Report | Raising America's Pay

How to Raise Wages: Policies That Work and Policies That Don’t

Raising America's Pay

Briefing Paper #391

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Introduction and executive summary

There is now widespread agreement across the political spectrum that wage stagnation is the country’s key economic challenge. As EPI has documented for nearly three decades, wages for the vast majority of American workers have stagnated or declined since 1979 (Bivens et al. 2014). This is despite real GDP growth of 149 percent and net productivity growth of 64 percent over this period. In short, the potential has existed for adequate, widespread wage growth over the last three-and-a-half decades, but these economic gains have not trickled down to the vast majority.

The Agenda to Raise America’s Pay

Because wage suppression stems from intentional policy choices, it can be reversed by making different policy choices. To boost Americans’ wages, policymakers must intentionally tilt bargaining power back toward low- and moderate-wage workers.

As this paper explains, wage stagnation is not inevitable. It is the direct result of public policy choices on behalf of those with the most power and wealth that have suppressed wage growth for the vast majority in recent decades. Thus, because wage stagnation was caused by policy, it can be alleviated by policy. In particular, policymakers must address two distinct sets of policies:

  • One set of policies that have stifled wage growth are aggregate factors that have led to excessive unemployment over much of the last four decades, and others that have driven the financialization of the economy and excessive executive pay growth.
    • Policymakers can help to deliver broadly shared wage growth through monetary and budgetary policy that prioritizes full employment—thereby tightening the labor market so that employers have to offer pay increases to get and keep the workers they need—and tax and other policies that help ensure economic gains do not accrue mainly to the top 1 percent.
      • Policies that will help create jobs and reach full employment include keeping interest rates unchanged until wage growth reaches 3.5 to 4 percent; enacting employment programs targeted toward hard-hit communities; increasing public investment in transportation, broadband, R&D, and education; and reducing the U.S. trade deficit.
      • Policies that will not help create jobs or reach full employment include corporate tax reform, lowering tax rates on individuals or corporations, raising interest rates, and pursuing trade deals harmful to U.S. workers.
  • Another set of policies concerns the business practices, eroded labor standards, and weakened labor market institutions that have reduced workers’ individual and collective power to bargain for higher wages.
    • Policymakers can help to grow wages by raising the minimum wage; updating overtime rules; strengthening rights to collective bargaining; regularizing undocumented workers; ending forced arbitration; securing workers’ access to sick leave and paid family leave; closing race and gender inequities; awarding government contracts only to firms that adhere to wage, health, and safety laws; and tackling workplace abuses such as misclassification and wage theft.
    • Policies that will not help to raise wages include individual or corporate tax cuts, austerity, increasing college or community college completion, deregulation, and policies aimed at increasing long-term growth.

Creating jobs and reaching full employment

The good news is that 246,000 jobs were created on average each month in 2014, faster than any year in the last recovery and since 2000. This job growth lowered unemployment to 5.6 percent in December. Unfortunately, we still have far to go before we recover from the financial crisis of 2008 and the recession that started after December 2007. Specifically, the Great Recession and its aftermath have left us with a jobs shortfall of 5.6 million—that’s the number of jobs needed to keep up with growth in the potential labor force since 2007—and current job creation rates will get us to pre-recession labor market health in August 2016 (Gould 2015). And even attaining this pre–Great Recession labor market health is an insufficiently ambitious goal. Instead, we should strive to reach genuine full employment with roughly 4 percent unemployment. Much is at stake (Katz 2014). If we do not attain robust full employment, many communities, particularly those of color, will be left out of the recovery. Moreover, under current policy conditions, significant wage growth for the vast majority may only occur when we achieve much lower unemployment than we now have. The reason for this is simple: Employers do not need to offer significant wage increases to attract and retain employees because the number of willing workers is far greater than the number of available jobs.

Policies that will help to achieve full employment are the following:

1. Monetary policy that targets full employment, with wage growth matching productivity gains

The most important economic policy decisions being made about job growth in the next few years are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates. The decision to raise interest rates is essentially a decision to slow the economy and weaken job and wage growth. There are many false concerns about accelerating wage growth and exploding inflation based on the mistaken sense that we are at or near full employment. Policymakers should not seek to slow the economy until wage growth is comfortably running at a 3.5 to 4.0 percent rate—wage growth consistent with a 2 percent inflation target (since trend productivity is 1.5 to 2.0 percent, wage growth 2 percentage points faster than this yields rising unit labor costs, and therefore inflation, of 2 percent). Thereafter, the Fed should pursue monetary policy conducive to allowing wage growth to match productivity gains. In short, the key danger is slowing the economy too soon rather than too late.

2. Targeted employment programs

Even at 4 percent unemployment, there will be many communities that will still suffer substantial unemployment, especially low-wage workers and many black and Hispanic workers. To obtain full employment for all, we will need to undertake policies that can direct jobs to areas of high unemployment. The tool for this is the public and non-profit employment programs that several members of Congress have introduced in the last several years that create jobs by meeting unmet needs.1

3. Public investment and infrastructure

There is widespread agreement that we face a substantial shortfall of public investment in transportation, broadband, R&D, and education. Undertaking a sustained (for at least a decade) program of public investment can create jobs and raise our productivity and growth. In the early years this program would most effectively create jobs if we borrowed to finance it, but as we approach full employment we can raise revenues to cover its costs. In this way budget policy can be a tool to allow us to raise productivity and bring us closer to full employment.

4. Reducing our trade deficit

The annual U.S. trade deficit in goods and services increased from $476.4 billion in 2013 to $505.0 billion in 2014, an increase of $28.6 billion, or 6.0 percent (U.S. Census Bureau 2015). That deficit represents a huge reduction in U.S. GDP and employment. By making imports cheaper and U.S. exports more expensive, currency manipulation inflates the trade deficit and leads to huge job losses. Eliminating currency manipulation could reduce the U.S. global trade deficit by between $200 billion and $500 billion each year, which could increase overall U.S. GDP by between $288 billion and $720 billion and create between 2.3 million and 5.8 million U.S. jobs (Scott 2015).

Policies that do not help us reach full employment include:

1. Corporate tax reform

There are many false claims that corporate tax reform is needed to make us competitive and bring us growth. First off, the evidence is that the corporate tax rates U.S. firms actually pay (their “effective rates”) are not higher than those of other advanced countries (Hungerford 2014). Second, the tax reform that is being discussed is “revenue neutral,” necessarily meaning that tax rates on average are actually not being reduced; for every firm or sector that will see a lower tax rate, another will see a higher tax rate. It is hard to see how such tax reform sparks growth.

2. Cutting taxes

There will surely be many efforts in this Congress to cut corporate taxes and reduce taxes on capital income (e.g., capital gains, dividends) and individual marginal tax rates, especially on those with the highest incomes. It’s easy to see how those strategies will not work. Look at Figure A, which shows that these taxes have been reduced over the last 35 years since 1980. Yet, economic growth was slower since 1980 than in the preceding 30 years, when tax rates were much higher. Another useful comparison is to the last recovery following the Bush-era tax cuts, which had slower job growth than the current recovery.

Figure A

Top federal marginal tax rates, 1952–2009

Earned income Capital gains Corporate income
1952 91.0% 25.0% 52.0%
1953 91.0% 25.0% 52.0%
1954 91.0% 25.0% 52.0%
1955 91.0% 25.0% 52.0%
1956 91.0% 25.0% 52.0%
1957 91.0% 25.0% 52.0%
1958 91.0% 25.0% 52.0%
1959 91.0% 25.0% 52.0%
1960 91.0% 25.0% 52.0%
1961 91.0% 25.0% 52.0%
1962 91.0% 25.0% 52.0%
1963 91.0% 25.0% 52.0%
1964 77.0% 25.0% 50.0%
1965 70.0% 25.0% 48.0%
1966 70.0% 25.0% 48.0%
1967 70.0% 25.0% 48.0%
1968 75.3% 26.9% 53.0%
1969 77.0% 27.9% 53.0%
1970 71.8% 32.3% 49.0%
1971 60.0% 34.3% 48.0%
1972 50.0% 36.5% 48.0%
1973 50.0% 36.5% 48.0%
1974 50.0% 36.5% 48.0%
1975 50.0% 36.5% 48.0%
1976 50.0% 39.9% 48.0%
1977 50.0% 39.9% 48.0%
1978 50.0% 39.9% 48.0%
1979 50.0% 28.0% 46.0%
1980 50.0% 28.0% 46.0%
1981 50.0% 23.7% 46.0%
1982 50.0% 20.0% 46.0%
1983 50.0% 20.0% 46.0%
1984 50.0% 20.0% 46.0%
1985 50.0% 20.0% 46.0%
1986 50.0% 20.0% 46.0%
1987 38.5% 28.0% 40.0%
1988 28.0% 28.0% 34.0%
1989 28.0% 28.0% 34.0%
1990 28.0% 28.0% 34.0%
1991 31.0% 28.0% 34.0%
1992 31.0% 28.0% 34.0%
1993 39.6% 28.0% 35.0%
1994 42.5% 28.0% 35.0%
1995 42.5% 28.0% 35.0%
1996 42.5% 28.0% 35.0%
1997 42.5% 28.0% 35.0%
1998 42.5% 28.0% 35.0%
1999 42.5% 28.0% 35.0%
2000 42.5% 28.0% 35.0%
2001 42.0% 20.0% 35.0%
2002 41.5% 20.0% 35.0%
2003 37.9% 15.0% 35.0%
2004 37.9% 15.0% 35.0%
2005 37.9% 15.0% 35.0%
2006 37.9% 15.0% 35.0%
2007 37.9% 15.0% 35.0%
2008 37.9% 15.0% 35.0%
2009 37.9% 15.0% 35.0%
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Source: Saez, Slemrod, and Giertz (2009)

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3. Raising interest rates

Those worried about inflation are calling on the Federal Reserve Board to raise interest rates soon and steadily thereafter. Their fears are unfounded. But we should be clear that those seeking higher interest rates are asking our monetary policymakers to slow economic growth and job creation and reflect a far-too-pessimistic assumption of how far we can lower unemployment, seemingly aiming for unemployment at current levels or between 5.0 and 5.5 percent. We can do better than that, and the failure to seek significantly lower unemployment would stifle opportunities for wage growth and employment for many who otherwise would not benefit from this recovery.

4. More bad trade deals

NAFTA cost U.S. workers almost 700,000 jobs (Scott 2011). Additionally, since the United States signed a free-trade agreement with Korea, the U.S. trade deficit with that country has nearly doubled, rising from $14.7 billion in 2011 to $26.6 billion in 2014—an increase of $11.8 billion, or 80.4 percent (USITC 2015). The Obama administration promised that “tariff cuts alone in the U.S.-Korea trade agreement will increase exports of American goods by $10 billion to $11 billion” (White House n.d.). To date, increased exports have achieved less than 8 percent of this goal, dwarfed by the growth of Korean imports and the growing bilateral trade deficit, which has displaced nearly 60,000 U.S. jobs (USITC 2015; Scott 2014). Furthermore, China’s admission to the WTO has been a disaster for U.S. manufacturing workers: The U.S. goods trade deficit with China increased by $23.9 billion (7.5 percent) in 2014, to $342.6 billion (U.S. Census Bureau 2015).

Clearly, further trade deals that follow the NAFTA and KORUS pattern should be avoided. Their failure to address currency manipulation or to effectively address labor standards, while exalting the interests of multinational corporate investors, has been a disaster that should not be repeated. These trade treaties are not even about trade, given that tariffs are already very low; they are about backroom deals to protect corporate profits and establish new rights. Giving the president fast-track authority to negotiate the Trans-Pacific Partnership (TPP) would be a mistake.

Wage growth

It is a welcome development that policymakers and presidential candidates in both parties have now acknowledged that stagnant wages are a critical economic challenge. This will generate an important debate on the best way to lift wages for the vast majority, which is necessary to raise households into the middle class and fuel middle-class incomes. That wage trends lay at the heart of income stagnation is just common sense. After all, middle-class families rely almost completely on what they earn from their jobs to support their consumer spending. These families do not own many financial assets that produce income; at best they have a little stock (only one-third of households have more than $5,000 of stock), and their home accounts for most of their wealth. This is also true for low-income households, who obtain 70 percent of their income from wages (including the Earned Income Tax Credit).

It is useful to establish some of the basic facts on wage stagnation. Figure B illustrates the tremendous gap between the 138 percent wage growth enjoyed by the top 1 percent since 1979, and wages for the bottom 90 percent, which grew just 15 percent, with most of that growth occurring in the late 1990s.

Figure B

Cumulative change in real annual wages, by wage group, 1979–2013

Top 1% Bottom 90%
1979 0.0% 0.0%
1980 3.4% -2.2%
1981 3.1% -2.6%
1982 9.5% -3.9%
1983 13.6% -3.7%
1984 20.7% -1.8%
1985 23.0% -1.0%
1986 32.6% 1.1%
1987 53.5% 2.1%
1988 68.7% 2.2%
1989 63.3% 1.8%
1990 64.8% 1.1%
1991 53.6% 0.0%
1992 74.3% 1.5%
1993 67.9% 0.9%
1994 63.4% 2.0%
1995 70.2% 2.8%
1996 79.0% 4.1%
1997 100.6% 7.0%
1998 113.1% 11.0%
1999 129.7% 13.2%
2000 144.8% 15.3%
2001 130.4% 15.7%
2002 109.3% 15.6%
2003 113.9% 15.7%
2004 127.2% 15.6%
2005 135.4% 15.0%
2006 143.4% 15.7%
2007 156.2% 16.7%
2008 137.5% 16.0%
2009 116.2% 16.0%
2010 130.9% 15.2%
2011 134.1% 14.6%
2012 148.4% 14.7%
2013 137.7% 15.2% 
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Source: EPI analysis of Kopczuk, Saez, and Song (2010), updated through 2013 with data from the Social Security Administration Wage Statistics database

Reproduced from Figure F in Raising America’s Pay: Why It’s Our Central Economic Policy Challenge

Source: EPI analysis of data from “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data Since 1937,” by Wojciech Kopczuk, Emmanuel Saez, and Jae Song, The Quarterly Journal of Economics, February 2010; updated through 2013 with data from the Social Security Administration Wage Statistics database

Reproduced from Figure F in Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, by Josh Bivens, Elise Gould, Lawrence Mishel, and Heidi Shierholz, Economic Policy Institute, 2014

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Figure C presents the divergence between productivity—the growth of the output of goods and services per hour worked—and the pay of a typical worker. Over the 40 years since 1973, there has been productivity growth of 73.0 percent, yet the compensation (wages and benefits) of a typical worker grew far less, just 8.9 percent (again, mostly in the latter 1990s).

Figure C

Disconnect between productivity and typical worker's compensation, 1948–2013

Year Hourly compensation Productivity
1948 0.0% 0.0%
1949 6.3% 1.5%
1950 10.5% 9.3%
1951 11.8% 12.4%
1952 15.0% 15.6%
1953 20.8% 19.5%
1954 23.5% 21.6%
1955 28.7% 26.5%
1956 33.9% 26.7%
1957 37.1% 30.1%
1958 38.2% 32.8%
1959 42.6% 37.6%
1960 45.5% 40.1%
1961 48.0% 44.4%
1962 52.5% 49.8%
1963 55.0% 55.0%
1964 58.5% 60.0%
1965 62.5% 64.9%
1966 64.9% 70.0%
1967 66.9% 72.1%
1968 70.7% 77.2%
1969 74.7% 77.9%
1970 76.6% 80.4%
1971 82.0% 87.1%
1972 91.3% 92.0%
1973 91.3% 96.8%
1974 87.0% 93.7%
1975 86.9% 97.9%
1976 89.7% 103.4%
1977 93.2% 105.8%
1978 96.0% 107.8%
1979 93.4% 108.1%
1980 88.6% 106.6%
1981 87.6% 111.0%
1982 87.8% 107.9%
1983 88.3% 114.1%
1984 87.0% 119.7%
1985 86.4% 123.4%
1986 87.3% 128.0%
1987 84.6% 129.1%
1988 83.9% 131.8%
1989 83.7% 133.7%
1990 82.2% 137.0%
1991 81.9% 138.9%
1992 83.1% 147.6%
1993 83.4% 148.4%
1994 83.8% 150.7%
1995 82.7% 150.9%
1996 82.8% 156.9%
1997 84.8% 160.5%
1998 89.2% 165.7%
1999 92.0% 172.1%
2000 93.0% 178.5%
2001 95.7% 182.9%
2002 99.6%  190.8%
2003 101.8% 200.2%
2004 101.1% 208.3%
2005 100.2% 213.7%
2006 100.3% 215.6%
2007 101.8% 217.8%
2008 101.9% 218.4%
2009 109.9% 224.9%
2010 111.7% 234.4%
2011 109.2% 234.8%
2012 107.2% 237.1%
2013 108.3% 240.4%
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Note: Data are for compensation (wages and benefits) of production/nonsupervisory workers in the private sector and net productivity of the total economy. "Net productivity" is the growth of output of goods and services less depreciation per hour worked.

Source: EPI analysis of Bureau of Labor Statistics and Bureau of Economic Analysis data

Updated from Figure A in Raising America’s Pay: Why It’s Our Central Economic Policy Challenge

Source: EPI analysis of unpublished Total Economy Productivity data from Bureau of Labor Statistics (BLS) Labor Productivity and Costs program, wage data from the BLS Current Employment Statistics, BLS Employment Cost Trends, BLS Consumer Price Index, and Bureau of Economic Analysis National Income and Product Accounts

Updated from Figure A in Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, by Josh Bivens, Elise Gould, Lawrence Mishel, and Heidi Shierholz, Economic Policy Institute, 2014.

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Thus, wage and benefit stagnation is a long-term trend (Figure D) and one that is not due to insufficient economic growth, since the economic growth over the last four decades did little to produce rising pay for the vast majority. Last, it is important to note that there has been widespread wage stagnation for the last 10 years or so, affecting both blue-collar and white-collar workers and both high school and college graduates. Wage stagnation occurred over the last recovery from 2002–2003 until 2007, as well as during the Great Recession and its aftermath.

Figure D

Cumulative change in real hourly wages of all workers, by wage group, 1979–2013

Very high wage Middle wage Low wage
1979 0.0% 0.0% 0.0%
1980 -1.9% -1.0% -5.5%
1981 -1.7% -3.6% -4.0%
1982 0.2% -2.2% -7.7%
1983 3.4% -2.7% -10.5%
1984 4.2% -2.2% -12.7%
1985 6.0% -1.3% -14.1%
1986 7.6% 0.5% -14.3%
1987 7.4% 0.6% -14.5%
1988 10.1% 0.0% -14.5%
1989 7.5% -0.6% -14.6%
1990 9.6% -0.6% -13.1%
1991 10.3% 0.0% -11.5%
1992 8.5% 0.8% -11.7%
1993 7.6% 0.1% -12.0%
1994 13.1% -1.6% -12.9%
1995 13.2% -2.4% -13.1%
1996 13.8% -2.8% -13.5%
1997 15.2% -0.5% -10.6%
1998 18.0% 2.3% -5.7%
1999 21.5% 5.4% -4.3%
2000 25.2% 5.1% -3.4%
2001 27.7% 7.4% -0.4%
2002 32.0% 8.3% 0.7%
2003 30.3% 9.6% 0.3%
2004 31.6% 9.6% -1.1%
2005 32.5% 8.3% -2.8%
2006 33.2% 8.7% -2.2%
2007 36.1% 7.8% -1.0%
2008 37.6% 8.3% -1.9%
2009 39.0% 10.1% -1.1%
2010 38.7% 8.6% -1.9%
2011 37.1% 5.7% -4.3%
2012 39.0% 5.0% -5.9%
2013 40.6% 6.1%  -5.3% 
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Source: EPI analysis of Current Population Survey Outgoing Rotation Group microdata

Reproduced from Figure F in Why America’s Workers Need Faster Wage Growth—And What We Can Do About It

Source: EPI analysis of Current Population Survey Outgoing Rotation Group microdata from the CPS survey con­ducted by the Bureau of the Census for the Bureau of Labor Statistics [machine-readable microdata file]. Washington, D.C.: U.S. Census Bureau

Reproduced from Figure F in Why America’s Workers Need Faster Wage Growth—And What We Can Do About It, by Elise Gould, Economic Policy Institute, 2014

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Wage stagnation is conventionally described as being about globalization and technological change, explanations offered in the spirit of saying it is caused by trends we neither can nor want to restrain. In fact, technological change has had very little to do with wage stagnation. Such an explanation is grounded in the notion that workers have insufficient skills so employers are paying them less, while those with higher wages and skills (say, college graduates) are highly demanded so that employers are bidding up their wages. We know that these trends have not been in play over the last 15 years. Many studies (including Levy and Murnane 2013; Autor 2013; Beaudry, Green, and Sand 2013; and Mishel, Schmitt, and Shierholz 2013) have shown that the best-paying occupations have not expanded their share of employment since 1999–2000, and that job growth has been centered among low-wage occupations. The so-called job polarization (eroded jobs in middle-wage occupations but expanded jobs at the top and bottom) that has been much discussed has not been present in the United States since the 1990s. So, employers are not creating jobs at the “high end,” yet we see wages grow far faster for those at the top (the top 1 percent as well as the top 10 percent) than in the middle or bottom of the wage scale.

It is also important to note that the inflation-adjusted wages of college graduates have been stagnant since 2002–2003, the wages and benefits earned by recent college graduates have been plummeting for every new cohort since 2000, and the Federal Reserve Bank of New York has documented that an increasing share of recent college graduates work in jobs that do not require a college degree (Abel, Deitz, and Su 2014). Last, there are hundreds of thousands of college students and recent college graduates working in internships that provide no wage. A number of these unpaid internships in the private sector are likely illegal, but that is another matter. The presence of college graduates in a wide variety of fields working for free indicates that there is not a generalized excessive unmet demand for their skills. In other words, there is no skill shortage that is generating wage inequalities.

As for globalization, it has, in fact, served to suppress wage growth for non-college-educated workers (Bivens 2013), who constitute roughly two-thirds of the workforce. However, such trends as import competition from low-wage countries did not naturally develop; they were pushed by trade agreements and the tolerance of misaligned and manipulated exchange rates that undercut U.S. producers.

In short, wage stagnation is not inevitable; it is a direct result of policy decisions. As such, it can be remedied by policy. There are two sets of policies that have greatly contributed to wage stagnation that receive far too little attention. One set is aggregate factors, which include factors that lead to excessive unemployment and others that have driven the financialization of the economy and excessive executive pay growth (which fueled the doubling of the top 1 percent’s wage and income growth). The other set of factors are the business practices, eroded labor standards, and weakened labor market institutions that have suppressed wage growth. These are examined in turn.

Aggregate factors

Unemployment substantially above full employment and rapidly escalating pay for finance professionals and executives are directly related to wage stagnation for the vast majority.

1. Excessive unemployment

Unemployment has remained substantially above full employment for much of the last 40 years, especially relative to the post-war period before then. Since high unemployment depresses wages more for low-wage than middle-wage workers and more for middle-wage than high-wage workers, these slack conditions generate wage inequality. This reinforces the need to achieve full employment, as delineated above.

The excessive unemployment in recent decades reflects a monetary policy overly concerned about inflation relative to unemployment and hostile to any signs of wage growth (Palley 2015). Budget policy has sometimes exacerbated our unemployment problem, as it has in the last few years at the state level, where budget cuts led to hundreds of thousands of public employee layoffs, and at the federal level, where deficit hysteria caused a failure to adequately focus on job creation to counter the recession and a weak recovery.

2. Unleashing the top 1 percent: finance and executive pay

The major forces behind the extraordinary income growth and the doubling of the top 1 percent’s income share since 1979 were the expansion of the finance sector (and escalating pay in that sector) and the remarkable growth of executive pay. Notably, CEO pay grew more than twice as fast as profits and three times faster than the pay of other very high-wage earners—the top 0.1 percent of wage earners (Mishel and Davis 2014). The increased incomes in finance and for executives do not reflect a corresponding increase in national output. Thus, restraining the growth of such income will not adversely affect the size of our economy. Moreover, the failure to restrain these incomes leaves less income available to the vast majority, the 90 percent of wage earners who have seen little wage growth since 1979. For these reasons—and not because of envy—we cannot ignore the top 1 percent as we seek to increase wages for the vast majority. What the top 1 percent has taken in income growth largely has come at the expense of other income groups.

There are various policies that can help to accomplish this. Tax preferences for executive pay can be eliminated or their use tied to the executive’s firm giving wage increases equal to productivity growth. Others have recommended tying corporate tax rates to the ratio of executive-to-median worker pay. Imposing a financial transactions tax can steer investments toward productive uses and away from speculation and restrain unproductive financial activity.

Labor standards, labor market institutions, and business practices

There are a variety of policies related to labor standards, labor market institutions, and business practices that can greatly help to lift wage growth.

1. Raising the minimum wage

The main reason wages at the lowest levels lag those at the middle has been the erosion of the value of the minimum wage, a policy undertaken in the 1980s that has never fully been reversed. The inflation-adjusted minimum wage is now about 25 percent below its 1968 level (Cooper 2013), despite the fact that productivity has doubled and the education and skills of those in the bottom fifth have greatly improved. Moving the minimum wage to $12.00 by 2020 would benefit about a third of the workforce directly and indirectly.

2. Updating overtime rules

The share of salaried workers eligible for overtime has fallen from 65 percent in 1975 to just 11 percent today (Eisenbrey and Donald 2014). Someone who spends a small share of her time supervising others can spend the bulk of her time doing work that hourly workers do (e.g., unloading trucks, filling shelves with products) and work far in excess of 40 hours and receive no overtime pay. This is because the salary threshold (the salary level beneath which you are guaranteed overtime pay) has eroded such that only those earning less than $23,660 (a poverty-level wage) are covered by the Fair Labor Standards Act. Fortunately, President Obama has instructed the Department of Labor to revise the salary threshold. Moving that threshold to the value it held in 1975—roughly $51,000 today—would provide overtime protections to 6.1 million workers, providing them higher pay, more leisure, and more time with their families (Eisenbrey 2014).

3. Strengthening rights to collective bargaining

The single largest factor suppressing wage growth for middle-wage workers over the last few decades has been the erosion of collective bargaining, which can explain one-third of the rise of wage inequality among men, and one-fifth among women (Mishel et al. 2012). One of the greatest impacts of the decline of collective bargaining has been that nonunion workers in industries or occupations that previously had extensive collective bargaining no longer receive the higher pay that their employers used to provide (given concerns that their best workers might leave for a union job or for fear their workers would choose collective bargaining). Thus, the erosion of collective bargaining has affected both union and nonunion workers alike. We know that many more workers want collective bargaining than are able to benefit from it: If all who wanted to pursue collective bargaining could in fact do so, the United States would have as much collective bargaining as Germany (Freeman 2007). There are a wide variety of proposals to strengthen and rebuild our collective bargaining system.

4. Regularizing undocumented workers

Undocumented workers are vulnerable to exploitation. Consequently, they earn lower wages than workers who have greater access to legal protections and are able to switch jobs more readily. Executive actions, such as those the administration is pursuing, or comprehensive immigration reform that provides a path to citizenship, are polices that will lift wages. Regularizing undocumented workers will not only lift their wages but will also lift wages of those in the same fields of work.

5. Ending forced arbitration

One way for employees to challenge discriminatory or unfair personnel practices and wages is to go to court or a government agency that oversees such discrimination. However, many large firms force their workers to give up their access to court and government agency remedies and agree to settle such disputes over wages and discrimination only in arbitration systems set up and overseen by the employers themselves. These systems can impose unaffordable costs on workers and limit their use of class actions. Such practices limit workers’ options and facilitate discrimination and violations of wage and hour laws.

6. Modernizing labor standards: providing earned sick leave and paid family leave

We have not only seen the erosion of protections in the labor standards set up in the New Deal, we have also seen the United States fail to adopt new labor standards that respond to emerging needs. In particular, we need updated standards to assist workers and their families to achieve a better balance between work and family. The most prominent examples are standards relating to earned sick leave and paid family leave. More support for child care is also necessary to assist workers and their families, especially low- and moderate-wage workers whose child care choices are limited and of uneven quality.

7. Closing race and gender inequities

Generating broader-based wage growth must also include efforts to close race and gender inequities that have been ever present in our labor markets. Many of the policies already mentioned—raising the minimum wage, updating overtime rules, pursuing full employment, legalizing undocumented workers, and increasing workers’ bargaining power—though not overtly race- or gender-based, would disproportionately raise wages for women and people of color who are more likely to work the kinds of jobs impacted by such policies. Beyond these broader efforts, we need consistently strong enforcement of antidiscrimination laws in the hiring, promotion, and pay of women and minority workers. This includes greater transparency in the ways these decisions are made (including improved collection of pay data by race, ethnicity, and gender) and ensuring that the processes available for workers to pursue any violation of their rights are effective. Finally, we must tackle social issues like mass incarceration that limit employment opportunities and pay for countless ex-offenders, particularly African American men. Improving adult education opportunities can help better integrate immigrant workers into our economy and our communities.

8. Ensuring fair contracting

Last summer, the president signed The Fair Pay and Safe Workplaces Executive Order, setting a new framework governing the awarding of federal contracts that the Department of Labor estimates will apply to 24,000 businesses employing 28 million workers. These new rules “will require prospective federal contractors to disclose labor law violations and will give agencies more guidance on how to consider labor violations when awarding federal contracts.” The framework “also ensures that workers are given the necessary information each pay period to verify the accuracy of their paycheck and workers who may have been sexually assaulted or had their civil rights violated get their day in court by putting an end to mandatory arbitration agreements at corporations with large federal contracts” (Office of the White House Press Secretary 2014). These new contracting rules can help reduce wage theft, obtain greater racial and gender equity, and generally support wage growth.

According to a 2010 Government Accountability Office report, “almost two-thirds of the 50 largest wage-and-hour violations and almost 40 percent of the 50 largest workplace health-and-safety penalties issued between FY 2005 and FY 2009 were at companies that went on to receive new government contracts” (Office of the White House Press Secretary 2014). There are good reasons, therefore, to go further than the new executive order and bar violators from federal contracts, as amendments to the defense and transportation appropriations bills in the House last year required.

9. Tackling misclassification, wage theft, and prevailing wages, and supporting enforcement of labor standards

There are a variety of other policies that can support wage growth. Too many workers are deemed independent contractors by their employers when they are really employees. This is called “misclassification,” though Secretary of Labor Perez rightly labels this “wage fraud.” The consequence is less revenue collected by state and federal governments as well as workers lacking the important protections of the unemployment insurance and worker compensation systems. These practices are particularly severe in construction. Rampant misclassification also undercuts the ability of employers who follow the law to win bidded contracts, thereby lowering the wages of workers in their firms. Misclassification is perhaps best seen as part of the larger phenomenon of “wage theft” where workers are not paid for the work they have done or are cheated out of overtime pay. We estimate that workers are cheated out of as much as $50 billion each year in wages to which they were entitled (Meixell and Eisenbrey 2014). Efforts to increase and improve labor standards enforcement, end misclassification (the Department of Labor has a multi-state initiative on this), and protect and strengthen prevailing wage laws can reduce wage theft and support wage growth.

Policies that will not facilitate broad-based wage growth

Unfortunately, many of the economic policies under discussion will do nothing to spur widespread wage growth—and may even exacerbate wage stagnation.

1. Tax cuts: individual or corporate

The failure of wages to grow cannot be cured through tax cuts. Claims are sometimes made that tax cuts propel long-run job gains and economic growth but in fact, tax cuts are not effective tools to promote growth. Even if they did create growth, it is clear that growth by itself will not lift wages of the typical worker. After all, we have seen plenty of productivity and GDP growth since 1973, but very little wage growth for the vast majority of workers. That is, tax cuts are a tried and failed policy that does not change the dynamics of the labor market so that workers will gain from productivity. Corporate tax reform, as discussed above, holds little promise of promoting economic growth, let alone generating wage growth. One should be mindful that while workers’ pay has been stagnant, corporate profits are reaching the highest levels in over four decades. In short, there is no basis for believing that expanded corporate profitability will necessarily benefit the typical worker.

Personal income tax cuts are sometimes advocated as a way to provide some cash to ease the financial struggles of families. This is understandable, as such policies seem readily doable to congressional policymakers. The problem is that wage stagnation is an ongoing challenge, and one-time tax cuts are, at best, a short-term Band-Aid. Moreover, tax cuts erode revenues needed for education, national defense, law enforcement, health research, and other unmet needs.

2. Austerity

The deficit reduction that began in 2011 torpedoed the recovery and is responsible for much of the enduring slack in the labor market. Measuring from the previous business cycle peak—so fully accounting for the Recovery Act and the following ad hoc stimulus measures—overall government spending today remains 10 percent below what it would have been had it followed its trajectory over the 2001 business cycle. This is about $500 billion, enough to cost the economy more than 5 million jobs (Bivens 2014).2

3. Increasing college or community college completion

Facilitating more people attending and completing higher levels of education, or other types of training (e.g., apprenticeships) is very good policy. It can help fuel economic growth in the future, and it can expand access to better jobs for low- and middle-income children who would not otherwise have those opportunities. That is, improving education quality and attainment is critically important to promoting upward mobility, assuring today’s children have the opportunity to rise farther up the income ladder than have their parents. The issue is not whether completing more education is “worth it” for certain individuals, but whether rapidly increasing the share of workers with greater education is an important tool to generate broad-based wage growth.

But advancing education completion is not an effective overall policy to generate higher wages. Some who attain higher credentials will earn more. Recall that the wages of college graduates have been stagnant for over 10 years. Furthermore, the wages (and benefits) accepted by recent college graduates have been lower than those graduating in earlier years. Let’s presume these trends persist for the next 10 years. This means that increasing college completion to any great degree will mean that the wages of college graduates will be falling, especially among men and newer graduates. This will lead to less inequality, but it is not a generalized recipe for wage growth. There is no reason to believe that everyone who completes a college degree will be able to obtain a job that requires such an education. If not, college graduates will increasingly be used in jobs that those with less education now perform.

The same analysis is true for community college completion. Providing access will help many attain the opportunities for jobs previously unavailable to low- and moderate-income students, facilitating intergenerational mobility. According to an EPI analysis of Current Population Survey Outgoing Rotation Group data, community college graduates now earn 7.5 percent less than they did in 2004 and earn comparable wages to those in 1992, the earliest year for which we have data. The share of the workforce with community college degrees has expanded from 7.3 percent in 1992 to 10.8 percent in 2014, so the economy has absorbed substantially more of them. At the same time, the fact that the wages of community college graduates relative to high school graduates (i.e., the wage premium) has fallen, and that the wage levels of community college graduates have fallen, indicates that there is not a swelling unmet need for such graduates. This is an avenue to help some workers, but not a generalized approach to raising wages. What is needed are policies that lift wages of high school graduates, community college graduates, and college graduates, not simply a policy that changes the amount of workers in each category.

4. Deregulation

There is no solid basis for believing that deregulation will lead to greater productivity growth or to wage growth. According to the Office of Management and Budget (2014), the estimated annual benefits of major federal regulations exceeded their cost by at least $160 billion and as much as $779 billion during the decade from 2003 to 2013. The economy and the American people are better off because of the federal government’s regulatory efforts.

5. Policies to promote long-term growth

Policies that can substantially help reduce unemployment in the next two years are welcomed and can serve to raise wage growth. Policies aimed at raising longer-term GDP growth prospects may be beneficial but will not help wages soon or necessarily lead to wage growth in future years. This can be seen in the decoupling of wage growth from productivity over the last 40 years. Simply increasing investments and productivity will not necessarily improve the wages of a typical worker. What is missing are mechanisms that relink productivity and wage growth. Without such policies, an agenda of “growth” is playing “pretend” when it comes to wages.

About the authors

Lawrence Mishel, a nationally recognized economist, has been president of the Economic Policy Institute since 2002. Prior to that he was EPI’s first research director (starting in 1987) and later became vice president. He is the co-author of all 12 editions of The State of Working America. He holds a Ph.D. in economics from the University of Wisconsin at Madison, and his articles have appeared in a variety of academic and non-academic journals. His areas of research are labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education.

Ross Eisenbrey has been vice president of EPI since 2003. He is a lawyer and former commissioner of the U.S. Occupational Safety and Health Review Commission. Prior to joining EPI, Eisenbrey worked for many years as a staff attorney and legislative director in the U.S. House of Representatives, and as a committee counsel in the U.S. Senate. He served as policy director of the Occupational Safety and Health Administration from 1999 until 2001. Eisenbrey has testified numerous times in the House of Representatives and the Senate, and has written scores of articles, issue briefs, and policy memos on a wide range of labor issues. He holds a J.D. from the University of Michigan.


1. See H.R. 2889, Local Jobs for America Act, sponsored by Rep. George Miller; and H.R. 1617, Emergency Jobs to Restore the American Dream Act, sponsored by Rep. Jan Schakowsky.

2. The data presented here are updated numbers based on Bivens (2014).


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