, yet it’s not a bloodless policy. With all that said, the minimum wage cannot be raised without limit. Dube’s suggested minimum wage policy is “a sensible benchmark [of] two-thirds of each state’s median wage for all workers…[A]pplied to 2023 data, this rule yields minimum wages from $12.73 in Mississippi to $22.64 in Maryland, with a median across states of $15.92.”
Minimum wage policies are, however, just the minimum. Dube further recommends sectoral bargaining and wage boards. Wage boards are government-organized bodies where employers and employees negotiate wages, among other benefits and worker conditions, for entire industries and sectors. Dube argues that wage boards can extend the coverage of collective bargaining to a larger population of workers beyond the membership of unions. Dube contends that the U.S. was particularly vulnerable to deunionization compared with peer nations because it adopted a firm rather than sectoral-level bargaining structure. For comparison, “union membership in France is 10 percent in 2019 [not extraordinarily different from the US], but union coverage remains as high as 98 percent.” Wage boards appear to deliver the wage benefits of unionization to workers without the necessity of vastly expanding union membership in the US.
I will offer a few points of interest and concern to close. First, fairness plays a major role in Dube’s narrative, yet I am unsure how precisely he would define it. We see fairness discussed as a shared cultural norm that determined pay disparities in the mid-twentieth century. Elsewhere, fairness is described in terms of innate psychological drives. We also encounter repeated discussions of a “fairer” economy as one with greater wage equality. Yet, “more equal than the status quo” can be many things. Do we need to follow Rousseau’s instruction that “no citizen should be so rich as to be capable of buying another citizen, and none so poor that he is forced to sell himself”? Or perhaps the Rawlsian Difference Principle, which mandates that any additional social and economic inequalities are to benefit foremost the least well off. If fairness is the desideratum for Dube’s economic reform agenda, it is important to clarify what constitutes fairness.
There is also the question of what is a properly “fair” economy. For instance, Dube’s recommended minimum wage benchmark of 2/3rds of the median wage may produce a fairer economy, but is that policy target properly fair, or is it merely what policy makers can achieve in a practical sense? What does a fair economy look like, and how do we know when we have achieved it?
Another consideration here is the politics of minimum wage increases and what that indicates for policy reform strategies. Dube advises that “nearly every time it’s put to voters—whether in blue, purple, or red states—minimum wage increases win approval. Yet, the issue remains contentious in state legislatures and Congress.” Both Democratic and Republican voters respond positively to increasing minimum wages when allowed the option. Dube’s discussion appears to recommend ballot initiatives over legislative approaches to reform because initiatives unbundle economic questions from party identification and social issues. For instance, blue-collar Republicans who are socially conservative and more moderate on economic questions (even before Trump shuffled the parties, such economically liberal Republicans were plentiful) can vote for fair wage policies without needing to hold their nose and vote for a Democrat they otherwise find odious. One unpleasant, though not surprising, conclusion from this is that inequality has festered in the U.S. because our two-party system deprives Americans of cleaner policy choices.
On the whole, Dube presents in The Wage Standard an argument that a substantial share of the economic inequality that has grown in the past half-century in the U.S. is not a matter of fate dictated by adamantine market forces. Instead, many Americans have less money in their pockets because of policy decisions by elites. The volume contains a degree of optimism that, perhaps ironically, fills my cautious soul with trepidation as Dube in effect argues that there are few to no downsides in terms of inflation or unemployment to his preferred policy regime, aside from closing low-productivity firms. I hope the world is that kind, but fear deeper complications lurk in reality.
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