The Council was preparing to discuss a wage adjustment in June 2025 when the chair resigned. It is expected to take up the issue when the governor names a new chair, which has yet to happen. Given that almost two years have passed since the initial setting of the $20 wage standard—a year and a half that has seen continued inflation—the Council should prioritize this cost-of-living adjustment in 2026 to prevent rising prices from erasing the gains made by fast-food workers. One impediment to this adjustment is opposition from fast-food restaurant operators, who argue that raising workers’ pay to $20 damaged their businesses and that they cannot absorb any further increases.

This debate in California between fast-food workers and employers highlights the importance of regular and automatic adjustments to wage standards (like minimum wages) that ensure inflation-adjusted living standards for low-wage workers do not erode over time.

Indexation is often an afterthought in debates over wage standards. But it can turn out to be the most important part of any policy that sets a wage standard. This report examines salient issues related to indexing wage standards and offers recommendations for policymakers. Its key arguments are:

• Wage standards are necessary and efficient because of unbalanced power in labor markets.
• Wage standards that are fixed in nominal terms and have no automatic adjustment (like the federal minimum wage) get weaker every single year that passes without a legislated increase. The cumulative erosion of inflation-adjusted wage standards often exceeds the initial legislated increase.
  • For example, in inflation-adjusted terms, the federal minimum wage today is lower than it was in 2007, the last time a new standard was passed into law.
• Mandating higher wages for any group of workers will set off a chain of adjustments elsewhere in labor and product markets. What these adjustments eventually mean for relative incomes, prices, and employment is an empirical question.
  • Thankfully, minimum wage increases are some of the most well-studied events in economics, and the weight of empirical evidence is that they do not measurably increase overall inflation or lead to significant job loss, but they do raise the inflation-adjusted pay of targeted workers.
• Adjusting wage standards only for increases in inflation is actually a conservative policy in the sense of minimizing potential burdens on low-wage employers. More ambitious targets for adjustment—like wages or even productivity—could be preferable depending on the specific case.
  • In the case of the California Fast Food Council, providing a price-based adjustment to account for inflation since the initial adoption of the $20 minimum wage in April 2024 is an appropriate and modest step.
  • A 3.5% increase in the wage standard—the maximum adjustment the Council can recommend—is also conservative because it will only partially offset the actual 4.2% cost of living increase since April 2024 and because it does not account for ongoing productivity improvements in the sector.
• Over the past decade—and continuing since April 2024—the inflation rate faced by lower-income households has been higher than the overall inflation rate, largely because housing is a higher share of lower-income households’ budget. This means indexing based on the average inflation rate would fail to fully restore the affordability lost to fast-food workers since the enactment of the $20 wage standard, making such an adjustment even more modest (and even more necessary).

Wage standards are necessary because of unbalanced labor market power

Modern labor markets—particularly those that low-wage workers participate in—are characterized by significant employer power. Low-wage employers rarely if ever negotiate pay with workers, instead posting take-it-or-leave-it wage offers. Further, when a given employer lets its own wages lag those of potential competitors, workers’ exit from the lower-wage firm is far less common than would be predicted under truly competitive labor markets where employers robustly compete for workers.

The seminal source for modeling labor markets as situations where employers have substantial wage-setting power is Manning (2003), who describes this situation as one of “monopsony” power in labor markets.The literal definition of monopsony is a market with a single buyer. At points in history (think 19th century “company towns” in rural and isolated areas) this kind of literal monopsony may have existed. But Manning and those who have built on this work point to several features and frictions in real-world labor markets that make it hard for workers to effectively search for better jobs. These job search barriers effectively grant employers excess market power over workers even when there are numerous employers. Some of these frictions include things like lack of information about wages and other policies of alternative employers, transportation restrictions that require workers to look for jobs only in places near their home or public transit nodes, child care considerations that require a job’s location be compatible with picking up kids at a regular time, along with many other factors.

Employers use these barriers to employees finding better outside options to “mark down” wages below what would be necessary for employers to attract and retain workers in competitive labor markets. These markdowns can be large enough to push workers’ pay well below the value they produce for the employer, making pay levels inefficient.

At the level of the total economy, the excess power of employers in labor markets and their ability to markdown wages can be seen in the gap between economy-wide productivity (the amount of income generated in an average hour of work in the economy) and the hourly pay (including benefits) of typical workers.

Figure A

Wage standards—like minimum wages—can correct for this excess employer power. This leaves low-wage workers with higher pay and living standards and moves the economy to a more efficient allocation of workers across jobs. It can in theory even lead to an increase in employment. This degree of employer power in labor markets and the inefficiency of labor market outcomes without wage standards help explain the general empirical finding that minimum wage increases in the United States have not caused significant employment declines, a finding that is counter to what one would expect if labor markets were competitive.1

California’s fast-food minimum wage has had minimal employment effects

Current evidence suggests that California’s fast-food minimum wage is no different in that it has raised wages without causing large, negative employment reductions. There are four studies on the specific wage and employment effects of the California fast-food minimum wage. Three studies show both sizable earnings effects and limited-to-no employment changes. One analysis, in contrast to the other three studies, shows moderately negative employment effects, but also found the policy raised the total earnings of fast-food workers.

Schneider, Harknett, and Bruey (2024) surveyed fast-food workers in large chains and showed that relative to other states, the California policy raised wages and had no effect on the usual number of hours of fast-food workers in the quarter after the minimum wage change. With data from Equifax, Hamdi and Sovich (2025) compared fast-food establishments within large firms across different states and found that California fast-food establishments raised wages by about 12% and increased employment by a statistically insignificant 2%. Sosinskiy and Reich (2025) used data from the Quarterly Census of Employment and Wages (QCEW) to study employment and earnings trends in fast-food restaurants in California relative to those in other states and to full-service restaurants in California, which are not directly bound by the fast-food minimum wage. The authors’ preferred specification estimated a wage increase of about 7% and an employment decline of just under 1% that was statistically indistinguishable from zero. Finally, Clemens, Edwards, and Meer (2025) used QCEW data and estimated a similar wage increase of about 8%, but also a statistically significant employment decline of over 3%.2

In interpreting employment changes from a minimum wage increase, it’s best to compare the size of estimated wage effects with the estimated employment effects. The ratio of these two estimates—the own-wage elasticity of employment3—helps to gauge whether any employment changes were small or large relative to how much the policy actually raised wages. When the ratio is more positive than -1, total fast-food worker earnings rose even after accounting for potential employment losses. Standardizing the estimates by dividing employment and wage effects also allows us to make consistent comparisons across these studies and with studies of other minimum wage increases.

For the three studies where it is possible to calculate them, the own-wage elasticities are 0.19 (Hamdi and Sovich 2025), −0.12 (Sosinskiy and Reich 2025), and −0.40 (Clemens, Edwards, and Meer 2025). The first two are consistent with small or no employment impacts, but the last one moves into “medium negative” territory. All three studies’ estimates imply that the policy increased the aggregate earnings of fast-food workers, but the last study implies that employment losses caused fast-food workers to receive only about 60% of the potential earnings increase spurred by the minimum wage hike.

Even though Sosinskiy and Reich (2025) and Clemens, Edwards, and Meer (2025) use similar data, one important difference is that the Sosinskiy and Reich (2025) study controls for population changes. Net immigration rapidly fell after the implementation of the policy, disproportionately affecting California’s population levels. For example, according to the latest Census estimates, California’s resident population did not grow in 2025, whereas the rest of the country’s population grew by about 0.5%. Not accounting for these different population trends between California and elsewhere could cause an analysis to overstate any employment declines stemming from the policy, particularly if fast-food employment levels are sensitive to falling labor supply or a shrinking customer base. In their appendix, Sosinskiy and Reich (2025) find that ignoring population changes causes their estimates to be more negative.

In addition, when selecting a comparison group for fast-food workers, Clemens, Edwards, and Meer (2025) use fast-food workers in other states and high-wage industries in California, but they do not directly compare the California fast-food sector with the California full-service sector, which is not covered by the policy. Comparing the two sectors would be especially useful for capturing underlying economic trends if slowing population growth is driving declines in both fast-food and full-service employment levels. Indeed, Clemens, Edwards, and Meer (2025) show that the policy did not raise wages in the California full-service sector, but full-service employment in California declined by close to 2%. Failing to account for this decline in full-service employment also causes the Clemens, Edwards, and Meer (2025) estimates to be more negative.

Regardless of the source of these differences, the average own-wage elasticity across the three studies is −0.11, suggesting that the fast-food policy was successful in raising wages without causing sizable job losses. This point estimate is very similar to the median elasticity of all published minimum wage studies on restaurants (see Dube and Zipperer 2025). However, even if the policy were associated with larger employment reductions, measured job losses may still overstate the consequences for low-wage workers. First, lower headcount employment in the fast-food sector does not automatically translate into reduced employment or lower wages for low-wage workers if they move to other low-wage jobs, like retail, where they must be paid at least the California $16.90 minimum wage. Second, a measured decline in headcounts in a high turnover sector like fast-food is more likely to manifest as more weeks in between jobs rather than being shut out of work completely; in that case, some fast-food workers would indeed be working less but earning more money over the course of the year due to higher hourly wage rates.4

Why wage standards need to be automatically adjusted

If wage standards stay fixed in nominal terms, they are reduced in real (inflation-adjusted) terms every year inflation is nonzero. When there is a burst of rapid inflation, these real wage cuts get large very quickly. In fact, steady inflation can combine with policy inaction to leave wage standards lower in real terms than they were the last time a legislated increase happened.

Take the example of the federal minimum wage. Its current value of $7.25 came into effect in 2009. Today’s inflation-adjusted value of the federal minimum wage is almost 40% lower than its historic peak. It reached this peak in 1968, in an economy where productivity (the income generated in an average hour of work in the economy) was just 46% as high as it is in 2025. 5

Figure B

Adjusted for inflation, the 2025 value of the federal minimum wage is in fact lower than it was in 2007 when the U.S. Congress and president last signed a legislated increase into law. Put simply, without effective and automatic indexation, higher wage standards can be eroded almost entirely over time.

Today’s debate over the cost-of-living adjustment to the California Fast Food Council’s minimum wage often frames such adjustments as imposing new burdens on low-wage employers. But inflation since April 2024 means that the real minimum wage paid to California’s fast-food workers has been steadily cut since then. From April 2024 to January 2026, as measured by the consumer price index for all urban wage earners (CPI-W), this cut amounts to 4.2%. Without indexation, any burden on employers from this wage standard has fallen considerably since its adoption, providing a windfall to low-wage employers at the expense of their frontline employees. A failure to regularly index for inflation is essentially a backdoor method for unraveling the wage standard that policymakers passed into law.

Price indexing wage standards is a necessary and conservative policy

Raising wage standards each year by an amount equal to inflation holds low-wage workers’ living standards steady at the level that prevailed when the wage standards were set. For example, the $20 minimum wage for fast-food workers in large chains in California came into effect in April 2024. If these wages are indexed regularly to account for inflation since then, this will keep California fast-food workers’ living standards frozen at April 2024 levels going forward.

This is a clear improvement compared with outright erosion of living standards. But it remains the case that price indexing wage standards is a conservative policy in the sense that it minimizes any potential burdens on low-wage employers. It is a conservative policy for two reasons: (1) indexed wage changes are very small relative to the initial phase-in of wage standards, and (2) indexing for prices allows productivity growth in the wider economy to steadily reduce any potential burden or need for adjustment imposed by wage standards.

Price indexations are very small increases to wage standards

The increases to wage standards that result from price indexation are significantly smaller than the increases that result when the standards are initially phased in. For example, say that the last federal minimum wage increase in 2009 also indexed for subsequent price changes. The initial phase-in of the higher federal minimum wage saw it rise from $5.15 to $7.25 between 2007 and 2009. This constituted an average annual change of 19% for these two years. The average annual inflation rate (measured by the consumer price index for all items) between 2007 and 2024 was just 2.5%.

If the initial introduction of higher wage standards does not cause problematic outcomes, then it is very hard to see how the much smaller changes spurred by indexation for price changes would cause any.

The research on minimum wages provides very little reason to worry that changes in the United States in recent decades have caused any such problematic outcomes. The most commonly expressed worries about minimum wage increases are employment losses and upward price pressure.

We noted earlier that studies looking specifically at the California wage standard continue a common pattern in research on the employment effects of phased-in minimum wages: Employment declines caused by these minimum wage changes tend to be extremely modest or even zero on average. If one applied the modest measured employment losses stemming from the large initial increase in fast-food wages to the much smaller indexed adjustments, these already small employment losses become totally trivial.

The same logic holds regarding potential upward price pressures stemming from indexation: Compared with the initial setting of wage standards, indexed changes are very small and therefore unlikely to push up prices.

It is a fact that one person’s income is another person’s cost, so as low-wage workers’ pay rises, this raises costs for their employers. These employers could pass on these costs (in part or in full) to their customers by raising prices. But even if the entirety of the wage increases driven by price indexing wage standards was passed on in the form of price increases, overall price pressures would be extremely modest and low-wage workers would still unambiguously come out ahead.

Say that low-wage workers’ pay constitutes a third of labor costs in the fast-food sector, and that labor costs in turn constitute a third of total costs of fast food.6 If low-wage workers’ pay rises by 3.5% due to price indexing, this would increase prices the employer charges customers by less than 0.4% even if the full amount was passed on as price increases. Because fast food accounts for less than 3% of the overall inflation consumption basket, even a 0.4% increase in fast-food prices would raise overall prices by only 0.01%.

Price indexing still sees reductions in low-wage workers’ relative pay and allows productivity growth to steadily erode any potential burden on low-wage employers

We noted earlier that price indexing a minimum wage essentially holds low-wage workers’ pay frozen thereafter at the level that prevailed when the wage was introduced. Again, this is better than allowing inflation to erode the real value of pay, but average incomes throughout the overall economy are not frozen over time in real terms. Instead, they rise faster than prices over any reasonable period. Inequality often keeps this growth in average living standards from reaching many (or even most) workers and families in the economy, but the potential for living standards to rise is generated every year of positive economic growth.

This means that even when wage standards are indexed to prices, low-wage workers’ relative standing in the economy still falls over time. Further, because low-wage workers’ earnings are a cost to their employers, this means that even with price indexing, any potential burden of wage standards on low-wage employers slightly declines any year that productivity rises. In this sense, price indexing of wage standards—providing regular cost-of-living adjustments based on price growth—is a conservative policy that allows the costs and benefits of wage standards to slowly erode over time relative to developments in the larger economy.

A quick example can help make this point. Say that pay for low-wage workers at a particular employer amounts to 20% of the final price of the firm’s output. Say that productivity (how much output is generated with each hour of work) rises by 2% per year. If low-wage workers’ pay rises only with inflation (and not with productivity) and all other firm costs rise with inflation and productivity, this implies that over 10 years the share of low-wage workers’ pay in total costs would fall to just 16.4% of total costs. Employers could use this decline in real costs to either lower their prices to consumers or raise their profit margins. Either way, so long as there is any growth in productivity, the burden of low-wage workers’ pay to employers falls even when this pay is indexed to inflation.

Price indexing is not the only option for adjusting wage standards. One could, for example, index growth in minimum wages to growth in wages at other parts of the wage distribution—growth in the median wage for example.7 An even more ambitious indexing choice would be to match wage changes to changes in average wages or even economy-wide productivity.8

The obvious benefit of using these alternative wage indexations would be faster wage growth and higher living standards for low-wage workers. The potential downside is that they do not allow any potential burden from higher wages for employers to relent over time—meaning that if the initial setting of wage standards is high enough to cause problematic outcomes (job losses or rapid price increases), then this would not smooth over time with wage indexation. Price indexation, conversely, would actually allow any higher than optimal initial wage standard to become less binding over time. In this sense, it is a conservative choice that is highly responsive to the pressures faced by low-wage employers.

In the case of the California Fast Food Council, the $20 minimum wage enacted in 2024 was an admirably ambitious standard. There is little persuasive evidence that it is too high in that it has caused any problematic outcomes on either the employment loss or price increase fronts. Yet it was high enough to provide a significant wage boost for affected workers. For these types of ambitious standards, indexing to prices seems necessary to protect workers’ gains yet conservative in that it puts declining pressure on low-wage employers over time. Further, since 2019, the limited-service restaurant sector has seen significant productivity growth—roughly 2% per year—which should allow any price indexation to be easily absorbed with no wrenching adjustments for employers.9

Different groups face different inflation rates: The case for discretion in indexing

The benefit of indexing wage standards for inflation is the protection it provides for the living standards of low-wage workers. The costs are the various adjustments or burdens forced onto employers. Because the group of low-wage workers and employers are heterogenous, and because inflation is measured by the aggregation of price changes across the entire economy, there remains room for judgement and discretion in balancing these costs and benefits.

The California Fast Food Council has some discretion, as they can either index wages up to 3.5% for inflation or they can decline to index these wages and let them be eroded.

We noted before that indexing only for prices (as opposed to indexing for wages or productivity growth) results in a steady reduction in any economic burden wage standards might place on employers. So long as these employers see any growth in productivity (the efficiency with which each hour of labor generates output), then having some portion of their wage costs fixed in real terms will see these costs become a progressively smaller share of total output over time. In this sense, simply choosing to index by prices means the cost of wage standards to employers is set to shrink consistently over time.

In terms of the benefits to low-wage workers, recent years have seen a large jump in the overall price level. Any given episode of inflation is likely to have uneven effects across groups in the economy. For example, the inflation of the 1970s was actually accompanied by an increase in real wages, even for low-wage workers.10 The inflationary spike in 2021 and 2022, conversely, was largely driven by large increases in profit margins, which meant that real wages for most workers fell in those years.

More systematically, inflation faced by various groups in the economy can diverge if they have different consumption baskets that skew average price growth in a predictable way. For example, housing makes up a larger share of consumption spending for lower-income households than higher-income households, and in recent decades the price of housing as measured by the consumer price index has slightly outpaced overall price growth. This implies that inflation faced by lower-income households has likely been systematically higher than that faced by higher-income households. This makes the overall CPI that informs discussions of wage indexation inadequate for fully protecting lower-wage workers from inflation in recent years.

Concretely, the CPI-W, which is the price index the Council can target, has risen by 4.2% since April 2024. This means that a 3.5% cost of living adjustment—the largest that can be granted by the Fast Food Council—would not quite neutralize the affordability losses experienced by workers since the $20 minimum wage was enacted. Research from the Federal Reserve Bank of New York (2025) indicates that households in the bottom 40% of the income distribution saw inflation between April 2024 and August 2025 (the most recent data point available) that averaged 0.2% higher than overall inflation. This means actual inflation faced by many fast-food workers in California exceeded 4% since the introduction of the $20 wage standard.

The bias in actually experienced inflation stemming from housing runs even deeper. The housing component of the CPI essentially assumes everybody is paying market rent for their housing. There are good reasons for this decision, but it means that discretion and judgement must enter into using the CPI for different purposes. Well over half of the U.S. population owns their homes, and these people have significantly higher incomes on average than renters. Homeowners either have no monthly housing payment or pay a mortgage that is fixed over time and therefore experiences no inflation. By assuming these homeowning households experience the average amount of rental inflation each month the CPI overstates actually experienced inflation for homeowners.

This means when weighing the interests of low-wage workers against other economic actors—including consumers facing potential price increases stemming from wage standards—the real gap in living standards growth is likely larger than what would be implied by assuming all households face the same CPI inflation. Given this, there is a strong case for policymakers to use their discretion to put a countervailing thumb on the scale by boosting low-wage workers’ pay.

Notes

1. For a review of the estimates of employment loss caused by minimum wage increases, see Dube and Zipperer 2025.

2. There is an additional study by Pandit (2026) that estimates the fast-food minimum wage caused an 8% decline in staffing intensity based on long-duration visits from mobile phone location data. However, the study finds almost all of the estimated effect occurred before the actual policy went into effect, with little-to-no change in the proxy for employment activity after the effective date of the minimum wage increase on April 1, 2024. It is hard to believe that in a very high turnover industry like fast food—where employers can adjust employment levels rapidly by reducing hiring—that businesses would reduce staffing levels several months before being compelled to pay higher wages, but then not change employment levels at all after actually being required to increase wages. The study also provides no evidence on wage changes, cannot distinguish between headcounts and hours reductions, and excludes new businesses that may have started during the policy period.

3. For an explanation of the importance of the own-wage elasticity in interpreting studies of the minimum wage’s effect on employment, see Dube and Zipperer 2024.

4. See Cooper, Mishel, and Zipperer 2018 for the importance of accounting for turnover rates when assessing the likely implications of any measured employment decline.

5. See Economic Policy Institute 2025a for data on productivity levels over time.

6. Both of these assumptions are likely close to true or overstate the actual price pressure that would be experienced from price indexing wage standards in fast food. For the leisure and hospitality sector—the larger sector in which fast-food (or limited-service) restaurants are embedded—aggregate weekly payrolls are roughly $10 billion. To estimate low-wage workers’ aggregate pay, we took the number of leisure and hospitality sector workers making less than $17 per hour in 2024 (5.7 million) and multiplied this by $17 and by 35 hours per week. All of these (the high $17 threshold for defining “low-wage”, the assumption that all making under $17 were making exactly $17, and the 35 hours per week) likely increase the estimate of low-wage workers’ wage bill in the sector. Making these generous assumptions yields a weekly wage bill of roughly $3.4 billion, or just over a third of the total wage bill in the sector. For total labor costs as a share of total output in the sector, we used the Composition of Gross Output by Industry table from the GDP by Industry accounts of the Bureau of Economic Analysis.

7. Growth in wages has been used to index some labor standards. Under the overtime rule enacted by the Obama administration the salary threshold for being granted automatic rights to overtime protections was set at the 40th percentile of annual earnings in the lowest-wage region of the country.

8. Social Security uses an “average wage index” to deflate workers’ past earnings to calculate their initial Social Security benefit amount. This implicitly credits recipients for overall economic growth (overwhelmingly determined by productivity) over the course of their working life.

9. This figure calculated from data provided by the Detailed Industry Productivity database from the Bureau of Labor Statistics.

10. See Economic Policy Institute 2025b, specifically the wages for workers at the 10th percentile.

References

Bivens, Josh. 2022. “Corporate Profits Have Contributed Disproportionately to Inflation: How Should Policymakers Respond?” Working Economics Blog (Economic Policy Institute), April 21, 2022.

Clemens, Jeffrey, Olivia Edwards, and Jonathan Meer. 2025. “Did California’s Fast Food Minimum Wage Reduce Employment?” NBER Working Paper no. 34033, July 2025.

Cooper, David, Larry Mishel, and Ben Zipperer. 2018. Bold Increases in the Minimum Wage Should Be Evaluated for the Benefits of Raising Low-Wage Workers’ Total Earnings. Economic Policy Institute, April 18, 2018.

Dube, Arindrajit, and Ben Zipperer. 2024. “Own-Wage Elasticity: Quantifying the Impact of Minimum Wages on Employment.” NBER Working Paper no. 32925, September 2024.

Dube, Arindrajit, and Ben Zipperer. 2025. Minimum wage own-wage elasticity repository, Version 2025.9.1., https://economic.github.io/owe.

Economic Policy Institute. 2026. “The Productivity-Pay Gap” (web page). Last updated January 16, 2026.

Economic Policy Institute. 2025a. State of Working America Data Library, “Productivity and pay levels – Productivity and pay, real dollars per hour (2024$).”

Economic Policy Institute. 2025b. State of Working America Data Library, “Minimum wage – Real minimum wage (2024$).”

Economic Policy Institute. 2025c. State of Working America Data Library, “Hourly wage percentiles – Real hourly wage (2024$).”

Federal Reserve Bank of New York. 2025. “Economic Heterogeneity Indicators.” Accessed January 2026.

Hamdi, Naser, and David Sovich. 2025. “The Wage and Employment Effects of California’s Fast-Food Minimum Wage.” SSRN, March 28, 2025.

KFF. 2025. “Population Distribution by Citizenship Status.” Accessed January 23, 2026.

MacDonald, Daniel, and Eric Nilsson. 2016. “The Effect of Increasing the Minimum Wage on Prices: Analyzing the Incidence of Policy Design and Context.” Upjohn Institute Working Paper no. 16-260, June 2016.

Manning, Alan. 2003. Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton, N.J.: Princeton Univ. Press.

Pandit, Hitanshu. 2026. “Simply Can’t Wait: Evaluating the Effect of California’s Fast-Food Minimum Wage Increase.” SSRN, February 23, 2026. 

Schmitt, John. 2013. Why Does the Minimum Wage Have No Discernible Effect on Employment? Center for Economic Policy and Research.

Schneider, Daniel, Kristen Harknett, and Kevin Bruey. 2024. Early Effects of California’s $20 Fast Food Minimum Wage: Large Wage Increases with No Effects on Hours, Scheduling, or Benefits. The Shift Project, October 2024.

Sosinskiy, Denis, and Michael Reich. 2025. “A $20 Minimum Wage: Effects on Wages, Employment and Prices.” Institute for Research on Labor and Employment Working Paper, September 2025.

United States Census Bureau (Census). 2026. Annual Estimates of the Resident Population for the United States, Regions, States, District of Columbia and Puerto Rico: April 1, 2020 to July 1, 2025. NST-EST2025-POP. Accessed January 27, 2026.

Zipperer, Ben. 2024. “Most Minimum Wage Studies Have Found Little or No Job Loss.” Working Economics Blog (Economic Policy Institute), September 9, 2024.

This November, Alaska voters will decide whether to increase the state’s minimum wage to $15 an hour by 2027.1 This new wage floor will produce significant increases for Alaska’s low-wage workers, helping them make ends meet amid high costs of living throughout the state. The minimum wage increase will help lock in the wage gains low-wage workers have experienced during the economic recovery from the pandemic and will create greater equity by disproportionately lifting wages for women, workers of color, and parents. 

Key findings

• Alaska’s current minimum wage falls short of providing true economic security for low-wage workers. A modest estimate of a living wage for Anchorage residents is $18.58 an hour.
• The proposed minimum wage increase would lift wages for 30,800 workers, roughly ten percent (9.7%) of Alaska’s wage-earning workforce. In total, the increase would put $51,141,000 in the pockets of workers. 
• More than half (55.1%) of workers that would get a wage increase are women. The minimum wage increases would also disproportionately benefit workers of color. Hispanic workers make up 13.3% of the affected workers; and American Indian, Alaska Native, and multiracial workers are 22.7% of the workers receiving wage increases. 
• Minimum wage workers are from all walks of life. Most workers getting an increase—78.4%—would be 20 years old or older. Nearly 1 in 5 (19.1%) are parents.

Why Alaska’s current minimum wage falls short

Alaska’s current minimum wage ($11.73 an hour as of January 1, 2024) falls short of covering the basic expenses of working people in the state.2 EPI’s Family Budget Calculator (FBC) measures the monthly and annual costs families need to afford a modest standard of living in each county in the United States. (In Alaska, the primary substate jurisdictions are boroughs.) These estimates include essential expenses for a secure life including food, housing, health care, and transportation, but omit other expenses many would consider critical, such as retirement and education savings. The FBC estimates can also be customized to account for families of various sizes and with different numbers of children.

Table 1 shows the annual expenses for households in the five most populous boroughs in Alaska, which in total contain 80% of the state’s population (AK DOLWD 2020). Even in the least expensive of these boroughs, Anchorage, a single adult must cover expenses of $47,713 to reach the Family Budget Calculator’s threshold for a modest, but secure, standard of living. For a family with two adults and two children, those expenses rise to $118,206. The Family Budget Calculator allocates families with children significantly higher living costs due to increased need in all major expense categories and the addition of child care expenses.

Table 1

The FBC numbers provide a useful benchmark for assessing the adequacy of the minimum wage. However, translating family expenses into a single estimate of a “living wage” requires making judgments about the type of household the living wage should cover. A working adult living alone does not need to earn as much as a working caregiver with two young children to provide for.

A conservative choice for a living wage would be one that covers the basic expenses of only single, childless adults who work full time and year-round. To be even more conservative, we can also assume that some of these workers’ expenses will be covered by income other than wages—such as employer-provided health insurance or government-provided social insurance or means-tested benefits (e.g., housing or food assistance). A reasonable assumption would be that the workers’ wages only need to cover 81% of their expenses, and that the remaining 19% will be covered by non-wage income and social insurance and means-tested transfers, based on Congressional Budget Office data on income sources for households at different levels of household income (Gould, Mokhiber, and deCourcy 2024).

Even in this scenario, Alaska’s current minimum wage is not enough. In Juneau, the most expensive borough listed, a conservative living wage would be $19.65 an hour today. Meanwhile, in Anchorage, the living wage would be $18.58. Thus, increasing the state minimum wage to $15 an hour by 2027 will not fully achieve a living wage for all Alaskans, but it would be an important step toward greater economic security for working families. 

Breaking down the benefits of a minimum wage increase

Table 2 shows the proposed ballot measure’s schedule for increasing the minimum wage in Alaska. If passed, the minimum wage will increase from its current level of $11.73 to $13.00 at the beginning of 2025. The minimum wage would rise again in 2026 to $14.00 and once more to $15.00 in 2027. Beginning in 2028, the minimum wage would be automatically adjusted for inflation every year thereafter to protect the buying power of the minimum wage if prices increase. Importantly, Alaska is one of seven states where employers must pay tipped workers such as bartenders, waitstaff, barbers, and hairstylists at least the full minimum wage, regardless of any earnings from tips (Hickey 2023).

Table 2

Raising the minimum wage will provide significant wage increases for tens of thousands of workers in the state. Through 2027, Alaska’s minimum wage increase will lift wages for 30,800 workers, roughly ten percent (9.7%) of Alaska’s wage-earning workforce. In total, the increase will put $51,141,000 in the pockets of workers impacted by the change. The wages of a typical full-time, year-round worker would increase by $1,659 a year. And these effects go beyond workers who benefit directly from the minimum wage increase. For a directly affected worker, the new minimum has a higher value than their current wage, so their employer must increase their wage to comply with the law. But there are also indirectly affected workers earning slightly above the new minimum wage threshold who will benefit from the change because research shows that employers adjust their wage ladders in response to the new minimum wage (Cooper, Mokhiber, and Zipperer 2019). 

Raising the minimum wage would have powerful equity ramifications for Alaskan workers. Table 3 shows that despite being less than half (46.2%) of workers in Alaska, women make up 55.1% of the workers who would benefit from the increase. While white workers will be the most impacted by the minimum wage as a group (with more than 14,000 white workers receiving increases), Black, Hispanic, Asian American and Pacific Islander (AAPI), American Indian and Alaska Native (AIAN), and multiracial workers will all disproportionately benefit from the increase. Hispanic workers are 7.4% of Alaska’s workforce but make up 13.3% of the affected workers. Similarly, AIAN and multiracial workers are 16.7% of the workforce, but 22.7% of the workers getting a raise. Increasing the minimum wage will help narrow gaps between workers by gender, race, and ethnicity. 

The increases will also provide critical support for Alaskans living in poverty. Over 20% of the workers getting an increase have incomes below the federal poverty line, and 47.4% earn less than 200% of the poverty line.3 Research has found that the raising the minimum wage can significantly reduce poverty (Godoey and Reich 2021). 

Table 3

Minimum wage workers come from many walks of life and are at different points of their career. Almost four-fifths (78.4%) of workers getting increases will be 20 years old or older. Almost 40% will be prime-age workers between 25 and 55. Almost half (45.2%) of the affected workers are full-time. Although most minimum wage workers have a high school degree or less education, 38.2% have completed at least some college coursework.4 Minimum wage workers are also parents and caregivers. Nearly 5,900 workers (19.1%) getting a raise have children. In total, we estimate that 23,600 children live in households that will benefit from the increase. 

Raising the minimum wage will lock in wage gains for low-wage workers 

In recent years, Alaskan workers have had to navigate rising prices. At the same time, the economic recovery from the pandemic has produced once-in-a-generation wage growth for low-wage Alaskan workers. Increasing the minimum wage would help workers lock in gains before the end of another business cycle. Doing so would help preserve a more equitable economy in Alaska.

Figure A shows the minimum wage, median wage, and 10th percentile wage in Alaska from 1991–2023 in constant (i.e., inflation-adjusted) 2023 dollars. The median wage (at the 50th percentile) is the wage of someone in the middle of the distribution—what might be considered the wage of a typical middle-class worker. The 10th percentile is the wage of someone closer to the bottom of the wage distribution who makes more than 10% of all workers but less than 90% of all workers.

From 2019 to 2023, real 10th percentile wages in Alaska grew from $12.40 to $14.12, the quickest growth rate (13.9%) of any state in the Pacific Census Division and slightly faster than the U.S. overall (13.5%).5 This rapid wage growth was no accident. Key federal policy decisions including expanded unemployment insurance, economic impact payments, aid to states and localities, child tax credits, and protection from eviction helped families weather the pandemic recession and maintain regular levels of spending (Gould and deCourcy 2024). Millions of low-wage workers could stay home without risking their health and lives to work. As a result, when the economy reopened, employers had to work harder to attract and retain workers. A competitive labor market with low unemployment forced employers to pay higher wages to recruit workers. 

Of course, the strong labor market and resulting strong wage growth will not last forever. And it is in periods of labor market slack when workers have less leverage that policies like the minimum wage are essential for protecting low-wage workers’ earnings. During the most recent economic recovery, both states with and without minimum wage increases have seen strong wage growth for low-wage workers. But during the recovery from the Great Recession when labor market conditions were not favorable to workers, the wage growth in states with minimum wage increases strongly outperformed states without those increases (Gould and deCourcy 2024).

Figure A

This strong wage growth for low-wage workers also created a more equitable wage distribution in Alaska. In 2022, the Alaskan 10th percentile wage was $14.59, which was 59.0% of the median wage of $24.72, a high-water mark since at least 1979. Before the pandemic, the 10th percentile wage had not exceeded 52.4% of the median wage.6 This means that in the last two years, low-wage workers in Alaska have been paid wages closer to those of typical middle-class workers than at any point in more than four decades.7 This condensed wage distribution means economic prosperity is being shared more equally across workers in the economy.

The minimum wage can be a tool for improving and sustaining equity by ensuring that the wage for the lowest paid job is not too far from that of a middle-income job. Research has found that from 1979 to 2012, almost 39% of the increase in inequality between the median worker and workers at the 10th percentile can be attributed to declining minimum wages (Zipperer 2015b). Comparing the minimum wage share of the 50th percentile wage indicates how far the distance is between the lowest paid worker and a typical worker. As a benchmark, in 1968 the federal minimum wage was at its highest real value and was worth 52% of the median wage (Zipperer 2015a). Figure B shows that since 1991, Alaska’s minimum wage has generally increased as a share of the median wage in the state but has never exceeded 50% of the median wage.

Figure B

Within this story of general progress, there are periods of stagnation where the minimum wage has declined in value. From 1999 to 2002, the minimum wage share of the median wage declined by 5.9 percentage points. From 2004 to 2009, it declined by 6.9 percentage points. Both declines occurred during multi-year periods when the minimum wage was not proactively increased.

In recent years, Alaska’s minimum wage has once again experienced a significant decline in value. From 2018 to 2023, the minimum wage share of the median wage has decreased by 5.6 percentage points. This decline has occurred in spite of Alaska’s 2014 decision to index its minimum wage to annual inflation growth.8 Without indexing, Alaska’s minimum wage value would have eroded even more quickly, but the historic conditions of the pandemic recovery mean that this prudent step has still not been enough. A proactive increase is needed to bring the minimum wage back to a level where it is creating a more equitable economy in Alaska. 

In addition to promoting equity, the minimum wage also serves as a backstop that protects the earnings of low-wage workers during weak and strong labor markets. In an economic downturn, without a strong minimum wage floor, there’s greater potential for backsliding of wages. To effectively support low-wage workers, the minimum wage can’t fall too far behind the going rate of low-wage labor. Even at times when wage growth is strong for low-wage workers, it is important for the minimum wage to keep pace with increases in earnings. 

The recent strong wage growth in Alaska means the minimum wage’s level has decreased compared with low-wage workers’ earnings. Figure C shows that in 2019, Alaska’s minimum wage was $9.89, more than 95% of the 10th percentile wage. However, in 2022, the minimum wage was only 73.8% of the 10th percentile wage, its lowest share since at least 1991. In 2023, the minimum wage value grew slightly, but was still only 76.8% of the 10th percentile wage.

Since 1991, the only other occasions when the minimum wage’s value fell below 76% of the 10th percentile wage were in 1996 and 2001–2002. Both times were preceded by periods where the minimum wage stagnated for at least five years without an increase. Alaskans recognized on both occasions that the minimum wage was too low and increased it. During the pandemic recovery, the value of Alaska’s minimum wage has eroded once again. To protect the gains that Alaska’s low-wage workers have experienced, the minimum wage should be increased to bring its value back into the range of what has historically been the case. 

Figure C

How will raising the minimum wage affect employment? 

Raising the minimum wage will provide an economic boost to low-wage workers without hurting employment in Alaska. Concern that raising the minimum wage hurts low-wage workers has been refuted consistently by high-quality research. A comprehensive review of 30 years of minimum wage research found at most a muted effect on employment (Dube 2019). Another study focused only on the highest minimum wages enacted at state or local levels showed no evidence of reduction in the number of jobs for low-wage workers (Cengiz et al. 2019). A study of 21 city-level minimum wage increases found that they raised wages with little effect on the number of jobs (Dube and Lindner 2021). 

These research findings imply that in the low-wage labor market, employers have significant power over their workers, and higher minimum wages can help to correct some of this imbalance of power. The empirical research shows that when the minimum wage is raised, low-wage workers’ paychecks increase, and businesses can adjust through channels that don’t require laying off workers (Zipperer 2023). For instance, higher labor costs from the rising minimum wage can be offset by other cost savings.

Some of these cost savings result from decreased turnover. Most low-wage jobs have extremely high turnover rates, but when workers are paid more, they tend to stay at their current jobs longer. This cuts down on the time workers spend between jobs without getting paid and means businesses are spending less money on recruitment and training. Workers also might become more productive, both because of working in the same role longer and because of valuing their job more.

Employers also react to minimum wage increases by passing some of their cost increases on to consumers although research shows that the resulting price increases tend to be very small (Allegretto and Reich 2016). This effect does not seem to reduce the demand for the services in the industries most affected by minimum wage increases, perhaps because all businesses must raise their costs simultaneously, so consumers cannot discriminate by price. The minimum wage could also increase consumer demand by putting more money in the pockets of low-wage workers, who are more likely than business owners and higher income households to spend every additional dollar in the local economy. 

Conclusion 

Increasing Alaska’s minimum wage would strengthen the economic security of working people in the state. The wage benefits that the increase will bring are much needed for low-wage working people who face living expenses far in excess of the current minimum wage. In addition, the proposed ballot measure further supports the economic well-being and dignity of working Alaskans by providing them with paid sick leave and prohibiting employers from retaliating against workers who refuse to attend employer-sponsored religious or political meetings.9 Implementing these policies would create a stronger and more inclusive state economy. 

Appendix Table 1

Notes

1. If passed, the ballot measure would also provide Alaskan workers with paid sick leave and allow them to opt out of attending unsolicited political and religious meetings in the workplace.

2. See the Economic Policy Institute’s Minimum Wage Tracker for all state and local minimum wage rates (EPI 2024c).

3. Although 200% of the poverty line reflects an income level that is not technically poor, many families and individuals at that income level still struggle to make ends meet and achieve economic security. In 2024, the official poverty threshold for a 4-person household in in Alaska is $39,000 (HHS 2024).

4. Workers with at least some college coursework include those with some college education, but no degree; an associate degree; and either a bachelor’s degree or higher.

5. EPI analysis of Current Population Survey Outgoing Rotation Group microdata (EPI 2024a).

6. The 10th percentile wage was 52.4% from 2004–2005.

7. Low-wage workers also made gains compared with high-wage workers. In 2022, the 10th percentile wage was 26.5% of the 90th percentile wage, a high point since at least 1979.

8. Alaska’s minimum wage did not increase in 2022 because the Consumer Price Index (CPI) for Anchorage did not increase in 2021 (EPI 2024c).

9. For more on paid sick leave, see Gould and Wething 2023. For more on mandatory religious and political meetings, see Perez and Sherer 2023.

References

Alaska Department of Labor and Workforce Development (AK DOLWD). 2020. Alaska Population Overview: 2019 Estimates. Alaska Department of Labor and Workforce Development, December 2020. 

Alaska Department of Labor and Workforce Development (AK DOLWD). 2024. “Minimum Wage Standard and Overtime Hours” (web page). Accessed March 25, 2024. 

Alaska Division of Elections (AK DOE). 2023. Alaska’s Minimum Labor Standards Initiative, n.d.

Allegretto, Sylvia, and Michael Reich. 2016. “Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-Based Restaurant Menus.” ILR Review 71, no. 1: 35–63. 

Cengiz, Doruk, Arindrajit Dube, Attila Lindner, and Ben Zipperer. 2019. “The Effect of Minimum Wages on Low-Wage Jobs,” The Quarterly Journal of Economics 134, no. 3 : 1405–1454 (August 2019). 

Cooper, David, Zane Mokhiber, and Ben Zipperer. 2019. Minimum Wage Simulation Model Technical Methodology. Economic Policy Institute, February 26, 2019. 

Dube, Arindrajit. 2019. “Impacts of Minimum Wages: Review of the International Evidence.” Report Prepared for Her Majesty’s Treasury (UK), November 2019. 

Dube, Arindrajit, and Attila Lindner. 2021. “City Limits: What Do Local-Area Minimum Wages Do?” Journal of Economic Perspectives 35, no. 1 (Winter): 27–50. 

Economic Policy Institute (EPI). 2024a. Current Population Survey Extracts, Version 1.0.49, https://microdata.epi.org. 

Economic Policy Institute (EPI). 2024b. Family Budget Calculator. Last updated January 31, 2024. 

Economic Policy Institute (EPI). 2024c. Minimum Wage Tracker. Last updated March 1, 2024. 

Godoey, Anna, and Michael Reich. 2021. “Are Minimum Wage Effects Greater in Low-Wage Areas?” Industrial Relations 60, no. 1: 36–83. 

Gould, Elise, and Katherine deCourcy. 2024. Fastest Wage Growth over the Last Four Years Among Historically Disadvantaged Groups: Low-Wage Workers’ Wages Surged After Decades of Slow Growth. Economic Policy Institute, March 2024.

Gould, Elise, Zane Mokhiber, and Katherine deCourcy. 2024. What Constitutes a Living Wage? A Guide to Using EPI’s Family Budget Calculator. Economic Policy Institute, January 2024. 

Gould, Elise, and Hilary Wething. 2023. Paid Sick Leave Access Expands with Widespread State Action: Low-Wage Workers Without Access Face Economic and Health Insecurity. Economic Policy Institute, November 2023. 

Hickey, Sebastian Martinez. 2023. “Twenty-Two States Will Increase Their Minimum Wages on January 1, Raising Pay for Nearly 10 Million Workers.” Working Economics Blog (Economic Policy Institute), December 21, 2023. 

Perez, Daniel, and Jennifer Sherer. 2023. “Tackling the Problem of ‘Captive Audience’ Meetings: How States Are Stepping Up to Protect Workers’ Rights and Freedoms.” Working Economics Blog (Economic Policy Institute). October 24, 2023. 

U.S. Department of Health and Human Services (HHS), Office of the Assistant Secretary for Planning and Evaluation. 2024. “HHS Poverty Guidelines for 2024” (web page). Accessed April 29, 2024. 

Zipperer, Ben. 2015a. Bolstering the Bottom by Indexing the Minimum Wage to the Median Wage. Washington Center for Equitable Growth, June 2015. 

Zipperer, Ben. 2015b. How Raising the Minimum Wage Ripples Through the Workforce. Washington Center for Equitable Growth, April 2015. 

Zipperer, Ben. 2023. “Turnover, Prices, and Reallocation: Why Minimum Wages Raise the Incomes of Low-Wage Workers.” Journal of Law and Political Economy 3, no. 1: 160–171. 

Introduction 

For more than a decade, academics and education policy experts have raised concerns about a widespread shortage of teachers in the United States.1 The first wave of warnings came in response to the drastic cuts in state and local spending on education following the Great Recession. But teacher shortages remained a significant challenge for the nation’s public education system long after the immediate effects of the Great Recession wore off. Most recently, the COVID-19 pandemic ignited a new round of concerns.

In this report, we use data from a wide range of sources to document the size and scope of the teacher shortage. The data show that the teacher shortage is both widespread and acute across several dimensions, from subject matter specialties to school poverty status. We also review data that point to the two most important drivers of the shortage:

• the declining compensation in the teaching profession relative to other occupations that employ college graduates
• and the increasingly stressful work environment teachers face, a long-standing reality that has been greatly exacerbated by COVID-19.

Our key finding is that the current shortage is generally not the result of an insufficient number of potentially qualified teachers.2 The shortage is, instead, a shortfall in the number of qualified teachers willing to work at current wages and under current working conditions. The combination of substandard teacher compensation and highly stressful working conditions has, in recent decades, made teaching a much less attractive profession than alternatives available to workers with college degrees.3

Low pay and high stress are, and have been for many years, the major barriers to meeting the national demand for teachers. A shortage of this nature––driven by poor pay and stressful working conditions––will not be ameliorated simply by increasing the potential number of qualified teachers.

Teacher shortages are widespread and long-standing

Researchers using data from a variety of sources have documented a long-standing and widespread shortage of teachers—overall, by subject area, by racial and ethnic composition of schools’ students, by poverty status, by geography, and by other dimensions.4 In this report, we focus on: the large and growing share of unfilled teaching vacancies; the rising share of teachers leaving their jobs each year; and the declining interest in the teaching profession, which is reflected in falling enrollment in and completion of teacher preparation programs. We show that all these trends long predate the COVID-19 pandemic but have grown more acute since 2020.5

A central challenge for research on teacher shortages is how to define and measure the demand for teachers, the supply of teachers, and any gap between the two. To measure demand, researchers have generally taken school administrators’ determination of the number and kinds of teachers they would like to hire each year. To measure supply, many researchers use the total number of people of working age who are, or who easily could become, qualified to teach. This group includes adults who have postsecondary degrees in education or who have completed less traditional teacher preparation programs.

To estimate the demand for teachers, we follow most existing research and use school administrators’ assessment of the number of teaching positions needed to fulfill their educational goals as a reasonable and practical estimate of the “demand” for teachers. However, we emphasize that school administrators make staffing decisions based on current budgets and their best estimates of likely future budgets. The demand for teachers, therefore, depends on both educational considerations and the financial constraints facing public school administrators.

With respect to teacher supply, we argue that the supply of teachers is not well captured by simply summing the number of adults who already are, or who could quickly become, qualified to teach in public K–12 schools. As some researchers have emphasized, at any given point in time “supply” defined in this way is likely to be large relative to the number of unfilled vacancies.6 We argue that this approach ignores crucial features of the current teacher shortage, including long-standing problems with pay and stress that discourage qualified teachers from filling existing vacancies.

Vacancies

We begin with the data on vacancies for teaching positions. Each of the data sources we draw on below has strengths and weaknesses, but together they paint a consistent picture of schools working harder and harder—and increasingly failing—to fill openings for their available teaching positions.

Teacher Shortage Areas data

Each year since the 1990–1991 school year, the Department of Education has asked state governments to report on teacher shortages by subject area in their states. The Department of Education compiles the responses and issues an annual report on “Teacher Shortage Areas” (TSA), which allows us to identify the shortages in a wide range of subject areas, over more than two decades, separately for each state.7

In the year before the COVID-19 pandemic began, education researchers Pennington McVey and Trinidad (2019) produced a comprehensive analysis of the TSA data covering school years 1998–1999 through 2017–2018. Their analysis illustrates two important features of the national teacher shortage.

First, state reports of shortages were substantially higher at the end of the period they studied than they were at the beginning, with most of the increase taking place between the school years 2003–2004 and 2008–2009, and holding roughly steady at elevated levels thereafter. In nine of the 10 subject areas that Pennington McVey and Trinidad identified as most likely to be experiencing a shortage, fewer than 30% of states reported shortages in those areas at the beginning of the period studied (1998–1999). But by the 2017–2018 school year, between 25% and 90% of states were reporting shortages in these particularly shortage-prone subject areas (Pennington McVey and Trinidad 2019, Figure 5). The increase in reported shortages was evident even for the 14 subject areas identified as least likely to experience shortages. In the first three school years studied (1998–1999 to 2000–2001), fewer than 10% of states reported shortages in any of these 14 relatively low-shortage subject areas. By 2017–2018, between 10% and 35% of states reported teacher shortages in nine of these same 14 subject areas (Pennington McVey and Trinidad 2019, Figure 8).8

The second important feature captured in the TSA data is that while shortages are widespread, they are particularly acute in some subject areas. The top 10 subject areas experiencing teacher shortages in the Pennington McVey and Trinidad analysis were: special education, mathematics, science, foreign language, English language arts, English as a second language, “career tech,” arts, social science, and librarian.

State teacher workforce reports

One limitation of the TSA data is that the survey reports whether a state is experiencing a shortage in a particular subject area, but does not provide information on the size of the shortage. As Pennington McVey and Trinidad note, in the TSA data a report of a shortage could indicate “one or 1,000” vacancies.9 An analysis by the Learning Policy Institute (LPI) (n.d.), however, provides one estimate of the scale of teacher shortages using data covering the 2015–2016 and the 2016–2017 school years, close to the end of the period studied in the Pennington McVey and Trinidad analysis.

LPI reviewed teacher workforce reports prepared by 40 states. These states reported either the number of unfilled teaching vacancies or the total number of teachers “not fully certified for the teaching assignments,” or both. Summing those numbers and extrapolating them to include the states that did not report data, LPI estimates that public schools nationally were operating 108,000 teachers below what was needed to fully staff vacancies with teachers certified for their assignments.10 LPI also warns “that these data also most likely underrepresent the extent and impact of shortages because districts often address shortages by canceling courses, increasing class sizes, or starting the school year with substitute teachers.”

Job Openings and Labor Turnover Survey data

The LPI analysis provides a careful estimate of the number of teacher vacancies at a specific point in time prior to the 2020 pandemic. With some limitations, the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) allows us to look at the size of vacancies over the entire period from 2000 through the present. The JOLTS tracks monthly job openings (vacancies), new hires, quits, layoffs, and firings on a consistent basis across the entire economy and by specific industries, including the state and local government education sector. JOLTS does not publish separate estimates for public school teachers. Teachers, however, are about 44% of the workforce in state and local public education,11 so the trends visible in the JOLTS data give some insight into the experience of public K–12 teachers.12

Consistent with the idea that schools have found it increasingly difficult to attract enough teachers, the JOLTS data show a long, steady increase in vacancies between roughly the end of the Great Recession and 2019 (Figure A). Between 2001 and 2012, for example, monthly vacancies in the sector averaged 1.1% of total employment. By 2015–2019, the average vacancy rate had increased by 60% to a monthly average of 1.7%.

Figure A

The JOLTS vacancy data also report a further, sharp increase in monthly vacancy rates during the pandemic—despite an initial collapse at the onset of the pandemic. From 2020 to the present, the vacancy rate has averaged 2.7%, well above the 1.7% rate for 2015–2019 and more than two-and-a-half times the 1.1% rate for 2001–2012.

Meanwhile, monthly quit rates in the JOLTS data for state and local public education also rose steadily after the end of the Great Recession, suggesting that a growing share of workers in the sector were leaving their jobs each month even before the pandemic. Between 2001 and 2012, the quit rate averaged 0.6% per month. From 2015 through 2019 that rate rose to 0.8%, and after an initial dip in quits at the beginning of the pandemic the monthly quit rate rose to an average of 0.9% in 2021 and 2022.

Despite rising vacancy and quit rates after the Great Recession, new hires in the sector remained flat, holding close to the 1.4% average level for the entire pre-pandemic period 2001–2019 (Figure B). This lack of responsiveness of hires to rising vacancies suggests that the shortages reported in other survey data reflect an unwillingness of potential teachers to accept jobs given the compensation and working conditions on offer. The simultaneous rise in the quit rate (Figure A) also reinforces the idea that teaching jobs are becoming less desirable.13

Figure B

The pandemic caused major disruptions to the long-term hiring patterns in state and local government education. Shortly after March 2020, layoffs spiked (not shown) and new hires dropped sharply (Figure B). Substantial federal aid early in the pandemic allowed local and state public education to reverse course and rehire a large share—but not all—of those initially laid off.14 Even though new hires have been above historical averages since the start of 2021, hiring has remained consistently below vacancies since January 2018.

School Pulse Panel data

While the TSA and JOLTS data document that education vacancies have been rising for at least a decade, the National Center for Education Statistics (NCES) School Pulse Panel (SPP) provides independent evidence that COVID-19 has aggravated the shortage. The SPP, a new survey implemented in response to the pandemic, has been sampling school and district staff monthly at about 2,400 public elementary, middle, and high schools during the 2021–2022 school year.15 Recently released results covering January 2022 found that 10% of all public schools reported that 10% or more of teaching positions were vacant; an additional 13% of schools reported that 5%–10% of teaching positions were vacant; and only 56% of schools reported they were operating without teaching vacancies (Figure C). Half of schools (51%) said that vacancies were caused by resignations; 21% said vacancies were the result of retirement. Almost one-third (30%) stated that vacancies were the result of creating new staff positions (IES 2022a).

Figure C

The SPP data also show that vacancy rates were higher on average in schools with higher shares of students of color. One in every eight schools (13%) with 75% or more students of color had teacher vacancies in excess of 10% of total teaching staff, versus 7% in schools where students of color made up less than 25% of students. Teacher vacancy rates have also been consistently higher in schools in high-poverty areas. Fifteen percent of schools in high-poverty neighborhoods, for example, had teacher vacancies of 10% or higher, compared with 8% in low-poverty neighborhoods.

The most recent data from the SPP, covering August 2022, found that the educator shortage has continued into the current school year, with “53% of public schools…reporting feeling understaffed entering the 2022–2023 school year” (IES 2022b).

The SPP data also reinforce the earlier findings of the TSA survey that shortages are most acute in some specialties, particularly special education (45% of schools reporting vacant teaching positions), mathematics (16%), English or language arts (13%), English learner education (13%), and physical sciences (10%) (Figure D). But the SPP data also show almost one-third (31%) of schools reporting vacancies for “general elementary” teachers and one-fifth (20%) of schools reporting vacancies for substitute teachers, a problem that became particularly acute during the pandemic.

Figure D

American School District Panel data

A separate survey of over 350 school district leaders conducted between October and December of 2021 by RAND and partner organizations also found widespread evidence of teacher shortages after the pandemic (Figure E). Two-thirds (67%) of district leaders in traditional public school districts agreed that the pandemic has caused shortages of teachers and 95% agreed that the pandemic has caused shortages of substitutes (Schwartz and Diliberti 2022, Figure 1). In the case of substitute teachers, 93% of district leaders reported shortages were “moderate” (16%) or “considerable” (77%); for special education, 60% of district leaders reported shortages, with 19% moderate and 41% considerable; and for mathematics, 48% of district leaders reported shortages, with 16% moderate and 32% considerable. These shortages, however, were not confined to area specialties, with 54% responding that they had moderate or considerable shortages for “high school” teachers, 43% for “middle school” teachers, and 38% for “elementary school” teachers16 (Schwartz and Diliberti 2022, Figure 2).

Figure E

A summer 2022 nationally representative survey conducted by the EdWeek Research Center of 255 principals and 280 district leaders had similar findings. Seventy-two percent of the school administrators said that there were not enough applicants to fill the teaching positions they had open for the 2022–2023 school year (Lieberman 2022).

Decline in interest in the teaching profession

At the same time that we have observed high and rising levels of vacancies, interest in entering the teaching profession has been on the decline. In addition to declining interest in majoring in education among incoming college freshmen across the U.S., there has been a decrease in the number of education degrees conferred by postsecondary institutions, as well as a falling number of people completing nontraditional teacher preparation programs. These findings are consistent with the idea that teaching is becoming less attractive relative to other professions employing a high share of college graduates.

Falling interest in education as a field of study

For the past five decades, the University of California at Los Angeles (UCLA) Higher Education Research Institute has surveyed incoming college freshmen nationwide to learn more about their backgrounds, beliefs, and expectations. In addition to questions regarding the respondents’ political views, levels of empathy, tolerance, and openness, and the distance of their chosen college from home, the survey also asks: “What is your probable field of study?” Respondents can choose from “arts and humanities,” “business,” “education,” “engineering,” “health professions,” “mathematics or computer science,” “physical and life sciences,” “social sciences,” and “other and undecided.”

Figure F

Figure F illustrates the sharp decline since the early 2000s in the share of incoming college freshman intending to major in education. The percentage of students intending to study education remained steady at about 10% for much of the 1990s but fell to 4.3% by 2018. In 2000, interest in education (11.0%), health professions (9.8%), and social sciences (11.1%) was nearly level. By 2018, however, interest in education had fallen by more than half, even as interest in health professions grew by one-third to 13.1% and social sciences remained steady at 11.1%. The falling student interest in education majors is consistent with results of the 2022 Phi Delta Kappan survey, which found that only 37% of parents with children in public schools would like to have their child “take up teaching in the public schools as a career”—down from 75% in 1969 (Walker 2022).

Falling number of education degrees conferred

The falling interest in education majors is reflected in the data for education degrees conferred, which have declined steadily since the early 2010s. Figure G presents data from the National Center for Education Statistics (NCES) on the number of bachelor’s degrees conferred in education and selected other majors. The absolute number of education degrees conferred was substantially lower in 2018 than it was in 1970, and lower in 2018 than at any point in the entire period in the last five decades. More importantly, the relative standing of education dropped substantially over the period: In 1970, education degrees were more popular than degrees in business, health professions, and social sciences and history. By 2018, education was, by a substantial margin, the least popular choice of major among these same categories. 

Figure G

Nontraditional teacher prep programs don’t make up the difference

Meanwhile, nontraditional teacher preparation programs have not made up for the steep decline in bachelor’s degrees in education. The U.S. Department of Education tracks enrollment and completion in nontraditional teacher preparation programs as part of its Title II State Report Card. The Title II Report provides data on the total number of teacher preparation programs, the number of individuals enrolled, and the number of program completers by program type.

Figure H

Figure H illustrates the overall decline in the number of teacher preparation program completers, as well as the respective declines in completers in traditional and alternative programs. Although the number of traditional program completers remained steady between the 2008–2009 and 2010–2011 academic years, since the 2008–2009 academic year the number of traditional program completers has fallen by 34%. Over the same period, the number of alternative program completers fell by 18%, indicating that alternative program completers have not been able to make up for the decline in traditional program completers. While the Title II data show a large, steady increase in enrollment in nontraditional teacher preparation programs after 2014, the large and growing gap between initial enrollment and successful completion casts doubt on the ability of nontraditional programs, as currently structured, to contribute to the total supply of potentially qualified teachers.

Large shares of teacher prep graduates decide not to teach

The decline in interest in teaching is even worse than the preceding data on teacher preparation programs suggest because a large portion of those who complete traditional and nontraditional teacher preparation programs ultimately decide not to enter teaching or to leave the profession soon after entering. As Dee and Goldhaber (2017) note, “the number of education graduates produced annually far exceeds the number of teachers new to the labor market who are hired” (pp. 7–8). Pennington McVey and Trinidad (2019) estimate that “about half of teachers who have degrees in teaching do not teach” (p. 10).

Analysts skeptical of the existence of teacher shortages sometimes argue that the large number of potential teachers who are not teaching is evidence that there is not a teacher shortage.17 Alternatively, the declining interest in education majors, the fall in the number of education degrees conferred, and the large share of adults who invest in a teaching career and then decide not to pursue it all signal a long-term decline in the attractiveness of the teaching profession.

The teacher shortage is bigger than unfilled or underfilled vacancies

All the evidence of shortages that we have reported so far relied explicitly on school administrators’ assessments of the number of teachers needed based on their professional judgement and their understanding of the budget constraints they face. If schools were less financially constrained, the teacher shortage could be even larger than what the existing data already suggest.

A quick calculation can give a rough sense of how large the teacher shortage would be if school administrators were able to make staffing decisions based on educational goals, rather than strictly on financial constraints. A recent analysis by Baker, Di Carlo, and Weber (2022) used a national education cost model to estimate “the funding levels required to achieve the goal of national average math and reading scores” in all U.S. public schools, a goal that they identified as “modest but reasonable [and] common” (p. 2). Their comprehensive review of current spending levels and student outcomes (student results on standardized tests) concluded that achieving this benchmark of “universal adequacy” would require an increase of $132 billion in total local, state, and federal spending, which would represent an increase of 13% in total 2019 state and local spending.

If the 13% increase were spent in the same proportion as current spending, this would require a 13% increase in the number of teachers. Using the NCES estimate for 2019 of 3.2 million public K–12 teachers in the United States,18 the Baker, Di Carlo, and Weber (2022) “universal adequacy” target would have required 416,000 more teachers, even before the pandemic. Even if increases in teaching staff were only half as large as the overall percentage increase, the number of new teachers required over and above 2019 staffing levels would be more than 200,000.19

Main drivers of the teacher shortage

As we have emphasized, the United States does not have a shortage of individuals qualified (or potentially qualified) to teach in K–12 public schools. The teacher shortage we are experiencing is, instead, a shortage of qualified teachers who are also willing to work for current levels of compensation and under the working conditions currently on offer. Researchers have identified many factors that make teaching an increasingly less attractive profession.20 We focus here on two of those factors that are particularly important: the low pay relative to other professions requiring similar levels of formal education and the increasingly stressful working conditions.

Poor compensation

Almost all public K–12 teachers have at least a four-year college degree (96%); a large share also have advanced (56%) degrees.21 Teachers, however, consistently earn substantially less—in salary and benefits—than other workers with a similar level of formal education. Most importantly for our analysis, the gap between teacher pay and the pay of other college graduates has grown in recent decades. Financially, teaching is substantially less attractive now than it was before the teaching shortage emerged.

Current Population Survey data

Since the mid-2000s, our colleagues at the Economic Policy Institute have used data from the nationally representative Current Population Survey (CPS) to track the pay of teachers relative to other college graduates. Figure I summarizes their most recent findings (Allegretto 2022). In 2021, teachers made on average 23.5% less per week of work than other college graduates in the workforce, after controlling for workers’ education, age, state of residence, and a range of additional characteristics that may affect earnings. The teacher pay gap measured in this way has increased almost continuously since the mid-1990s, when it stood at about 5% overall.

Figure I

One potential objection to this analysis is that nonwage benefits (such as health insurance and retirement benefits) more than compensate for lower teacher salaries. However, even after accounting for the more generous benefits paid to teachers, teachers remained 14.1% behind their nonteaching counterparts.22 Moreover, the growth in benefits over the period was not enough to prevent the teacher compensation gap—including both salary and benefits—from rising in recent decades. Allegretto (2022) calculated that the total teacher compensation gap increased by 11.5 percentage points between 1993 and 2021.

A second potential objection is that teachers only work part of the year, while most workers with college degrees work year-round. To address this concern, the analysis in Figure I compares weekly, rather than annual, earnings of teachers and nonteachers.

To understand the role of pay in the teacher shortage, the most important feature of the data summarized in Figure F is that the relative earnings of teachers—measured on a consistent basis in each year—steadily declined over the last three decades. This finding implies that the earnings of teachers today relative to their college-educated counterparts are substantially lower than the earnings of teachers in the 1990s relative to their own college-educated counterparts in the same decade. This decline in the financial standing of teachers relative to other college graduates coincides with a sustained rise in unfilled teaching vacancies, an increase in the rate of teachers quitting their jobs, and a long-term decline in interest in the teaching profession.

American Community Survey data

A separate, recent analysis by the U.S. Census Bureau American Community Survey (ACS), another nationally representative survey of U.S. households, arrived at similar conclusions: “Although teachers are among the nation’s most educated workers, they earn far less on average than most other highly educated workers and their earnings have declined since 2010” (Cheeseman Newburger and Beckhusen 2022). According to the Census Bureau, the inflation-adjusted median annual earnings of all full-time, full-year workers—60% of whom have less than a four-year college degree—grew 2.6% between 2010 and 2019 (Figure J). Over the same period, median earnings for elementary and middle school teachers fell 8.4%, for high school teachers fell 4.4%, and for special education teachers, where shortages have been particularly acute, fell 3.9%.

Figure J

Organisation for Economic Co-operation and Development data

International data compiled by the Organisation for Economic Co-operation and Development (OECD) suggest that teacher pay in the United States is poor when compared with other rich countries. For 2019 (or the most recent year available), the OECD calculates the annual earnings of teachers in each country relative to the annual earnings of full-time, full-year workers with the equivalent of a college degree or more in the same country.

Figure K presents the OECD data on pay for primary school teachers. The relative pay for teachers in the United States is at the bottom—tied with Hungary—of the set of countries for which the OECD has data. In the United States, the annual earnings of public primary school teachers are 61% of the earnings of full-time, full-year workers with a college degree or more. By comparison, the ratio is 80% or higher in other rich countries, including Sweden, Denmark, New Zealand, Ireland, Slovenia, Israel, Australia, Finland, and Germany. Similar data for lower secondary and upper secondary school teachers (not shown here) show a similar pattern (OECD 2021).23

Figure K

The low level of relative teacher pay in the United States is particularly problematic given that OECD data also indicate that, on average, U.S. teachers work more hours per year than teachers in all other OECD countries. Figure L presents the corresponding annual hours data for primary school teachers; annual hours data for lower and upper secondary school teachers follow the same pattern.

Figure L

Stress

Teaching is stressful. Sources of teacher stress include long hours during the school year, large class sizes, juggling second jobs to supplement pay, evaluation processes that depend heavily on standardized testing results, discrimination against teachers of color, lack of control over the curriculum, and an increasingly politicized environment. 24 From the onset of the pandemic, teachers have also had to cope with a host of new stressors, including elevated health risks, complicated child care arrangements, and challenges involved in switching between in-person, remote, and hybrid learning.

These old and new sources of stress are a major driver of the rising level of unfilled teaching vacancies and the diminished interest in teaching. A recent survey conducted by the RAND Corporation of teachers who left teaching before and during the COVID-19 pandemic found that “stress was the most commonly reported reason for leaving the profession among both those teachers who left before and those teachers who left during the pandemic” (Diliberti, Schwartz, and Grant 2021, p. 10). Stress is particularly acute for teachers of color and contributes to their higher attrition rates.25

Pre-pandemic stress

Data from a variety of sources show that, even before the pandemic, teacher stress was as high as or higher than stress for workers in other professions, including occupations known for challenging working conditions.

A 2013 Gallup-Healthways Well-Being Index survey found that 46% of K–12 teachers experienced “stress during a lot of the day” immediately before they were interviewed by Gallup (Gallup 2014). This rate was as high as or higher than rates for nurses (46%), physicians (45%), managers or executives (43%), service workers (43%), and business owners (42%) who were asked the same question (Figure M).

Figure M

A 2017 study by the American Federation of Teachers (AFT) interviewed 4,000 educators, including 830 randomly sampled AFT members, and found similarly high levels of stress. Almost one-fourth (23%) said work is “always stressful” and another 38% said work is “often stressful” (AFT and BAT 2017, Chart 1). The AFT also reported that one-fifth (21%) of respondents stated that their mental health was “not good” for 11 or more days in the preceding 30 days, double the 10% rate for working adults responding to a similar question in a 2014 National Institute of Occupational Safety and Health (NIOSH) -sponsored survey (AFT and BAT 2017, Chart 7).

The NCES’s 2017–2018 school year National Teacher and Principal Survey (NTPS) reported that more than one-fourth (27.8%) of public school teachers said that they “strongly” or “somewhat” agreed with the statement that “the stress and disappointments involved in teaching at this school aren’t really worth it” (NCES 2020b).

Pandemic-related stress

Unsurprisingly, measures of teacher stress have increased substantially since the pandemic. A January 2022 RAND Corporation survey of over 2,300 teachers found that 73% reported “frequent job-related stress,” just over twice the 35% rate in the nonteaching working population at the same point in time; 59% of teachers were experiencing burnout, compared with 44% of other working adults; and 28% had symptoms of depression, versus 17% for other workers (See Figure N, drawn from Steiner et al. 2022, p. 5).

Figure N

Steiner and Woo (2021, Figure 1) reported large differences in 2021 between a sample of teachers surveyed in RAND’s American Life Panel and all U.S. adults surveyed in the Understanding America Study conducted by the University of Southern California Dornsife Center for Economic and Social Research. More than three-fourths (78%) of teachers reported experiencing “frequent job-related stress” compared with 40% of adults in general. More than one-fourth (27%) of teachers had symptoms of depression, compared with 10% of all adults.

Diliberti and Schwartz (2022) found that almost nine out of 10 (87%) of school district leaders responding to RAND’s American School District Panel in November 2021 expressed “concern” about the mental health of teachers, with 56% indicating that mental health was a “major concern” (p. 2).

In a recent analysis, RAND researchers Diliberti, Schwartz, and Grant (2021) concluded that “stress seems to be at the heart of teachers leaving the profession early, both before and during the pandemic” (p. 10). They surveyed 958 teachers who had left public school teaching shortly before or after the outbreak of COVID-19. The survey found that “four in ten voluntary early leavers—including both those who left before and during the pandemic—selected ‘the stress and disappointments of teaching weren’t worth it’ as a reason for leaving” (p. 6). Table 1 reproduces the complete set of reasons for leaving teaching from the same survey.26

Table 1

The high levels of stress teachers endure are concurrent with declining earnings relative to other college-educated workers. The teacher shortage itself amplifies stress levels by increasing the workloads of those teachers who remain. Together, rising stress and declining relative earnings have made it harder and harder for public schools to fill vacancies with qualified teachers.

Conclusion

At least since the onset of the Great Recession, public K–12 schools have struggled to hire and retain the teachers they need to educate the next generation. Data on vacancies from a range of sources all point to a growing shortage of teachers. The shortage cuts across geographic regions and subject areas, but it is particularly acute in some states and in some teaching specialties. In almost every case, shortages are worst in schools with high shares of low-income students or students of color, thereby exacerbating broader inequalities along lines of class and race.

The shortage does not stem from a lack of qualified teachers. Even with recent declines in the share of individuals completing teacher preparation courses, the number of qualified (or potentially qualified) teachers substantially exceeds the number of teaching vacancies. The shortage is, instead, the result of a lack of qualified teachers willing to work in what has long been a highly stressful job for compensation that is well below what is available to college-educated workers in other professions.

Acknowledgments

We thank Madilynn O’Hara for research assistance.

Notes

1. For comprehensive discussions, see Sutcher, Darling-Hammond, and Carver-Thomas 2016, 2019 and García and Weiss 2019a–e.

2. Though it may be the case that there is an absolute shortage of qualified teachers in some subject areas.

3. See also García and Weiss 2019a–e and Sutcher, Darling-Hammond, and Carver-Thomas 2016, 2019.

4. See references below, but especially García and Weiss 2019a–e.

5. For another recent analysis of the teacher shortage, see NEA 2022.

6. See, for example, Cowan et al. 2016 and Dee and Goldhaber 2017.

7. See Pennington McVey and Trinidad’s 2019 review of the TSA methodology (pp. 19–21) for a discussion of limitations of the data. States are encouraged, but not required to submit data. The Department of Education does not provide states with a standard reporting template and, as a result, descriptions of shortage areas can vary across states. Perhaps most importantly in the current context, states do not provide information on the size of the shortages reported.

8. To be clear, Pennington McVey and Trinidad are less concerned about the state of the labor market for teachers than our interpretation of their results suggests here. They believe that “contrary to popular talking points, there is no generic shortage of teachers…[there is not a] lack of certified teachers overall, but a chronic and perpetual misalignment of teacher supply and demand…there are unique teacher shortages in specific subject areas, school types, and geographies” (p. 5, emphasis in original). However, the authors do not comment on the implications for teacher shortages of the substantial rise they document after 2003–2004 in the share of states reporting shortages across nearly all of the subject areas covered in their Figures 5, 6, 7, and 8.

9. See Pennington McVey and Trinidad’s 2019 methodological discussion for additional limitations of the data (pp. 1–22). States are encouraged, but not required, to submit data. The Department of Education does not provide states with a standard reporting template and, as a result, descriptions of shortage areas can vary across states.

10. As the authors note, they report the “minimum number of teachers not fully certified for their teaching assignments’ because state data often underestimate total shortages. For example, some states report uncertified teachers only in core academic areas rather than in all subjects, and other states report tallies from surveys that represent a subset of districts in the state.” 

11. Authors’ calculations based on the Current Population Survey, 2014–2019.

12. Public K–12 schools are also experiencing shortages of staff in nonteaching occupations, such as cafeteria workers, cleaners, bus drivers, and others (Cooper and Martinez Hickey 2022).

13. An alternative explanation is that state and local education workers are quitting at a faster rate, but switching jobs within the sector. The rising rate of vacancies and other information presented here on reported shortages, falling teacher compensation, and rising teacher stress suggest that this is a less likely explanation.

14. See Gould 2022.

15. For more information on the survey, see IES and NCES 2021.

16. For other recent accounts of teacher shortages, see also Carver-Thomas 2022 and NEA 2022. For additional analysis of the pre-pandemic teacher shortage, see Sutcher, Darling-Hammond, and Carver-Thomas 2016, 2019 and García and Weiss 2019a–e.

17. See, for example, Cowan et al. 2016 and Dee and Goldhaber 2017.

18. See National Center for Education Statistics (NCES) 2021.

19. As Gould (2022) notes, as of September 2022 state and local government employment was still 3.2% below pre-pandemic employment levels.

20. See Carver-Thomas 2022, DiNapoli 2022, García and Weiss 2019a–e, Kemper Patrick and Carver-Thomas 2022, and Kini 2022.

21. Authors’ calculations using Current Population Survey data for 2021.

22. In 2021, the teacher salary gap was 23.5%, while the teacher benefit advantage was 9.3% (Allegretto 2022).

23. A similar pattern of high annual hours for U.S. teachers also holds across lower and upper secondary education levels.

24. For reviews of these and related issues, see Kyriacou 2001, McCarthy, Lambert, and Ullrich 2012, McCarthy et al. 2016, Ryan et al. 2017, García and Weiss 2019a–e, among many others.

25. See García and Weiss 2019a–e, Cormier et al. 2021, Steiner et al. 2022.

26. See Diliberti, Schwartz, and Grant 2021, p. 6, and Table B.8. For further evidence on the impact of stress on teacher turnover, see the recent survey of National Education Association members conducted by GBAO Strategies 2022: “More than half (55%) of [3,621] members [surveyed] say they are more likely to leave or retire from education sooner than planned because of the pandemic, almost double the number saying the same in July 2020. Black and Hispanic educators are more likely to say they are more likely to retire or leave early, which could leave the teaching profession less diverse” (p. 2).

References

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What this report finds: In every state, an undervalued home health care workforce—overwhelmingly composed of women, workers of color, and immigrants—is paid extremely low wages to perform vital work for the nation’s older adults and people with disabilities. In the lowest-paying states, home health care workers typically make less than $12 an hour. Even in the highest-paying states, average wages top out below $18 per hour. If these workers were appropriately compensated for their labor, their average wages would range from $19.58 per hour in West Virginia to $28.98 in Massachusetts. New state-by-state estimates of what home health care workers should be paid can help states bolster their home care workforce to meet the growing demand for in home care.

Why it matters: The more than 1 million additional home health care workers needed by 2029 will add to a system already straining under worker shortages. At the same time, 1 in 6 home health care workers lives below the poverty line, in many cases using government safety net benefits to make ends meet. Raising pay for home health care work to a livable wage would make home health care jobs more attractive and decrease reliance of these workers on the social safety net. Studies also suggest that stabilizing the home health care workforce could improve the quality of care, strengthen economic growth, and allow family members of individuals needing care to return to the workforce.

What can be done about it: Congress can include additional funds for the Medicaid-based Home and Community Based Services (HCBS) program in legislation, as has been done twice in recent years. Lawmakers and the Biden administration could provide additional guidance on how these dollars could be spent that prioritizes higher pay for home health care workers. State officials could increase reimbursement rates to HCBS-funded home health care providers and encourage them to use the additional funding to raise pay for frontline caregiving staff to be more in line with the benchmark wage rates presented in this report.

Introduction

This report was produced in collaboration with New America

Home health care workers across the country help older adults and people with disabilities remain in their homes and communities. They assist with activities of daily living (ADLs), helping their clients with such actions as bathing, dressing, eating and drinking, and using the bathroom. This is intimate and important work that requires a high degree of trust and professionalism.

Home health care workers are often paid extremely low wages. State median wages for home health care workers in 2021 ranged from $8.76 per hour in Louisiana to $17.45 per hour in Massachusetts, with a national median of $14.15 (BLS 2021). (The median is the wage at the exact middle of the wage distribution—meaning that half of all home health care workers in these states make less than this amount.) Home health care workers are paid by those they serve or their immediate family, private long-term care insurance, or through Medicare or Medicaid’s Home and Community Based Services waiver program (HCBS).

The majority of home care workers are paid through the HCBS waiver program, which is administered at the state level through a federal waiver program (KFF 2022). Although HCBS is funded through a combination of state and federal dollars, each state chooses what services to offer under the program and how much providers will be reimbursed for HCBS services, which means states play a crucial role in setting wages for this workforce.

Because state Medicaid agencies set reimbursement rates and pay for many of these workers, states have the opportunity and responsibility to improve outcomes for home care workers and the families they serve by ensuring that the home health care workforce is supported by sustainable wages.

Many states already recognize that they need to raise home care worker wages to ensure that there are enough workers to serve current clients and to expand services to every person who needs them. As of 2020, nearly 700,000 families eligible for care sit on waiting lists, according to the Kaiser Family Foundation (KFF 2020). However, there are no current state-by-state estimates of what appropriate wages for this workforce would be. Building on the Economic Policy Institute’s previous work in this area, documented in Banerjee, Gould, and Sawo (2021), this report outlines state-level wages that would ensure home health care workers are appropriately compensated for their valuable labor. These new estimates can help states seeking to bolster their home care workforce moving forward.

Who are home health care workers and how do trends affect their occupation?

The home health care workers who help the nation’s older adults and people with disabilities remain in their homes and communities are an important national resource. This section provides a snapshot not only of who these workers are and what they do but also the structures and trends that shape the occupation now and in the future.

Who they are and what they do

Home health care workers are disproportionately women; disproportionately Black, Hispanic, and Asian American/Pacific Islander women; and in many cases, immigrant women. These workers who are vastly overrepresented in the home health care workforce compared with their numbers in the general workforce are also workers who face discrimination across multiple identities. This discrimination is central to understanding the devaluation of care work as a profession and the low wages these workers are paid.

Goubert, Cai, and Appelbaum (2021) note that 46.9% of all workers in America are women, and report that nearly double that percentage—88.6%—of home health care workers are women. Additionally, Asian, Latinx, and Black women represent almost 60% of this workforce, compared with 17% in the U.S. labor force (Goubert, Cai, and Appelbaum 2021). Finally, Banerjee, Gould, and Sawo (2021) note that 26.5% of workers in this industry are immigrants, compared with 7.3% of the workforce overall.

There is great variation in the type of work home health care workers do on a daily basis. Some workers specialize in hospice care, while others work with those needing rehabilitation from an injury, or with those with ongoing needs. Some home care workers have a years-long relationship with clients. They may walk the dog, clean up the house, monitor catheters, or bathe a client. This is physically and emotionally demanding work that helps people who are not able to live independently to stay in their homes and communities.

The increasing demand for home health care workers

The demand for home care is growing quickly. According to AARP (2021), 77% of people ages 50 and older say they want to age in place—a trend that has been reinforced by the COVID-19 pandemic, which has highlighted how institutional care increases dangerous exposures to infectious diseases for patients (and the resulting isolation from the outside world). This increasing interest in receiving care at home indicates a shift over previous decades, as home health care has become a larger and more effective means of caring for those who need assistance than institutional care, such as nursing homes and assisted living facilities.

As the preference for home health care increases, the population that will need care is also expanding. Johnson (2019) estimates that 70% of people who reach age 65 will need long-term care, and the U.S. Census Bureau projects that the number of people ages 65 and older will increase by 44% (or roughly 25 million) by 2040 (Vespa, Medina, and Armstrong 2020). With these trends, demand will only grow. By 2040, 1 in 5 Americans will be older than 65 (Urban Institute 2022).

There are currently 2.3 million home health care workers serving seniors and people with disabilities, and it is estimated that more than 1 million more home health care workers will be needed by 2029 (PHI 2019; McCall 2021). In fact, over the next several years, the Bureau of Labor Statistics projects more openings in home health care than in any other industry (BLS 2021), yet states already are facing a shortage of these critical workers (Graham 2022).

When home health care workers are not available, individuals need to find other ways to get their needs met, such as moving into nursing homes and other institutional settings, instead of remaining in their homes. This is not only contrary to what individuals want, but also puts additional strain on state budgets. The monthly median cost of home health care is $4,576, compared with $7,908 for a semi-private room in a nursing home (Genworth 2021). This additional cost is covered by Medicaid. More than 665,015 people are on waitlists for Medicaid-funded HCBS services, increasing unnecessary costs to public programs and putting a heavy strain on families and seniors going without care (KFF 2020).

How home health care work is funded

The majority of home health care workers are paid through the HCBS program, which is administered at the state level through Medicaid (KFF 2022). It is funded using both state and federal dollars. Every state’s program is slightly different, as states have discretion over what types of services they offer (for example, Colorado allows family caregivers to receive payments, while Massachusetts does not). As a result, the precise services vary across states.

Because most of these workers are paid through the Medicaid program, state Medicaid agencies set payment rates for care providers. When a physician determines that an individual is eligible for home care services, that individual is assigned a certain number of hours of care. Those hours are reimbursed by Medicaid at a rate set by the state Medicaid agency. If the rates are low, the wages paid to care providers are typically low. Conversely, reimbursing for services at a higher rate will often translate to a higher wage for these workers. (Home care agencies do receive payment for overhead and some of the increase in rates can also go to overhead.) State policy therefore has a powerful impact on home health care workers’ wages. In some states, such as Washington, the state Medicaid agency negotiates with worker unions to set rates at more adequate levels and increase reimbursement rates at set intervals. Other states, such as Arkansas and Louisiana, have far lower rates for their workers (Lieberman et al. 2021).

Why do wages matter?

Wages for home health care workers matter, not just to ensure that these workers earn a living wage, but also to decrease their reliance on the social safety net, improve quality of care, and attract more people to this rapidly growing industry. Also, by stabilizing the formal paid care work workforce, likely more women currently providing informal unpaid care would be able to return to the labor force as their family members receive services from home care workers.

Worker economic security 

As of 2021, state median wages for home health care workers ranged from $8.76 to $17.45 per hour, with a national median of $14.15 (BLS 2021). This is significantly less than the national median wage of $22.00, and few of these workers receive benefits (OEWS 2021). A 2020 report on working conditions of direct care workers (working in residential care settings as well as homes) found that although direct care workers work an average of 36 hours per week for 46.4 weeks a year, their average yearly income is only $23,263 (Weller et al. 2020).

Weller et al. (2020) also note that almost half of all direct care workers earn below a living wage, and therefore cannot afford basic necessities.1 Many have wages so low that they are entitled to public benefits, with 1 in 6 home care workers living below the poverty line despite their essential work (Bedlin 2021). No worker should be paid so little that they cannot make ends meet without relying on public assistance. Yet it is particularly troubling—and woefully inefficient—to have government policy set pay so low for a group of workers they must then turn back to the government for aid to afford their basic needs.

Quality of care

Higher wages for care workers would likely have significant impacts on patient safety and health. For example, in a study of nursing homes, the cost of increased wages were partially offset by improvements in care, such as fewer pressure ulcers and urinary tract infections, and the cost was completely offset when the social value of longevity is considered (Ruffini 2020). Additionally, after a care recipient returns from a hospital stay, access to home care can reduce their probability of readmission to the hospital (Carnahan et al. 2017).

Furthermore, people with disabilities often have close relationships with their care providers, and experience lower quality of care when turnover is high. By improving wages to decrease turnover, those receiving care would experience better outcomes for what is difficult and skilled work (IOM 2008).

Sustainability of the workforce and cost savings

Higher wages would reduce staffing shortages while also saving billions of dollars across government programs and tax credits that supplement the income of low-wage workers. According to the LeadingAge LTSS Center at UMass Boston, which studies long-term services and supports for the aging population, improved pay would attract more people into direct care work, improve consistency of care, and lead to workers working more hours (Weller et al. 2020). This not only would improve the sustainability of the workforce, but also lead to higher-quality experiences for both workers and those who need care.

A true living wage would also decrease reliance of these workers on the social safety net. For example, Currently, 16.8% of direct care workers (those in homes as well as residential facilities) rely on safety net programs. An increase to a living wage (according to their state) would lead to $556 million worth of savings in Medicaid payments alone, as well as $1.6 billion in savings across all benefit programs and tax credits (Weller et al. 2020).

These data demonstrate that not only are workers in the direct and home health care settings, and those receiving care, hurt by low wages, but that the government already pays more for these workers than just what it spends in wage reimbursements due to higher safety net costs. Federal and state dollars would thus be better spent on increasing wages than on compensating for those same low wages with social safety net programs.

Macroeconomic impacts

Investing in home health care and increasing workers’ wages would potentially lead to significant macroeconomic effects. Moody’s Analytics found that investing in home health care has an economic multiplier greater than one, meaning that every dollar spent boosts the economy by more than a dollar (Zandi and Yaros 2021). Raising wages and increasing the number of workers in this field would therefore lead to stronger economic growth.

Additionally, if higher wages were to stabilize the HCBS workforce and increase the number of people eligible to participate, labor force participation would likely increase overall. Shen (2021) finds that because seniors who are eligible for home health care but not able to access the program often receive informal care from family members, for every three older individuals who receive care, an average of one additional woman is able to return to the labor force. This suggests that a lack of access to care means families are “making do” with informal and unpaid care arrangements that preclude formal labor market participation, and that women are able to return to the labor force when their family members receive services from home health care workers.

Overall, investing in home health care would support stronger economic growth, as well as increase the number of women in the labor force. This is particularly important given how many women have left the formal labor force due to care responsibilities during the pandemic (Kohler, Odiase, and Forden 2021).

What are current wages of home health workers by state—and why are they so low?

The prevalence of low wages in the home health care workforce spans the entire country and is particularly stark in some states. Figure A details current average wages at the state level. It accounts for the fact that the sample of home health care workers in the Current Population Survey (CPS)—the data source used for much of the analysis in this report—is relatively small in some states. To ensure an accurate assessment of current home health care wages, we present current average wages as a range between the average home health care wage estimates calculated from the CPS and the average home health care wage estimate calculated from the Occupational Employment and Wage Statistics (OEWS) published by the Bureau of Labor Statistics. The map in Figure A is shaded by the average of the values from the two data sets. (See Appendices A and B for more details on the data sources, and our methodology for estimating recommended wage levels, as outlined in the last section of the report before the conclusion.)

Figure A

Figure A shades states based on the average value of these two wage estimates. Based on the estimated value resulting from averaging the two range values presented, current average hourly wages are lowest in Louisiana, West Virginia, Texas, Mississippi, and Oklahoma. In these states, home health care workers typically make less than $12 an hour. At the national level, the average hourly wage for these workers is about $13.50. The places where home health care workers are currently paid the highest hourly wages are Massachusetts, North Dakota, Alaska, Washington state, and Colorado. Average wages in these states range from $14.59–$17.70 per hour.

As our analysis asserts, home health care workers are severely underpaid. The underpayment of this workforce is due to the explicit lack of labor protections available to these workers, the undervaluing of care work in our economy, and the discrimination faced by the (often immigrant) Black, Latinx, and Asian women who have historically and continue to make up the majority of the home health care workforce.

The historical exclusion of home care workers from federal labor law has led to fewer protections for this workforce and lower wages. Home care workers were left out of the groundbreaking 1938 Fair Labor Standards Act, a bedrock of the New Deal that “establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments” (U.S. DOL n.d.). The racism, sexism, and xenophobia embedded in this law when it was created structured the treatment of this workforce for decades (Dixon 2021; Banerjee, Gould, and Sawo 2021). It wasn’t until 2013, during the Obama administration, that home care workers became entitled to the same protections as other workers, such as minimum wage and overtime rules. More recently, lawmakers in some states have begun to introduce a Domestic Workers Bill of Rights (NDWA 2022), which would further reform labor laws and include such benefits as paid time off. However, a federal version introduced in both the House and Senate appears to be stalled (Office of Rep. Pramila Jayapal 2021), and there is still a long way to go to ensure labor protections and fair wages for this workforce (NDWA 2022).

Additionally, a large body of research has established that care workers face a pay penalty for performing this type of work (England, Budig, and Folbre 2002; Budig, Hodges, and England 2019; Wolfe et al. 2020). The most recent estimates place the value of the home care penalty at 27% to 36%, meaning that home care workers receive approximately one-third less compensation compared with similar workers who are not in care jobs (Wolfe et al. 2020). Therefore, appropriately compensating workers for their labor would ensure there is not a penalty for choosing to enter this field.

Turning to demographic characteristics, these workers are underpaid because those who perform home care work are undervalued in our society and economy. As described above, home care workers are frequently discriminated against and marginalized because of their gender, race, and citizenship status (Banerjee, Gould, and Sawo 2021). This means that any fair wage should account for how the economy has systematically discriminated against and undervalued these workers.

Finally, in most states, few home health care workers are unionized and thus do not receive the pay premium that union status typically confers. Unions can have a powerful impact on wages across sectors. Overall, union members are paid 10.2% more than workers in the same industry who are not union members, demonstrating how powerful unionization can be as a tool to demand higher wages (EPI 2021). Unionized home care workers receive significantly higher wages and benefits (for example, Washington state home care workers receive paid time off). And patients cared for by unionized workers typically experienced superior health outcomes during the pandemic (Dean, Venkataramani, and Kimmel 2020).

What should home health care wages be in each state?

The opportunity to raise home health care wages to more effective levels arose when Congress passed the first COVID-19 response legislation under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. States received increases in the federal match of Medicaid dollars for their state programs. Some states recognized the home health care industry was in crisis and used these resources to increase wages for these workers.

However, increases were temporary, and so more federal investment was needed. In early 2021, Congress passed the American Rescue Plan Act (ARPA), which provided an additional $12 billion in funding to the HCBS program. Each state had to submit a plan for how to allocate its funds, and 46 states and Washington, D.C., used ARPA dollars to improve wages, provide hazard pay, and award bonuses.

Unfortunately, the federal dollars from ARPA also were temporary, so most states instituted only temporary wage increases. This demonstrates that there is a need for further interventions, such as the inclusion of the HCBS program in the next iteration of any reconciliation package or domestic spending legislation. However, because HCBS is administered at the state level, each state will be responsible for setting its own rates, meaning that wages will continue to vary across the nation. Yet, even with such variance, state agencies can more consistently set wages at levels that appropriately value home care work and the workers who perform it. The following state-level wage benchmarks provide a starting point for state policymakers who seek to use future dollars to invest in this workforce and ensure adequate access to home-based care in the future.

Results

The hourly wages presented below build upon the work of Banerjee, Gould, and Sawo (2021), who estimated national-level care worker wage benchmarks that accounted for 1) the wage penalty associated with care work; 2) the wage penalties associated with the gender, race/ethnicity, and citizenship of large portions of the care workforce, and 3) the wage premium that comes from unionization. In other words, the hourly wages recommended here represent what home health care workers’ wages would be if the factors that depress wages were reduced and these workers received the wage boost that typically comes from unionization (which has a wage equalizing effect by gender and race/ethnicity). This report uses a series of methods detailed in Appendix A to regionalize Banerjee, Gould, and Sawo’s national wage values to every state.

Table 1 details the hourly wage level for home health care workers that we are proposing for each state. Our proposed wages range from a low of $19.58 per hour in West Virginia to a high of $33.87 per hour in Washington, D.C. Out of the 51 proposed wages, 37 of them fall between $20 and $25 per hour. The D.C. number is an outlier because of its unique city-level status, in which economywide average wages are significantly higher than statewide averages in each of the 50 states. The D.C. average hourly wage of $40.62 compares with a national average of $26.69. Excluding D.C., the next highest proposed wage is about $5 less—$28.98 in Massachusetts.

Table 1

In every state, current home health care wages do not meet the more appropriate levels proposed in this analysis. Figure B depicts both the proposed wage for each state and how far away current home health care wages are from our proposed wage benchmarks. (For the gap ranges and averages by state behind the map, see Appendix Table 2.) Based on the estimated value resulting from averaging the two estimates for current home health care workers at the state level presented in Figure A, the states for which current wages are closest to our proposals are South Dakota, Vermont, Idaho, Montana, and Iowa. For these states, current wages are about $6 – $9 less than the average hourly wages proposed for those states. Excluding Washington, D.C., current wages are furthest away from our benchmarks in Virginia, Maryland, Massachusetts, New Jersey, and Colorado. In these states, current wages range from about $11–14 less than our proposals. As discussed above, the proposal for D.C. is an outlier because of its unique status and how high economywide wages are there. At the national level, the average home health care wage is about $8.70 less than our proposed benchmark.

Figure B

Conclusion

As policymakers seek to address the rising demand for in-home care, and to ensure both high-quality care and the sustainability of the home health care workforce, these estimates provide a yardstick for what appropriate wages for this workforce would be in every state. Our proposed wages range from a low of $19.58 per hour in West Virginia to a high of $28.98 in Massachusetts (with $33.87 per hour in Washington, D.C.). These are wages that more accurately reflect the value of home health care work and would ensure more livable earnings for home health care workers. As this diverse workforce grows over the next decade, this industry could provide economic security and mobility, or it could trap these workers in low-wage jobs that have little room for growth.

Workers, care recipients, and the economy overall would benefit from this important investment in home health care work. Not only would more workers be able to enter this profession and provide for their families, but those receiving care would enjoy better outcomes and more stability of care. States would be able to save money on safety net programs while also enjoying greater economic growth. These are workers whose wages are in most cases paid with state and federal dollars, and they should be paid enough to enjoy a living wage that benefits everyone.

Appendix A: Methodology

The state-level home health care worker wage benchmarks presented in this report rely heavily on the methodology developed in Banerjee, Gould, and Sawo (2021), which lays out a detailed examination of the state of home health care and child care workers in the United States at the national level. The 2021 report proposes several wage benchmarks that would redress many of the wage inequities direct care workers endure. In this report, we generate state-level versions of the national proposed wage of $22.26 per hour for home health care workers from Banerjee, Gould, and Sawo (2021) as a base. That proposed wage was developed through consideration of three key factors:

• the estimated cost in lost wages workers face simply for being care workers (the care penalty as estimated in Budig, Hodges, and England 2019, where the penalty is how much less care workers make than workers in other occupations with similar education and experience)
• the estimate of the wage penalties workers face in the labor market based on their gender, race/ethnicity, and citizenship status
• the estimated boost to wages that results from increased unionization and harnessing the power of collective bargaining

Data sources and definition of home health care workers

The main data source used to generate our state-level proposed home health care (HHC) wages is the Current Population Survey Outgoing Rotation Group microdata (CPS-ORG) collected and harmonized by the Economic Policy Institute (EPI 2022). To ensure adequate sample sizes for state-level estimates, the CPS-ORG data used are pooled microdata for 2016–2020. All numbers presented are in 2020 dollars.

We use the definition of home health care workers specified in Banerjee, Gould, and Sawo (2021). Following the methodology laid out in that study, we identify these workers by their relevant industry and occupational category combination.2 Home health care workers are identified in the CPS by the following occupations: nursing, psychiatric, and home health aides; personal and home care aides; home health aides; personal care aides; nursing assistants; orderlies; and psychiatric aides. These are combined with the following industry specifications: private households, home health care services, and individual and family services.

Generating state-level wage benchmarks

The proposed national hourly care worker wage benchmark from Banerjee, Gould, and Sawo (2021) that we use as a starting point is $22.26 per hour. Using this number as a base, we explore three methods for adjusting it to the state level. In the first method, we scale the national wage benchmark for home health care workers using Regional Price Parity (RPP) data from the Bureau of Economic Analysis (BEA) on the variation in cost of living across the 50 U.S. states and Washington, D.C. Each state has an RPP measure expressed as a percentage of the national overall price level. Using BEA’s latest estimates for 2020, we multiply each state’s RPP by the national base wage of $22.26 to get a price-adjusted state-level proposed care wage.

Our second method uses variability in existing home health care wages at the state level to scale the national proposed wage for these workers. We first calculate average hourly wages for home health care (HHC) workers at the state level using the CPS-ORG data. We then express these state-level HHC wages as a share of the national average HHC hourly wage (estimated under our analysis as $13.59) by dividing them by the national estimate. The resulting ratio for each state is then multiplied by the national HHC wage benchmark to scale it to the state level. This method effectively establishes a home health care wage benchmark that reflects the existing variation in home care wages across the states.

Our third method accounts for variation in economywide wages at the state level. We begin by calculating the economywide mean hourly wage across all workers in each state using CPS-ORG data. We then express these state-level economywide wages as a share of the national average economywide wage across all workers in the United States (estimated as $26.69) by dividing them by the latter. The resulting ratio for each state is then multiplied by the proposed national HHC wage to scale it to the state level. This produces a wage benchmark that accounts for broader differences in economic and labor market conditions across states.

For each state, we select a final wage benchmark for home health care workers based on the maximum resulting estimate from the three methods described above. We select the maximum of these three methods because each method reflects a different dimension of wage adequacy, none of which can be ignored when setting appropriate wage levels—namely, variations in the cost of living, the wage distribution within home health care, and the wage distribution of all workers in the state, respectively. In states where the cost of living is particularly high relative to the average cost of living across the country, home health care worker pay should reflect these higher costs. In states where the existing wages of home health care workers in that state are high relative to the national average, wages should continue to reflect whatever premium the state market for these jobs currently exhibits. In states where economywide wages are high relative to the national average, care worker wages will need to reflect these broader labor market trends to remain competitive. Whichever of these methodologies is highest will necessarily satisfy the aims of all three.

Generating state-level current wages and gaps between current and benchmark wages

To estimate current average wages in each state we use two data sets. From the Current Population Survey we compute an average wage using pooled 2016–2020 Outgoing Rotation Group wage microdata for the following occupations: nursing, psychiatric, and home health aides; personal and home care aides; home health aides; personal care aides; nursing assistants; orderlies; and psychiatric aides. These are combined with the following industry specifications: private households, home health care services, and individual and family services. From the Occupational Employment and Wage Statistics, we compute an average wage using May 2021 data for the following occupation: home health and personal care (HHPC) workers (see more on this data set in Appendix B). We express the current wage as the range between the two averages. The gaps between the wage range and benchmark wages are the wage gaps.

Appendix B: Supplemental set of proposed wages

In Appendix Table 1 we provide a second set of proposed wages that relies on published data from the May 2020 Occupational Employment and Wage Statistics survey data (OEWS 2021) instead of our own calculations of wages using the Current Population Survey Outgoing Rotation Group microdata (CPS-ORG). We use the CPS-ORG data in order to remain consistent with the data source used in Banerjee, Gould, and Sawo (2021)—the source of our national base wage. However, similar home care worker and economywide wage scaling can be done using government-published data from the OEWS. We include below a supplemental set of state-scaled wages derived using these government-published OEWS data.

We arrive at this second set of estimates using the same methodology described earlier in this report. In particular, we calculate another set of estimates of the latter two scaling methods described above using OEWS data in lieu of CPS-ORG data. The first scaling method described earlier remains the same, since it is based on BEA price parities data. For the second method, we use the May 2020 OEWS state-level data for the average hourly wage for home health and personal care (HHPC) workers. These state level wages are divided by the national average HHPC wage of $13.59. The resulting ratio for each state is then multiplied by the proposed national wage to scale $22.26 to the state level. For the third scaling method, we use the May 2020 OEWS state-level data for the average hourly wage for workers across occupations. These state economywide wages are then divided by the OEWS estimate for the national average hourly wage across all occupations of $27.07. The resulting ratio for each state is then multiplied by the proposed national wage to scale it to the state level. The final proposed wage for each state is the maximum resulting number across these three estimates.

Appendix Table 1

Appendix Table 2

Endnotes

1. Here, a living wage is defined by state using MIT’s living wage calculator. This calculator is similar in concept and values to the Economic Policy Institute (EPI)’s Family Budget Calculator, which would describe the earnings required to achieve a modest but adequate standard of living (https://www.epi.org/resources/budget/).

2. Given a change in the industry and occupation categories in 2020 within the Current Population Survey (CPS) data, we combined disaggregated categories for 2020 data to be consistent with the earlier definitions on which data for earlier years we use are based.

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The Organization for Economic Cooperation and Development (OECD) creates and reflects an intellectual center of gravity for economic policymakers among the advanced democratic industrial countries. Ultimately, its authority rests upon the credibility of its analysis, though its economic thinking has reflected and reinforced the paradigm shifts between different schools of economic thought.

Such influence has been especially evident regarding employment analysis and recommendations. The original OECD Jobs Strategy in 1994 marked the high point of an era of market fundamentalism. In the words of one ex-OECD staff member, “The OECD is seen as stressing the primacy of markets and thus of market-based solutions; institutions are generally viewed as hindrances, and deregulation is favoured over regulation.” The 1994 strategy argued that high unemployment, especially in Europe, was essentially a structural problem and that economies were operating close to the “natural rate” of unemployment, which could not be reduced through monetary or fiscal policy. The solution was to make labor markets “flexible” through the reduction of employment protection: Wages would be allowed to fall, and employment thus to rise, by reducing minimum wages and weakening collective bargaining systems.

But the most recent version of the OECD Jobs Strategy in 2018 came to a very different conclusion: “countries with policies and institutions that promote job quality, job quantity and greater inclusiveness perform better than countries where the focus of policy is predominantly on enhancing (or preserving) market flexibility.” The subsequent OECD report on collective bargaining released in 2019 argued: “Collective bargaining is a key institution to promote rights at work. At the same time, collective bargaining and workers’ voice are unique instruments to reach balanced and tailored solutions to the challenges facing OECD labour markets.” The claims that labor market, or job, flexibility should be a paramount goal of economic policy to minimize unemployment should correspondingly fade.

This paper explores the developments along that journey step-by-step:

• Calls for labor market flexibility had appeared in OECD documents since 1980, but the 1994 Jobs Strategy was influential in reinforcing the drive to remove what had come to be referred to as labor market rigidities in many OECD countries in the 1990s, namely by reducing minimum wages, decentralizing collective bargaining, weakening employment protection legislation, and reducing unemployment benefits.
• Over the following decade, despite assertions to the contrary, there was little empirical evidence to indicate positive employment results from these reforms.
• Divergence appeared between the European Union and the OECD over the support for a social-market as opposed to a free-market economy.
• The OECD revision of the Jobs Strategy in 2006 recognized that the impact of labor market institutions on employment performance depends on the economic and social setting. It was argued later that there are several “roads to Rome.”
• Growing income inequality, previously ignored by mainstream economists, was seen to have negative economic as well as social effects. Two major OECD reports—“Growing Unequal” and “Divided we Stand”—charted the rise in income inequality across OECD countries.
• The OECD acts in concert with the International Monetary Fund (IMF) and the World Bank, and in 2011 the IMF Research Department argued that inequality leads to imbalanced growth. Subsequent IMF research found that half of the rise in inequality in industrialized countries since 1980 was due to the decline of union density or bargaining coverage.
• The World Bank 2013 World Development Report on “Jobs” described a “plateau effect” of labor institutions on employment; specifically, it found only a small impact of minimum wages and employment protection on employment levels.
• As the effects of the Great Recession persisted, the costs of lightly regulated financial markets became clearer and the broader impacts of deregulated markets and free-market ideology were cast in a new light. During that time, the OECD launched a “New Approaches to Economic Challenges” program designed to revisit past policy prescriptions.
• Trade unions began to argue that the OECD’s labor market policy focus on education and skill levels was a necessary but not a sufficient condition for reducing inequality. More important were minimum wages and collective bargaining.
• Against the background of growing populism, a backlash against globalization and the digitalization of employment, and debates around the gig economy, the OECD revised the Jobs Strategy in 2018. The new strategy made 20 specific policy recommendations and for the first time recognized a positive role of collective bargaining, concluding that “well-designed collective bargaining systems are also found to promote labour market resilience.”
• The OECD’s 2019 report, “Negotiating Our Way Up: Collective Bargaining in a Changing World of Work,” concluded: “The need for co-ordination and negotiation mechanisms between employers and workers is heightened in the changing world of work.” Coordinated bargaining was seen to be superior in labor market outcomes, including for workers considered “marginal.”
• The OECD hosted the “Global Deal,” a multistakeholder partnership initiated by the Swedish government designed to benefit from, and contribute to, a platform that highlights the value of social dialogue and strengthens existing cooperation structures. Tacitly the OECD came full circle and recognized the advantages of the Nordic approach to greater cooperation and broader economic consensus, an approach that relies on collective bargaining and social dialogue.
• The global Covid-19 pandemic, beginning in 2020, has underlined the risks of social and economic inequality in the labor market and beyond.

Introduction

The Organization for Economic Cooperation and Development (OECD) creates and reflects an intellectual center of gravity for economic policymakers among the advanced democratic industrial countries. Krugman (2010) has described the organization as “conventional wisdom central.” It operates as a coordinating body and has been called a think tank for its member governments. Its leadership has been at pains to point out that it is a “do tank” (Gurria 2020), as it frequently issues recommendations. While there has always been some heterogeneity across different departments within the OECD, the power to establish this center of gravity lies within the Economics Department. That power in turn is derived from the national government treasury departments that nominate representatives to the OECD Economic Policy Committee and from the fact that the chair of the committee normally comes from the United States. These sources of power can be highly influential in determining broadly what is acceptable in economic policy and what is not. While the United States has often happily ignored the OECD views of American economic policy, other countries often cannot afford to do so without incurring the wrath of bond markets.

Ultimately, the OECD’s authority rests upon the credibility of its analysis, though its economic thinking has reflected and reinforced the paradigm shifts between different schools of economic thought. Such influence has been especially evident regarding employment analysis and recommendations. The original OECD Jobs Strategy in 1994 marked the high point of an era of market fundamentalism. While the strategy’s recommendations were often couched as euphemisms, the underlying messages were clear to decipher. In the words of one ex-OECD staff member evaluating the original Jobs Strategy 10 years after its launch: “The OECD is seen as stressing the primacy of markets and thus of market-based solutions; institutions are generally viewed as hindrances, and deregulation is favoured over regulation” (Casey 2004). The 1994 strategy argued that high unemployment, especially in Europe, was essentially a structural problem and that economies were operating close to Friedman’s (1968) “natural rate” of unemployment, which could not be reduced through monetary or fiscal policy. The solution was to make labor markets “flexible” through the reduction of employment protection: Wages would be allowed to fall, and employment thus to rise, by reducing minimum wages and weakening collective bargaining systems.

The most recent version of the Jobs Strategy adopted by the OECD Ministerial Council in 2018 came to a very different conclusion: “countries with policies and institutions that promote job quality, job quantity and greater inclusiveness perform better than countries where the focus of policy is predominantly on enhancing (or preserving) market flexibility” (OECD 2018). The subsequent OECD report on collective bargaining released in 2019 argued: “Collective bargaining is a key institution to promote rights at work. At the same time, collective bargaining and workers’ voice are unique instruments to reach balanced and tailored solutions to the challenges facing OECD labour markets” (OECD 2019). The claims that labor market, or job, flexibility should be a paramount goal of economic policy to minimize unemployment should correspondingly fade.

This paper explores the developments along that journey:

• Calls for labor market flexibility had appeared in OECD documents since 1980, but the 1994 Jobs Strategy was influential in reinforcing the drive to remove what had come to be referred to as labor market rigidities in many OECD countries in the 1990s, namely by reducing minimum wages, decentralizing collective bargaining, weakening employment protection legislation, and reducing unemployment benefits.
• Over the following decade, despite assertions to the contrary, there was little empirical evidence to indicate positive employment results from these reforms.
• Divergence appeared between the European Union and the OECD over the support for a social-market as opposed to a free-market economy.
• The OECD revision of the Jobs Strategy in 2006 recognized that the impact of labor market institutions on employment performance depends on the economic and social setting. It was argued later that there are several “roads to Rome” (OECD 2018).
• Growing income inequality, previously ignored by mainstream economists, was seen to have negative economic as well as social effects. Two major OECD reports—“Growing Unequal” (2008) and “Divided we Stand” (2011)—charted the rise in income inequality across OECD countries.
• The OECD acts in concert with the International Monetary Fund (IMF) and the World Bank, and in 2011 the IMF Research Department argued that inequality leads to imbalanced growth. Subsequent IMF research (2015) found that half of the rise in inequality in industrialized countries since 1980 was due to the decline of union density or bargaining coverage—itself the result in part of the drive for labor market flexibility encouraged by the earlier version of the Jobs Strategy and IMF structural adjustment programs.
• The World Bank 2013 World Development Report on “Jobs” described a “plateau effect” of labor institutions on employment; specifically, it found only a small impact of minimum wages and employment protection on employment levels.
• As the economic and financial crisis persisted following the 2008 Lehman Brother’s collapse, the costs of lightly regulated financial markets became clearer and the broader impacts of deregulated markets and free-market ideology were cast in a new light. During that time, the OECD launched a “New Approaches to Economic Challenges” program designed to revisit past policy prescriptions.
• Trade unions began to argue that the OECD’s labor market policy focus on education and skill levels was a necessary but not a sufficient condition for reducing inequality. More important were minimum wages and collective bargaining.
• Against the background of growing populism, a backlash against globalization and the digitalization of employment, and debates around the gig economy, the OECD launched a further revision of the Jobs Strategy. The new Jobs Strategy, published in 2018, made 20 specific policy recommendations and for the first time recognized a positive role of collective bargaining, concluding that “well-designed collective bargaining systems are also found to promote labour market resilience.”
• The OECD subsequently published in 2019 “Negotiating Our Way Up: Collective Bargaining in a Changing World of Work.” The report concluded: “The need for co-ordination and negotiation mechanisms between employers and workers is heightened in the changing world of work.” Coordinated bargaining was seen to be superior in labor market outcomes, including for workers considered “marginal” (young workers and women).
• The OECD hosted the “Global Deal,” a multistakeholder partnership initiated by the Swedish government designed to benefit from, and contribute to, a platform that highlights the value of social dialogue and strengthens existing cooperation structures. Tacitly the OECD came full circle and recognized the advantages of the Nordic approach to greater cooperation and broader economic consensus, an approach that relies on collective bargaining and social dialogue.
• The global Covid-19 pandemic, beginning in 2020, underlined the risks of social and economic inequality in the labor market and beyond.

From Keynesianism to structural adjustment policies, 1970–1994

Until the oil shocks of the 1970s, the predominant strand of OECD thinking was Keynesian. And as far as labor markets were concerned, its thinking was influenced by the Nordic model developed by Gösta Rehn and Rudolf Meidner when they were working at the Swedish trade union center, the LO, in the 1950s. Rehn went on in 1962 to become the director of what later became the OECD Department for Labor and Social Affairs.

Following the oil shocks of the 1970s the OECD’s conventional wisdom shifted to be more in line with the free-market thinking of the Thatcher and Reagan governments. Unemployment in the OECD area soared in the 1980s, but many governments saw this as a price worth paying for dampening inflation. The notion of a natural rate of unemployment determined by the structural features of economies was accepted, and macroeconomic policy, it was argued, could have little impact on employment—but government deficits would crowd out private investment and lead to inflation. A variant of the natural rate of unemployment—the nonaccelerating inflation rate of unemployment (NAIRU)—became the core of macroeconomic analysis in the OECD, the IMF, central banks, and finance ministries during the 1980s and 1990s. Economists made calculations for OECD countries of levels of unemployment that it was argued were “structural,” below which inflation would accelerate.

The view that many OECD labor markets, especially in continental Europe, were becoming sclerotic due to too much regulation to protect workers and set wages through minimum wages and collective bargaining became the conventional wisdom. Slow employment growth in Europe was contrasted with faster employment growth in the United States.

The new leitmotif of the OECD became structural reforms, especially reform of labor markets and labor market institutions. The 1983 OECD statement on structural adjustment program (OECD 1983) called for wage flexibility so that wages would reflect productivity, and policies that impeded this, including minimum wages and, in part, collective bargaining agreements, should be reformed. Employment protection legislation should be weakened to encourage management to hire more workers, secure in the knowledge that they could be fired. Internal work rules that could restrict management’s drive for cost cutting should be lifted. Although it was rarely made explicit, the OECD Economics Department saw the work bargain solely as a monetary exchange, thus legitimizing management prerogative and exploitation. The market and institutional failures that required labor market regulation to be introduced in the first place were never discussed.

Business, and especially American business, enthusiastically encouraged this drive. Barkin (1987) noted:

Management’s drive for the removal of contractual and governmental restraints on their control of the workforce is rationalized in Western Europe as necessary to achieve greater internal and external competitiveness. In support of this view the OECD substituted the advocacy of a flexible manpower policy (including wage policy) under the euphoric title of positive adjustment policy for the prior programme of an active manpower policy promoted during the 60s and early 70s.

A commission, serviced by the Employment and Social Department of the OECD and chaired by London School of Economics Director Ralph Dahrendorf, published a report in 1984 that sought to humanize the flexibility debate, arguing that reforms should not be instrumentalized against one group in society, namely workers. There is no sign that this argument had an impact on the mainstream recommendations of the OECD. Indeed, the conventional wisdom shifted little for two decades. Freeman (2005) commented:

Today, there is a new orthodoxy that makes the deregulation of labor market institutions and increased employment and wage flexibility in the labor market the keys to economic success. International agencies, such as the OECD and the IMF, and many economists blame unemployment and sluggish economic growth on unions and state regulations of pay and employment that purportedly reduce market flexibility. They recommend that governments weaken labor market institutions in favor of market driven solutions. They called for reductions in the pay of low wage workers to create additional demand for them and tax breaks for the highly paid to induce them to work more or harder.

The 1994 Jobs Study and Jobs Strategy

The original 1994 OECD Jobs Strategy, set in motion at the OECD ministerial meetings in 1992, codified this new orthodoxy as far as employment policy was concerned. The communique of the employment and labor ministers meeting in January 1992 set the tone, concluding: “Flexible and efficient labour markets are key to achieving non-inflationary economic and employment growth” (OECD 1992). The Jobs Study from the OECD secretariat and the resulting Jobs Strategy were published and adopted two years later at the 1994 Ministerial Council of Economic and Finance Ministers (OECD 1994a).

The strategy had originally nine recommendations, to which a 10th (increasing product market competition) was added the following year:

1. Fashion macroeconomic policy to encourage noninflationary growth.
2. Improve frameworks to enhance the creation and diffusion of new technology.
3. Increase flexibility of working time.
4. Eliminate impediments to the creation and expansion of enterprise.
5. Make wages and labor costs more flexible to reflect local conditions and individual skill levels.
6. Reform employment security provisions that inhibit the expansion of employment in the private sector.
7. Strengthen active labor market policies and reinforce their effectiveness.
8. Improve labor force skills and competency through reforming education and training systems.
9. Reform unemployment and related benefit and tax systems so that equity is not pursued at the expense of efficient labor markets.
10. Enhance product market competition to reduce monopolistic tendencies (added subsequently).

Of the 10 policy recommendations, one referred to macroeconomic policy and nine to microeconomic policy, reinforcing the underlying view that unemployment was a structural problem caused by insufficiently flexible labor markets. Of the nine structural policy recommendations, those concerning technology, improved skill levels, entrepreneurship, and increased competition were hardly controversial; they were described by Freeman (2005) as “boiler plate platitudes.” Four were recommendations to deregulate labor markets in continental Europe to bring them into line with the U.S. model.

The recommendation on wage setting specified that governments should “make wages and labour costs more flexible by removing restrictions that prevent wages from reflecting local conditions and individual skill level, in particular for younger workers,” and the recommendation on employment protection called upon governments to “reform employment security provisions that inhibit the expansion of employment in the private sector” (OECD 1994a). The strategy focused on provisions regulating dismissals and redundancies and those governing temporary employment contracts. On unemployment benefits, the OECD recommended “cutting unemployment benefit levels and duration of payment, tightening eligibility and enforcing work requirements, and restricting entry to and the generosity of early pensions” (Casey 2004).

The recommendations bore a strong similarity to the policies of the Thatcher government for “flexibilising” labor markets in the U.K. in the 1980s. These have been summarized by Blanchflower and Freeman (1993) as “industrial relations laws that weakened union power; measures to enhance self-employment; privatization of government run or owned businesses; reduction in the value of unemployment benefits and other social receipts relative to wages; new training initiatives; tax breaks to increase use of private pensions; lower marginal taxes on the individuals; elimination of wage councils that set minimum wages.” The Jobs Strategy followed rather than predated these reforms.

Nickell (2017) argued that the recommendation on active labor market policies, which called for strong job search conditionality to be attached to receipt of unemployment benefits, reflected a “Nordic approach” to activation policies. However, the strategy did not recommend the Nordic institutions of strong unions and high levels of expenditure on labor market policies.

Though the Jobs Study and Jobs Strategy were backed up by two volumes of “evidence and explanations” by the OECD (1994b), they offered little external empirical evidence to support the employment case for deregulating labor markets. As is discussed below, over the succeeding two decades no strong empirical evidence has emerged to support the claims for flexibilizing labor markets to obtain positive employment effects—among neoliberal economists the claim was simply taken as self-evident. Freeman (2005) notes:

Adherents to the new orthodox view search the data for specifications…[or] measures that support their priors, while barely noticing evidence that goes against them. If results are inconsistent with the priors, they assume that something is wrong with their empirical specification or measures, rather than question the validity of their case.

Follow-up, the 1998 ‘assessment’ of the Jobs Strategy, and ‘Going for Growth’

The OECD follow-up to the Jobs Strategy included a series of thematic reviews but also detailed country recommendations processed through the OECD’s Economic Development Review Committee (EDRC), which is responsible for producing annual or biennial economic surveys of member states. As with the Economic Policy Committee, the EDRC is made up of officials from the treasury, economics, and finance ministries. It uses a peer review process in which two countries comment on a draft of recommendations, prepared by the secretariat, to the country being surveyed. The EDRC’s work is the most closed and least transparent of all OECD committees and working groups.

The country-specific recommendations from the Jobs Strategy follow-up primarily focused on continental European countries.1 In the 1990s the only wage-setting recommendation directed at the United States was that it weaken minimum wage laws.

Regarding the recommendations to governments for increasing flexibility by wage-setting institutions, the follow-up included detailed proposals beyond the broad policy guidance. The recommendations included:

• Refocusing collective bargaining at the sectoral level to the provision of framework agreements that leave firms with more leeway to adjust wages to local conditions.
• Introducing opening clauses for local bargaining parties to renegotiate sectoral agreements.
• Phasing out administrative extensions of agreements that were considered to rigidify wage-setting arrangements.
• Reassessing the role of statutory minimum wages and either switch to better-targeted redistributive instruments or minimize their adverse effects by introducing sub-minimum wages differentiated by age or region and/or indexing them to prices instead of average earnings.

The five-year assessment of the Job Strategy in 1999 carried out by the OECD secretariat was largely self-congratulatory. It argued that many OECD countries had sought to implement the strategy’s recommendations, and those that had had enjoyed better employment performance. However, attempts to quantify the impact on employment of some of the key recommendations on labor market regulation produced insignificant results. The 2004 OECD Employment Outlook examined employment protection legislation (EPL) and acknowledged that, “The net impact of EPL…on aggregate unemployment is therefore ambiguous a priori, and can only be resolved by empirical investigation. However, the numerous empirical studies of this issue lead to conflicting results, and moreover their robustness has been questioned” (OECD 2004, Chapter 2). Nevertheless, reflecting the organization’s “priors,” the structural policy recommendations became a high-profile mantra for the OECD. The biennial “Going for Growth” report first published in 2005 repeated the self-reinforcing methodology of the initial Jobs Strategy assessment.

The influence of the OECD and the self-reinforcing relationship with finance ministry officials went beyond Europe. Jackson (2007) commented from a Canadian perspective:

…OECD processes have been influential and important in terms of defining the “conventional wisdom” that drives economic policy advice. Seen through the prism of published country reviews and based on information provided by senior Canadian government officials and interviews, the OECD strongly influenced the main themes of Canadian economic and labor market policy over the 1990s: very large cuts to the deficit achieved by cuts in social spending; deep cuts to the unemployment insurance programme; deregulation and privatisation; the pursuit of greater labor market flexibility; formal targets for low inflation; and a major focus on debt reduction and tax cuts as opposed to reinvestment in social programmes after the elimination of the federal deficit.

Factors behind the 2006 review of the Jobs Strategy: Different ‘roads to Rome’

In the early 2000s, thinking in the OECD began to shift. Two-thirds of the OECD members at that time were also members of the European Union, and the European Commission’s European Employment Strategy, developed over the same period as the Jobs Strategy and having many similarities, was more influenced by “social market theories whereby the state intervenes to moderate the negative effects of market relationships and to enhance the efficiency of market performance” (Casey 2004). The social dimension of European integration and instigation of what was known as the European Social Dialogue—negotiations between employers and trade unions at the European level—that was instigated by European Commission President Jacques Delors was an attempt to build agreement around a more social model of labor market reform. Already in 1997 a joint seminar between the OECD and the European Commission to discuss the implementation of the two strategies concluded that:

A number of member countries, notably in EU, have however been reluctant to implement the recommendations relating to labour market flexibility. As the OECD itself acknowledges this is due to concern the policies to achieve greater flexibility in the labour market would be at odds with the objectives concerning equity and social cohesion. The trade-off posed is clearly a difficult one. (European Commission 1999)

Labor and employment ministers meeting in 2003 called on the OECD to “reassess the Jobs Strategy in the light of more recent experience and future challenges.” The 2004 OECD Employment Outlook prepared by the Department of Employment, Labor, and Social Affairs began the work by including detailed chapters on two of the flexibility recommendations of the Jobs Strategy: the impact of employment protection legislation, and wage setting. The Outlook concluded that “the evidence of the role played by employment protection legislation on aggregate employment and unemployment rates remains mixed” (OECD 2004). It expressed concern that in some countries such as Spain temporary contracts that replaced permanent jobs produced labor market duality between those with permanent contracts and those with temporary contracts, and it recognized that job insecurity itself was a problem. The Outlook examined the Job Study diagnosis that excessively high aggregate wages and wage compression hindered employment creation and found that the “evidence is somewhat fragile.” It concluded that the effect of collective bargaining on employment “is contingent upon other institutional policy factors that need to be clarified to provide robust policy advice.”

In 2004, at an OECD seminar organized by the Trade Union Advisory Committee to the OECD (TUAC), Washington Center for Economic and Policy Research (CEPR), and the European Trade Union Institute (ETUI), the authors of a set of empirical surveys on the effect of labor market regulations on employment (Baker et al. 2004) presented their findings. The report of the meeting2 noted that the results “showed no statistically significant relationship between labour market protection and unemployment.” The authors concluded that there was a “yawning gap between the confidence with which the case for labour market deregulation has been asserted and the evidence that the regulating institutions are the culprits” (Baker et al. 2004). While the Economics Department director acting as discussant in the meeting found the results “uninteresting,” the response from governments present was more nuanced. The British treasury official who at the time was also chair of the Economic Committee Working Party on Structural Policy noted that the introduction of the minimum wage in the U.K. had been effective in raising wages of less-skilled workers without raising unemployment.

Other research in the 2000s that focused on the emerging market economies in Central and Eastern Europe similarly failed to find evidence of the positive effects of labor market deregulation. Avdagic (2015), examining the effect of employment protection legislation on aggregate and youth unemployment in advanced economies and Central and Eastern Europe during 1980–2009, concluded: “The results offer no clear support for the argument that EPL is a cause of unemployment.…[T]he findings on the whole indicate that government efforts to tackle unemployment by deregulating EPL alone may well be futile.”

Heimberger (2020) subsequently carried out a meta-analysis of 75 studies across a range of countries examining the relationship between employment protection legislation and unemployment, concluding:

We cannot reject the hypothesis that, on average, the genuine empirical effect of EPL is zero. Notably, this main finding would be consistent with an explanation according to which the effects of employment protection are not universal, as increased employment protection may have different effects on unemployment in different countries or time periods.

Some studies have discovered potentially positive welfare-improving effects of employment protection, depending on institutional settings. Belot, Boone, and van Ours (2007) found “new results on the welfare effects of employment protection”:

Using data from 17 OECD countries, we show that there exists an inverse U shape relationship between employment protection and economic growth. Using a simple theoretical model with non-contractible specific investments, we show that over some range increasing employment protection does indeed raise welfare. We also show that the optimal level of employee protection depends on other local market features, such as the bargaining power of workers and the existence of wage rigidities like the minimum wage.

Vergeer and Kleinknecht (2011) analyzed the impact of labor market deregulation on productivity in 19 OECD countries for a longer period, 1960–2004. They concluded:

…wage cost saving flexibilization of labour markets has a negative impact on labour productivity growth. A one percentage point change in growth rates of real wages leads to change in Labour productivity growth by 0.31 to 0.39 percentage points. This cannot solely be explained by hiring low-productive labour. Flexibilization of Labor markets leads to a labour-intensive growth path that is problematic with an ageing population in Europe.

Regarding collective bargaining, the OECD’s 2006 reassessment of the Jobs Strategy, drawing on Bassanini and Duval (2006), concluded that:

…high corporatism bargaining systems tend to achieve lower unemployment than do other institutional setups. Nevertheless, the evidence concerning the impact of collective bargaining structures on aggregate employment and unemployment continues to be somewhat inconclusive. The overall non-robustness of results across studies probably reflects, at least in part, the difficulty of measuring bargaining structures and practices, as well as the fact that the same institutional set-up may perform differently in different economic and political contexts. One exception to this pattern is the robust association between higher centralisation/coordination of bargaining and lower wage dispersion…. The empirical evidence concerning a negative impact of minimum wages on unemployment is mixed, with some studies finding evidence for significant effects particularly for youth while others do not detect any effects. The Bassanini and Duval research found no significant impact of the minimum wage on the aggregate unemployment rate. (OECD 2006)

The “Reassessed Jobs Strategy” in the 2006 Employment Outlook (OECD 2006) represented a shift in thinking by reflecting the uncertainty of the empirical evidence about the effects of labor market institutions and accepting that different national and institutional settings are key to understanding good employment performance. Acknowledging this a decade later the OECD said:

The 2006 Reassessed Job Strategy placed more emphasis on promoting labour force participation and improving job quality. The main message was that there are several roads to Rome, i.e., good labour market performance is consistent with more market reliant models that emphasise labour and product market flexibility, but also with models that involve a stronger role of public policies, generally coupled with strong social dialogue and a combination of stronger protection for workers with flexibility for firms. (OECD 2018)

Coats (2018) noted:

…the OECD, in its reassessment of the Jobs Study…stepped back from an unqualified endorsement of the Anglo-Saxon model of labour market flexibility. In part, this was because the evidence showed more than one route to strong jobs growth. For example, in the Nordic countries and Netherlands (to some extent), strong collective bargaining institutions, social dialogue, generous out-of-work benefits, rigorous job search requirements and investment in human capital constituted a package of policies that were just as successful at creating jobs as the deregulated Anglo-Saxon model. A judicious mix of flexibility and security seemed to have been achieved, to which the neologism “flexicurity” was applied.

Watt (2006) noted: “analysis of the policy recommendations and the underlying evidence presented in the Employment Outlook suggests that since 1994 the OECD has moved a considerable way on a number of key policy issues.”

Lansley and Reed (2010), drawing on international experience for recommendations for U.K. employment policies for British trade unions in the light of the Great Recession, concluded:

…the fundamental arguments of the anti-regulationist school and its belief in self-regulating markets simply don’t stand up to the economic experience of the last two decades. The free-market experiment has been plagued by instability, not the stability it predicted. The empirical evidence provides no backing for those calling for the weakening or abolition of the minimum wage and cutbacks in current and planned labour market interventions. While badly thought-out regulation can be harmful, the evidence is that it is possible to achieve successful economic outcomes (low unemployment, high employment participation and growth) with strong social and workplace protection. More regulation does not necessarily mean poorer economic performance while increased regulation of the appropriate kind can actually improve performance in the right circumstances. Indeed, the OECD once the champion of the orthodox view has accepted the case for intervention in recent years.

Part of what drove the selling of the Anglo-Saxon model of labor market flexibility was the perceived success of the U.S. labor market in providing low unemployment rates. But, even in the U.S., where most workers do not have contract protection under law, studies on the recent and limited protections workers have from at-will dismissal gave a mixed view on employment but a mostly positive view on workers’ wages. Women and workers of color, in particular, had higher wages with laws protecting against unjust or unreasonable cause protections from firing (Autor 2003; Kugler and Saint-Paul 2004; Miles 2000; Hoyt 2018). Showing improvements from the U.S. extreme of employer flexibility on an important labor market metric.

Within the OECD a break in consensus was allowing a subtle shift away from the neoliberal paradigm. There had been some opposition within the OECD to the structural policy hegemony of the Economics Department, and successive Employment Outlooks from what had become the Department of Employment, Labor, and Social Affairs produced research results that did not support the Economics Department’s enthusiastic drive for deregulation. Efforts to quantify the adverse economic effects of labor market regulations produced inconclusive results.

Nevertheless, neoliberal economists within and outside the OECD have continued to advocate flexibilizing labor markets. For instance, the “Going for Growth” report, still one of the flagship publications of the Economics Department, identifies five structural reform priorities for each OECD country, and until 2011 the benchmark for identifying these was a comparison with gross domestic product (GDP) per capita in the U.S. The 2010 “Economic Survey of Slovakia” gives the flavor of typical recommendations: It called on the government to undertake reforms “of a bold nature” and argued that reforming the wage determination system “[so as to allow] job seekers to price themselves into the market and employment will help to reduce poverty risks, reduce social expenditure pressures, limit the economic costs of fiscal consolidation, help lower entry barriers for innovative entrepreneurs and increase efficiency of active labour market measures” (OECD 2010).

The elephant in the room and the elephant curve: Rising income inequality

If there was growing uncertainty and disagreement within the OECD, the IMF, and the World Bank over the past two decades about the efficiency and employment effects of labor market institutions, there was growing consensus that rising inequality, primarily in advanced economies, was a major concern for economic as well as social and political reasons.

At the beginning of the current century the conventional view of most economists in the OECD and the international financial institutions (IFIs) would have been that distributional issues were questions for political and social decision-makers at the national level and only relevant to economists if measures to address inequality had a significant economic cost, which it was often argued was the case. Lucas (2003), author of the rational markets’ theorem, wrote: “Of the tendencies that are harmful to sound economics, the most seductive and in my opinion the most poisonous, is to focus on questions of distribution.”

At the time this would have been the consensus view of many economists within the OECD. To the extent that distributional issues were raised, it was frequently pointed out that globalization was reducing inequality between the developing countries and the OECD countries, explained almost entirely by the rapid industrialization of China and India since 1990—which, it was argued, was due to the success of market reforms. Rising inequality within countries was ignored.

The global picture of rising incomes in poor countries, exploding incomes of the top 1%, and stagnant or falling incomes of the middle class in OECD countries was depicted in 2016 by Milanovic (2016) of the World Bank in an “elephant curve,” which showed that those who had lost out over the period had been low- and middle-income groups in developed countries.

Complacency concerning inequality as well as the enthusiasm for the promotion of the light regulation of markets in general was shaken by the near meltdown of the global economy following the 2008–2009 financial crisis and the Great Recession. Stagnation of middle-class incomes in the United States was seen as one of the factors behind the growth of unsustainable subprime lending.

As noted above, the thinking on the employment and social side of the OECD concerning labor markets and in particular income inequality had already begun to shift in the 2000s, as reflected by the publication of a series of reports on income inequality—notably “Growing Unequal” in 2008 (OECD 2008) and “Divided We Stand: Why Inequality Keeps Rising” in 2011 (OECD 2011). Rising income inequality began to be regarded as an economic as well as a social and political problem. In the foreword to a 2015 OECD publication summarizing this work, OECD Secretary General Angel Gurria wrote:

Inequality is bad and getting worse. In the 1980s, the richest 10% of the population in OECD countries earned seven times more than the poorest 10%. They now earn nearly ten times more. When you include property and other forms of wealth, the situation is even worse: in 2012, the richest 10% controlled half of all total household wealth and the wealthiest 1% held 18%, compared to only 3% for the poorest 40%. The poorest members of society suffer immediately from inequality, but in the longer term, the whole economy is also damaged. OECD figures show that the rise in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off cumulative growth between 1990 and 2010. (Keely 2015)

In 2017 Gurria stated in a speech to employers:

Inequalities harm growth. They erode trust in governments, in business, in modern capitalism and in democracy. They also contribute to a polarised and dangerous environment where populism, protectionism, and exclusive nationalism tend to grow and spread. We urgently need to reverse these trends. (Gurria 2017)

The shift in rhetoric was not limited to the OECD. Then-IMF Managing Director Christine Lagarde stated in a speech to the 2012 annual meetings of the IMF and World Bank: “Excessive inequality is corrosive to growth; it is corrosive to society. I believe the economics profession and the policy community have downplayed inequality for too long” (Lagarde 2012). These statements were made at the time when the Occupy Wall Street protests had reverberations around the world, with public demonstrations erupting against economic inequality and the injustice of wealth and income being concentrated in the top 1%.

The picture painted by the OECD has become familiar in retrospect, but at the time it was significant and unusual, coming as it did from an organization that was seen as being highly orthodox in its analysis and policy prescriptions. Significantly, the U.S. launch of “Divided We Stand” was delivered in front of a trade union audience at an event held at the AFL-CIO and chaired by its president, Rich Trumka. It provoked Daniel Mitchell of the Cato Institute to decry Angel Gurria as “an International bureaucrat pushing socialism…using your tax dollars to push for class warfare” (Mitchell 2011). The analysis of household income data in “Divided We Stand” showed that in most OECD countries the incomes of the top 10% had grown faster than the bottom 10% over the previous two decades, resulting in an overall rise in inequality. The Gini coefficient3 rose over the same period in 17 out of 24 OECD countries for which long-term data series were available—the OECD average had risen almost 10%, from 0.29 to 0.316—and the rise in household inequality was primarily attributed to changes in the distribution of wages and salaries (OECD 2011). The highest levels of inequality in the larger OECD economies were in the English-speaking countries, notably the U.K. and the U.S., where inequality had first begun to rise in the 1980s after falling in the postwar decades. However, increases were also seen in traditionally low-inequality countries—the exceptions being Turkey, Greece, France, Hungary, and Belgium. In subsequent analyses of tax data for a more limited group of countries, in which the OECD drew on data published in Piketty’s (2014) bestselling 700-page study “Capital in the Twenty-First Century,” the OECD noted:

…from 1975 up to the crisis, the top percentile managed to capture a very large fraction of the growth in pre-tax incomes, especially in English speaking countries: around 47% of total growth went to the top 1% in the United States, 37% in Canada, and above 20% in Australia and the United Kingdom. By contrast, in Nordic countries, but also in France, Italy, Portugal, and Spain it was the bottom 99% of the population which benefited from more growth, receiving about 90% of the increase in total pre-tax income between 1975 and 2007. (OECD 2014a)

OECD work that began with “Divided We Stand” also found unconvincing that the focus of concern should be “inequality of opportunity” rather than “inequality of outcome” and that cross-generational mobility would offset inequality over time. It broadly confirmed the succinct argument of Atkinson (2015) that, “If we are concerned about inequality of opportunity tomorrow, we should be concerned about inequality of outcome today.” Inequality is transmitted through generations in part due to lack of access to education—high inequality is self-reinforcing. Moreover, high-inequality countries tend to display low intergenerational mobility, reflected in what came to be known as the “Gatsby Curve,” made famous by Alan Krueger (2012). The OECD concluded that, “One of the main objectives of social policy is to break the cycle of disadvantage across generations and prevent the development of a self-replicating underclass” (OECD 2008, 216).

Reports prepared for OECD committees in 2011 had highlighted the impact of regulatory reform and changes in labor market institutions alongside technological change on rising wage inequality. However, when it came to going public in 2012 in “Divided We Stand” on the causes of the rise in inequality, the OECD remained within a conventional analytic comfort zone. It dismissed the effects of globalization and financialization, arguing “neither rising trade integration nor financial openness had a significant impact on either wage inequality or employment trends within OECD countries” (OECD 2011, 29). While raising the possible effects of deregulation policies, including the weakening of unions that the OECD itself had been recommending for two decades, the report concluded that the effects were mitigated by the effects that deregulation, including wage suppression, could have by raising employment levels and thereby reducing inequality “amongst workers and jobless individuals.” Skill-biased technological change was seen as the key driver of inequality. The report noted that taxation systems had become less effective in redistribution and that “redistribution strategies based on government taxes and transfers alone would be neither effective nor financially sustainable” (OECD 2011, 40). A major feature of the report was therefore to highlight “the central role of education. The rise in the supply of skilled workers considerably offset the increase in wage dispersion associated with technological progress, regulatory reforms and institutional changes” (OECD 2011, 31). The overall policy conclusion was that economic strategy “should rest on three main pillars: more intensive human capital investment; inclusive employment promotion; and well-designed tax/transfer redistribution policies” (OECD 2011, 41).

Subsequent OECD work in 2014 quantified the negative impact of rising inequality on economic growth across a range of OECD countries. The main transmission mechanism was found to be the impact on human capital accumulation in low-income households and the persistence of this across generations. The summary of the work found that rising income inequality “has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low-income households and the rest of the population. In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth” (Cingano 2014).

A series of reports from other institutions including the IMF (referred to below) around the same time broadened the list of causal factors that led inequality to reduce economic growth. Stiglitz (2012) found that a rising concentration of income at the top of the distribution reduces welfare by allowing top earners to manipulate the economic system in their favor.

The OECD was also reluctant to tackle the issue of rising functional inequality and the decline of the share of wages in national income. At the 2011 Washington launch event of “Divided we Stand,” Richard Trumka, in broadly welcoming the work, noted that the report “seems to focus primarily on the distribution of wages as a principal driver of income inequality. You do not seem to view the more fundamental fall in share of wages in national income as a major cause of rising inequality. I think both the fall in wage shares and the rise in inequality are important causes of rising inequality and both have implications for policy” (Trumka 2011). Until the 1980s the share of wages in national income in industrialized countries was constant to such an extent that economists treated it as “stylized fact,” and different theories of the functional distribution of income were built around it. Neoclassical theory postulated that income distribution is determined by the marginal productivity of factors of production. Neo-Keynesian theory postulated that income distribution was determined by technological progress (Kaldor 1955). The data changed significantly after the Thatcher-Reagan reforms. The International Labor Organization (ILO) found that starting in the early 1990s wage shares had fallen in three-quarters of the 69 countries it studied; on average wage shares in industrialized countries fell by an average of nine percentage points of GDP over three decades (ILO 2011). In explaining the decline in wage shares the ILO found that “financialization” and “globalization” both played important roles in weakening the bargaining power of workers compared to business, as did declining union strength and the weakening of labor market protection. In contrast, the IMF and the OECD argued that technological progress was the main cause of the declining wage share, with capital substituting labor through automation (IMF 2017). As seen within the declining wage share, the rise in inequality, it was argued, was primarily due to skill-biased technological change, whereby high-skilled workers enjoy a wage premium.

Despite the reluctance of the OECD at that time to publicly accept that labor market flexibility was behind much of the rise in inequality, elsewhere there was increasing acceptance of the evidence that wage-setting mechanisms such as collective bargaining and wide trade union membership reduce income inequality, and also that the weakening of these institutions in industrialized countries through changing power relationships between workers and business over the past three decades has been an important cause of rising personal income inequality and a driving factor in explaining the fall in the wage share. Deakin, Malmberg, and Sarkar (2014), examining the effects of weakening labor laws in six OECD countries from 1970 to 2010, found that “worker protective labour laws are associated with a higher labour share and therefore, in broad terms, with improved income distribution—an outcome driven by laws on working time and employee representation.” Guschanski and Onaran (2017) found “a robust effect of institutional factors such as union density and minimum wages on the wage share, lending strong support to the political economy approach to functional income distribution.”

The shifting views of the IMF and World Bank

The advocacy of labor market deregulation reflected by the OECD Economics Department had been made with equal strength at the international financial institutions during the 1990s and early 2000s (IMF 2003). To some commentators, this stance was influenced by political influences rather than empirical evidence. According to Freeman (2005), the fact that trade unions and other institutions could resist structural adjustment programs imposed by the IFIs “led IMF-associated economists to stress the dangers of insufficient labour market flexibility in economic crises even when those crises arise from problems far removed from the labour market.”

However, different views came from within the IMF. An IMF 2011 Research Department report challenged fundamentally the traditionally benign view the IFIs had held toward income distribution. It concluded that higher inequality is associated with lower and less sustainable growth in the medium term even in advanced economies (Berg and Ostry 2011). A 2015 study by Jaumotte and Buitron examining the rise in inequality in advanced countries between 1980 and 2010 found that:

…the rise of inequality in the advanced economies included in this study has been driven by the upper part of the income distribution, owing largely to the increase in income shares of top 10 percent earners. We find evidence that the decline in union density—the fraction of union members in the workforce—is strongly associated with the rise of top income shares.…On average, the decline in union density explains about 40 percent of the 5-percentage point increase in the top 10 percent income share. This contribution rises to over 50 percent when controlling for sectoral employment shifts over the sample period.

The study was widely quoted in the press, including in the U.S., where the Los Angeles Times reported:

The IMF’s analysis undermines the accepted wisdom that lower union membership affects chiefly low- and moderate-income workers. The fund’s analysts…find instead that the impact of declining unionization is felt across the entire income spectrum. The trend not only reduces the welfare of the lower income worker, they find; it makes the rich richer. (Hiltzik 2015)

The Economic Policy Institute had been publishing regular briefs drawing attention to the link between increasing inequality and declining union membership.

In a 2013 assessment of the IMF’s advice on labor markets in advanced economies in the Great Recession, IMF then-Chief Economist Oliver Blanchard together with IMF researchers Florence Jaumotte and Prakash Loungani cautioned: “…the implications of alternative structures of collective bargaining are poorly understood, suggesting that the IMF should tread carefully in its policy advice in this area. Moreover, trust among the social partners appears to be just as important in bringing about macro flexibility as the structure of collective bargaining.” The IMF was criticized by trade unions at the time4 for not reflecting the reality of IMF country-level recommendations. The International Trade Union Confederation (ITUC) general secretary, writing to the IMF managing director, noted that “nothing we have seen from recent IMF reports on European countries indicates that this is being put into practice.”

From these exchanges and starting in 2013, Blanchard organized with the international trade union organizations—the ITUC and the TUAC—a series of workshops over the following two years on collective wage bargaining. The workshops brought together labor market academics, trade union representatives, and IMF staff. Conclusions of the meetings were not published by the IMF, but in the opinion of one of the current authors the discussions contributed to more caution in the IMF’s advocacy of labor market flexibility at the global level even if not reflected in national programs.

The conventional wisdom on labor market institutions shifted at the same time in parts of the World Bank. The title of the World Bank’s 2013 World Development Report was “Jobs,” and a chapter devoted to “Labour Policies Revisited” found that there was a “plateau effect” of the impact of labor regulations on employment and efficiency. At the edges of the plateau, where regulations were highly stringent or highly lax, the regulations might have a significant impact on economic efficiency and employment. But in between across most national settings, “estimated effects prove to be relatively modest in most cases—certainly more modest than the intensity of the debate would suggest” (World Bank 2012).

The impact of the financial crisis and the Great Recession

The Great Recession and rise in unemployment in most OECD countries following the 2008–2009 financial crisis was the key backdrop to the discussion of inequality and the role of labor market institutions over the following years, but the downturn had conflicting effects on the discussion of labor regulation at the international organizations. The ILO had dubbed the rise in inequality the “crisis before the crisis.” There was also growing recognition that the depression of middle-class incomes in the U.S. had led to credit-driven growth encouraged by lightly regulated financial markets, with conflicted governance, that proved to be unsustainable. There was also increasing awareness that the role of trade unions in social partnership arrangements such as in Germany had demonstrable positive outcomes in terms of moderating the impact of the crisis on employment. The debate on how to share the cost of the crisis had an impact on the political debate. However, there was also renewed attention given to the relationship between employment regulation and unemployment (Heimberger 2020). The causes of the Great Recession lay in financial markets, not labor markets, but the notion to never waste a crisis took hold among neoliberal commentators, and they employed it to promote the deregulation of labor market institutions. In Europe during the sovereign debt crisis beginning in 2010, unemployment rose to over 25% in Spain and Greece and to 16% in Portugal. The countries seeking external assistance to support their banking systems—Greece, Portugal, Cyprus, and Ireland—were forced to accept draconian austerity and structural reforms by the troika of the European Commission, the European Central Bank, and the IMF. Greece was obliged as part of the support package to adopt brutal cuts in minimum wages and the weakening of collective bargaining systems to bring about internal deflation of incomes. Despite the IMF Research Department’s own evidence of the impact of past policy in weakening labor market institutions, IMF country programs continued to promote labor market deregulation. A series of working papers from IMF authors published in 2012 that purported to show that labor market reforms were strongly associated with declines in unemployment were criticized by ILO authors for having serious data flaws (Aleksynska 2014).

The trade union movement made its own prescriptions for dealing with the crisis with its study, “Exiting from the Crisis: Towards a Model of More Equitable and Sustainable Growth” (Coats 2011). TUAC and AFL-CIO Chief Economist Ron Blackwell played a key role in putting the document together and recruiting the Nobel laureate Joseph Stiglitz to provide a preface. Stiglitz’s authority helped the argument that inequality had to be addressed as part of the path forward. The book challenged the narrow focus on GDP per capita as an economic yardstick and pushed for a rethinking of the Washington consensus—the package of neoliberal policy reforms pressed on many developing countries by the international financial institutions since the 1980s.

The Pittsburgh G20 Summit in 2009 made two key innovations that had significant implications for global employment policy as well as economic governance. The first was the decision to continue to focus on employment policy, in light of which the U.S. labor secretary was asked “to invite our Employment and Labour Ministers to meet as a group in early 2010 consulting with labour and business” (G20 2009). This set in motion for the first time the G20 labor and employment ministerial meetings; prior to that the only G20 ministerial meetings had been of finance ministers.

The second innovation was the statement by leaders declaring “the G20 to be the premier forum for our international economic cooperation.” This gave a degree of permanence to the G20 leaders’ meetings and, with the institution of the labor and employment ministerial meetings, ensured that a listening session with labor union leaders of the G20 countries would be included. That innovation helped encourage language in the G20 to respect tripartite meetings between government, business, and trade unions at the national level.

But the push for labor market reform persisted. In the Mutual Assessment Process (MAP) of the G20 Framework Working Group (FWG) of finance ministry and central bank officials, participants argued that structural reforms of labor and product markets could lift growth by 2% over five years. Using “Going for Growth” methodology, they offered governments a way to remedy disappointing growth when fiscal policies were set on a track of deficit reduction and monetary instruments were exhausted.

In assessing government commitments to lift growth, the OECD identified some 700 proposed reforms, about a quarter of which were labor market reforms. At the Brisbane G20 Summit in November 2014, leaders agreed that “against the backdrop of a disappointingly weak cyclical recovery from deep recession, weakened productive capacity in key economies and a legacy of vulnerabilities from the financial crisis, we need to pursue an integrated approach to boost growth” (G20 2014). Leaders “set an ambitious goal to lift the G20’s GDP by at least an additional two per cent by 2018.” The main mechanism for achieving this goal was the implementation of “structural reforms to lift growth and private sector activity, recognising that well-functioning markets underpin prosperity.” Analysis by the IMF-OECD had indicated “that our commitments, if fully implemented, will deliver 2.1 per cent.” As the growth trajectories were more and more off target, the action plan was subsequently and quietly forgotten. In the words of one participant: “In retrospect the 2014 G20 structural reform initiative looks like a last hurrah for the deregulatory labor market strategy driven by the OECD Economics Department. However, at the time it was very worrying [though] the wind was changing already within the OECD and the economics profession (Pursey 2021).

The 2015 G20 meetings of labor and employment ministers, held in Turkey, discussed as a priority inequality and the decline of the labor share. The final declaration abandoned the deregulatory framework and stated: “In order to address rising inequalities and declining labour income shares, we agree to undertake a mix of policies appropriate to our national circumstances including improving wage-setting mechanisms, institutions for social dialogue, social protection systems and employment services.” The ministers endorsed an annexed set of “G20 Policy Priorities on Labour Income Share and Inequalities” that gave support to collective bargaining systems. Two important commitments of the principles were: “Strengthening labour market institutions [social dialogue, collective bargaining, wage-setting mechanisms, labor legislation] based on respect for the Fundamental Principles and Rights at Work; and reducing wage inequality, through policy tools such as minimum wages and the promotion and coverage of collective agreements, ensuring fair wage scales and that work pays” (G20 2015).

The populist backlash and the geography of discontent

Starting with the Occupy Wall Street movement, something began to change in OECD countries regarding the toleration of inequality. There were explosions of anger against governments and the “elite” from both the left and right, with paradoxical political implications. The Brexit vote in the United Kingdom in 2016, the election of Donald Trump in the United States the same year, the growth of nationalist and anti-immigration parties in northern Europe and, in 2018, the “yellow vest” insurrection in France each can be interpreted as a populist reaction to the rising inequality, stagnant median incomes, and economic insecurity that followed the Great Recession. They reflected a growth of relative deprivation, where significant segments of populations felt that they and their families had lost out—and they feared a future of even greater insecurity. These sharpening divisions appeared after three decades of the weakening of trade unions, whose economic role was to act as a brake on rising inequality and whose political role was to provide voice to those feeling unjustly treated and to negotiate solutions to grievances. Brexit, Trump, nationalism, and street violence all represent bad answers to an important question—how to re-forge agreement on distributive justice for those who have lost out (or so feel) from globalization, technological innovation, and responses to climate change.

Concern over the political fallout of the Great Recession as well as the organization’s failure to anticipate the risks of deregulated markets and rising inequality led the OECD to launch a program of “New Approaches to Economic Challenges” (NAEC) that was intended to assess what had gone wrong in previous OECD models and policy recommendations. One of the key messages from the NAEC work to the OECD Ministerial Council in 2014 was that “the last three decades have seen a rise of inequality, which can effect economic growth, weaken social cohesion and sap trust in markets and institutions. To address the growing concerns linked to increasing inequality, policy makers are advised to support a move to a more inclusive and sustainable economic approach” (OECD 2014b). The OECD “Inclusive Growth Initiative” recognized the need to act across a range of different policy areas and called for a “’whole of government’ approach to make sure that financial, fiscal or monetary decisions, among others do not undermine social cohesion or social progress” (OECD 2017b).

In successive submissions to the OECD, its ministerial council meetings, and annual meetings with national representatives, TUAC had proposed a widening of government action to reduce inequality beyond the traditional remedies of improving skills and to operationalize the recommendations of the NAEC project. TUAC’s submission of December 2013 called for:

…a comprehensive strategy on tackling inequality and moving to inclusive growth including action to: address the growth of in work poverty through establishment of well set minimum wages; strengthen the coverage of collective bargaining by the social partners and adopt this as a government policy objective; undertake corporate governance reforms to contain all the excesses of top income compensation and encourage the setting of links of top pay to median incomes in the private sector; ensure the access of all to quality education and training systems; restore progressivity in the tax system; ensure that economic performance is judged by wider criteria than GDP per head. (TUAC 2013)

The unions took encouragement from the apparent shift in thinking by G20 labor and employment minsters, who at their July 2013 meeting had committed to move forward by:

…Implementing labour market and social investment policies that support aggregate demand and reduce inequality, such as broad based increases in productivity, targeted social protection, appropriately set minimum wages with respect to national wage setting systems, national collective bargaining arrangements and other policies to reinforce the links between productivity, wages, and employment. (G20 2013)

Economists such as Thomas Piketty and the late Anthony Atkinson were invited to make presentations at OECD meetings, and their work began to be used by the OECD to prepare the ground for shifting policy to more progressive taxation and to revisit analysis of labor market institutions. Atkinson (2015), focusing on the U.K., offered 15 proposals to reduce inequality; he recommended establishing a more favorable balance of power between labor and capital, allied with progressive taxation to help those in the lower deciles of the income distribution. He also promoted wider trade union representation to relink productivity growth and incomes.

The 2018 revision of the Jobs Strategy

A new effort to revise the OECD Jobs Strategy, begun in 2016, was influenced by both the popular backlash against globalization and the emerging debate about the future of work in light of technological change, the growth of nonregular work in many countries, and the rise of the “gig” economy. While the OECD appeared to initially flirt with the idea that gig work was a growing and natural progression in the work relationship brought on by technology, it began to take a stand that existing labor regulations must apply to “platform” work as well (O’Farrell 2016).

The 2017 OECD Employment Outlook, in summarizing the 2006 work revising the Jobs Strategy, argued that “The populist backlash against globalisation fundamentally challenges employment policy” (OECD 2017a). It noted:

The perception that the international economic system is rigged clearly challenges the democratic legitimacy of current policies and thus needs to be taken seriously. It also challenges the policy advice offered by international organisations like the OECD, which has long emphasised the economic benefits of global integration, but only recently adopted an inclusive growth approach that pays due attention to the distribution of those benefits across the population. (OECD 2017a, 9)

The OECD began detailed work on changes to collective bargaining systems and their impact on labor market outcomes. The 2017 Employment Outlook had included a taxonomy of collective bargaining systems based on three criteria: the formal level of bargaining (company, sector, or national); the space left for lower-level agreement; and the degree of coordination. It acknowledged that policy reforms had contributed to decentralization of bargaining and had “tested the system.” The outlook laid out the areas of work that needed to be carried out to inform the wider Jobs Strategy revision.

The initial narrative of the revised Jobs Strategy containing the key policy messages and analysis was adopted at the OECD Ministerial Council meeting in June 2018, and the full report was launched in December 2018 (OECD 2018). The OECD claimed that the Jobs Strategy represented a shift in thinking and policy from both the 2006 version and even more so from the original 1994 study. The TUAC backed this view, commenting:

The Narrative of the revised Job Strategy…takes a much broader approach than was previously the case. Policy objectives are no longer limited to the quantity of jobs but have been expanded to include their quality and inclusiveness. Moreover, the narrative recognises there is no necessary trade-off between the quantity of jobs on the one hand and their quality and inclusiveness on the other. Importantly, the OECD now concedes that flexibility has been over-rated in view of “new evidence that shows that countries with policies and institutions that promote job quality, job quantity [maximum employment rather than minimum unemployment] and greater inclusiveness perform better than countries where the focus of policy is predominantly on enhancing market flexibility.”

The revision also clearly rejects the argument that collective bargaining defends the interest of “insiders against outsiders” in the labor market—a long-held tenet of the OECD Economics Department (OECD 2018, 147).

However, Janssen (2019) notes that in also claiming that “flexibility in product and labour markets is essential to create high quality jobs in an ever more dynamic environment,” the strategy is offering two distinct narratives on labor market flexibility running in parallel. McBride and Watson (2019) wrote off the revision as “an attempt to restore legitimacy through ideological positioning rather than fundamental change in basic strategy.” This is hardly surprising in an international organization in which reaching agreement on change between different countries is a complicated process. TUAC’s evaluation prioritized the importance of the implementation process. In any case, the positive role ascribed to collective bargaining and the admitting of greater ambiguity in labor market deregulation and flexibility amounted to more than a cosmetic change.

This assessment was reinforced when in 2019 the OECD published its most comprehensive work on collective bargaining in 30 years under the title, “Negotiating Our Way Up: Collective Bargaining in a Changing World of Work” (OECD 2019). The central conclusions of the report were: (1) coordination in wage bargaining is a key ingredient for good labor market performance; (2) collective bargaining systems and workers’ voice arrangements also matter for job quality; and (3) collective bargaining and workers’ voice play an important role in preventing inequalities in a changing world of work, but they need to adapt.

Most importantly, the OECD came down firmly on the side of the need for countervailing power in the workplace:

Whether considering key issues such as wage inequality, job quality, workplace adaptation to the use of new technologies, or support for workers displaced by shifts in industries, collective bargaining and workers’ voice can complement public policies to produce tailored and balanced solutions. The alternatives to collective bargaining are often either state regulation or no bargaining at all since individual bargaining is not always a realistic option as many employees are not in a situation to effectively negotiate their terms of employment with their employer. (OECD 2019, 13)

Postscript: Labor markets and the Covid-19 pandemic

In the months following the publication of these OECD reports, the Covid-19 pandemic again raised the importance of reducing inequality in OECD countries and beyond. The pandemic and subsequent containment measures have had differential impacts on income groups, age groups, ethnic groups, and social groups. The economic prospects of young people, ethnic minorities, and women—the groups more likely to be employed in service sectors that have been most affected by closures, but which are also overrepresented in insecure and unprotected work (Reitsma et al. 2021; Rogers et al. 2020; Goldman et al. 2021; Williamson et al. 2020; Out et al. 2020)—have been hardest hit in most countries. Sectors with activities that allow teleworking and so are more likely to be performed from home have seen a smaller reduction in employment. Low-income workers are less able to work from home than high-income workers.

An IMF study comparing the distributional impact in the United States of the global financial crisis and the pandemic recession found that young workers, less-qualified workers, and low-income earners were hit hardest in both recessions, but women and Hispanic workers were more severely affected in the pandemic. The concentration of female employment in service sectors together with the difficulty of managing child care when schools and other facilities are closed have resulted in a disproportional impact on women (Shibata 2020).

A study in France (Inserm 2020) found that those living in dense and cramped accommodations have been infected disproportionately during the pandemic, while those in low-paid vulnerable jobs are most at risk from infection and have suffered most from economic hardship. A study in the U.K. of the impact of what was then expected to be the ending of jobs support schemes found that young and ethnic minority workers were twice as likely to lose their jobs when the furlough scheme came to an end (Crossley, Fisher, and Low 2021; Brewer et al. 2020).

Emerging and developing countries have also seen a rise in inequality because of the pandemic. IMF authors concluded that “the estimated effect from COVID-19 on the income distribution is much larger than that of past pandemics. It also provides evidence that the gains for emerging market economies and low-income developing countries achieved since the global financial crisis could be reversed” (Cugat and Narita 2020). The World Bank has warned of “new poverty” appearing in middle-income countries (World Bank 2020).

The growth of nonstandard work and platform work prior to the pandemic had already increased inequality, and since most platform workers do not have employment protection, unemployment benefits, or paid sick leave, economic risk was shifted onto their shoulders during the pandemic. Also, during the pandemic customers for platform workers’ services dried up overnight, and the workers found themselves without income or employment. In a global survey by an online search platform for app-based jobs, over half of the platform workers surveyed said they had lost their jobs, and more than a quarter had seen their hours cut in the first months of the pandemic (AppJobs Institute 2020).

The OECD has noted that the pandemic revealed the shortcomings of safety nets (OECD 2020), in essence admitting that nonregular work leaves many people out of reach of vital social protections for income and health. While before OECD reports made almost indiscriminate calls for lowering labor standards to increase labor market flexibility for employers, they now caution that irregular work can be a danger.

As in the financial crisis, it is already clear that youth are big losers economically in the pandemic. In addition to the disruption of education in most countries, unemployment among first-time job seekers has soared. There is much evidence that initial job market experience influences earnings capacity in the long term, and hence deep recessions lead to scarring effects on individuals and subsequently on economies and societies.

Meanwhile, the wealth of billionaires has increased during the pandemic in all the major economies (Jones and Romei 2020), and U.S. internet companies have seen their stock values rise rapidly. Profits at Amazon tripled to $6.3 billion since the beginning of the pandemic, while turnover at Amazon increased by 37% in the third quarter of 2020.

As economies reopen and pressure for a return to normal increases, there is a danger that a business-as-usual approach will return. But the pandemic has brought into sharp focus the broader importance of social justice. Rising income inequality has fragmented societies, and the countries and communities weathering these trends most effectively will be those with greater social cohesion and where policies are designed to be fair and seen to be fair. The new thinking exhibited in the recent OECD reports represents an opportunity for a positive shift in policy if translated into policy action.

About the authors

John Evans was until 2017 general secretary of the Trade Union Advisory Committee to the OECD, a post he held for more than 30 years. From 2012 until 2017 he combined his TUAC post with that of chief economist of the International Trade Union Confederation. He is currently a visiting fellow at the University of Greenwich in the U.K. and an academic visitor at St Peter’s College at the University of Oxford. He is working on a book project on the shifting views of economists toward income inequality and labor market institutions.

William Spriggs is a professor in, and former chair of, the Department of Economics at Howard University and serves as chief economist to the AFL-CIO. In his role with the AFL-CIO, he also chairs the Economic Policy Working Group for the Trade Union Advisory Committee to the OECD, and serves on the board of the National Bureau of Economic Research. He is currently president-elect of the Labor and Employment Relations Association and vice chair of the board of MDC Inc. (Durham, N.C.). He serves on the advisory boards of WorkRise (of the Urban Institute) and the Opportunity and Inclusive Growth Institute of the Federal Reserve Bank of Minneapolis. From 2009 to 2012, he was assistant secretary for the Office of Policy at the U.S. Department of Labor.

Acknowledgments

The authors are grateful to David Coats, Larry Mishel, Stephen Pursey, and Kari Tapiola for comments on earlier drafts and indebted to Dean Baker and Andrew Watt, who undertook the peer review of the draft.

Notes

1. For an analysis of the country-specific recommendations from 1994 to 1998, see Casey 2004.

2. Unpublished Trade Union Advisory Committee mimeo to the OECD.

3. A common measure of income inequality that ranges from 0 when income is the same for all to 1 when all income goes to one person.

4. See, for example, International Trade Union Confederation, Equal Times, April 2013.

References

Aleksynska, Mariya. 2014. “Deregulating Labour Markets: How Robust Is the Analysis of OECD Recent IMF Working Papers?” ILO Conditions of Work and Employment Series no. 47.

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by Elizabeth Anderson

I completed Private Government: How Employers Rule Our Lives (and Why We Don’t Talk about It) in 2017. In that work, I argued that under U.S. law, employers are dictators of their workplaces, empowered to exercise sweeping and virtually unaccountable power over their employees, even regarding their off-duty lives. This contradicts the dominant narrative—enshrined in public discourse, law, and much of economics—which represents the workplace as a domain of equals who have freely negotiated the terms of the employment contract so that it is tailored to each party’s interests. I argued that in reality, most workers don’t get the chance to negotiate terms, because the state already designed the default terms of the employment contract through the doctrine of employment at will. This and other legal doctrines hand virtually all the power cards over to the employer. Hence, workers have little choice but to acquiesce in an employment contract imposed by their employers, who have no interest in ceding the powers the state has granted them. The result is what I call “private government”—workers’ subjection to unaccountable authority.

Since I was poking holes in the dominant view of the workplace, I was not surprised by the criticisms Private Government received. My subtitle already alludes to the force of ideology in resisting my depictions of the workplace as a domain of subordination rather than freedom. Many criticisms appealed to economics. Hence, I am grateful for the work Chetan Cetty has done in providing empirical and theoretical support from economics for my arguments. Cetty shows why gig work does not offer the liberation for workers some have promised, and how monopsony offers an illuminating framework for understanding labor markets even where there are multiple employers. He argues that the lack of transparency in employment contracts reflects workers’ lack of power. He explains how coercion is present when employers extract workers’ consent to mandatory arbitration, why we can’t infer that workers are satisfied with their jobs from the fact that they don’t quit, and why the sky won’t fall if we limit the authority of employers over workers. Finally, Cetty demonstrates that economists’ cheery representations of work heavily depend on the assumption of full employment—a condition that rarely obtains for the average worker, and virtually never for Black and Hispanic workers.

In 2020–2021, the pandemic exposed many of the harsh realities of domination at work that I criticized in 2017. Front-line workers lionized in public opinion as “essential” to society were treated as disposable by their employers. Health care workers treating COVID-19 patients were fired for complaining about hospitals’ failure to supply personal protective equipment (Carville et al. 2020). Some were even forbidden from bringing in equipment they obtained at personal expense (Fadel 2020). Owners of meatpacking plants, a major source of rural COVID-19 hotspots, fended off closure by local public health authorities by lobbying the Trump administration to order them to stay open (Grabell and Yeung 2020). They even won the right to speed up their slaughter lines, even though this forced workers to crowd more closely, exposing them to higher risk of infection (Kindy, Mellnik, and Hernández 2021). Cetty shows why such abuses of employer power are not mere aberrations, but predictable outcomes of a sound economic analysis of American workplaces.

—Elizabeth Anderson is John Dewey Distinguished University Professor of Philosophy and Women’s and Gender Studies at the University of Michigan, Ann Arbor

Executive summary

In her book, Private Government: How Employers Rule Our Lives (and Why We Don’t Talk About It), political philosopher Elizabeth Anderson delivers a powerful critique of the disparate power relations between workers and their bosses. She argues that most people in the United States and other liberal societies spend their working lives—and hence a huge share of their lives overall—under the kind of autocratic rule that we would never tolerate in our public lives and that we normally associate with communist dictatorships. Workers are forced to perform in oppressive environments, are deprived of many freedoms, and are given practically no say over working conditions. Even in their nonworking lives workers are frequently subjected to employer scrutiny and sanction. And the legal framework and economic realities surrounding employment are such that exit is viable for only a small minority. Anderson calls such employer rule “private government,” by which she means “government that has arbitrary, unaccountable power over those it governs.”

Anderson’s critical examination of the contemporary workplace serves as a searing rebuke not only of the hegemony of monolithic firms over workers but also of the rhetoric of the free market as both a liberator and equalizer of workers’ ability to control their own economic lives. She aims to dispel the simplistic equation of the “state” with coercion and the “market” with freedom.

Her solution to the problem of private government is to make it public, that is, to render firms accountable to those over whom they rule. She proposes four different ways of doing so: (1) making exit a meaningfully viable option, (2) ensuring that the workplace is subject to the rule of law, (3) providing constitutional rights for workers, and (4) increasing worker voice through structures like a co-determination firm model. She is ultimately most partial to the last of these solutions, since the success of the first three ultimately depends on effective enforcement and, even if enforcement is effective, the changes only prevent employers from tyrannizing workers. They do not make employers accountable to workers.

How have Anderson’s arguments been received? Her work has generated its share of criticism from economists and political philosophers who question her view of the workplace, the labor market, worker bargaining power, firm monopsonist power, worker satisfaction, and managers’ authority. For example, these critics ask, doesn’t the gig economy give workers a way out? Can’t workers just quit if they’re dissatisfied? Can’t the terms of employment simply be made clear up front? Are workers really so unhappy? Don’t we consent to unequal relationships all the time? Aren’t her proposed reforms a hindrance to the efficient operation of firms and markets?

While this paper does not provide a complete assessment of these claims, it does lay the groundwork for what such an assessment would look like. In particular, this paper raises the pertinent questions that defenders of these claims would have to answer along with the types of empirical evidence they would have to provide to back up these answers. The goal here is to set the stage for further investigation into the veracity of these claims and, in turn, the overall merits of Anderson’s work.

Introduction

In Private Government: How Employers Rule Our Lives (and Why We Don’t Talk About It), political philosopher Elizabeth Anderson advances a powerful critique of authoritarian workplaces and the disparate power relations between workers and their bosses. She argues that most people in the United States and other liberal societies spend their working lives under the kind of autocratic rule that we would normally associate with communist dictatorships. They are forced to work in oppressive environments, deprived of many freedoms, and given practically no say over working conditions. Even in their nonworking lives workers are frequently subjected to employer scrutiny and sanction. And the legal framework and economic realities surrounding employment are such that exit is viable for only a small minority. Anderson calls such employer rule “private government,” by which she means “government that has arbitrary, unaccountable power over those it governs” (Anderson 2017).

Anderson’s critical examination of the contemporary workplace, originally delivered in the form of two lectures and later compiled into the book (together with four critical responses and her reply), serves as a searing rebuke not only of the hegemony of monolithic firms over workers but also of the rhetoric of the free market as both a liberator and equalizer of workers’ ability to control their economic lives. It aims to dispel the simplistic equation of the “state” with coercion and the “market” with freedom. She proposes several strategies for combating the problem of private government, some of which involve state regulations.

Anderson’s work has generated great interest and, along with it, several criticisms that take exception to her observations, economic assumptions, and conclusions. Below is a summary of the objections discussed in this article along with the replies to them:

• Doesn’t the gig economy offer a viable option for exiting oppressive work relationships? Not unlike craft workers in preindustrial times, gig workers are able to choose when and how long they work, and they aren’t restricted to a particular employer. But gig work continues to account for a tiny share of employment, and it is hardly free from exploitation.
• Can’t oppressed workers just quit? The contention that workers are chained to their employers, critics claim, assumes a monopsonist model of firms that doesn’t hold true. And even if it did, big firms are still incentivized economically to give workers wide latitude because doing so allows the firm to pay lower wages. Yet dismissal of the existence of monopsony relies on an outdated conception of monopsony that ignores the modern evidence of employer power. And the contention that firms can trade off between worker freedom and wages relies on a model of equal employer–worker power that fails to reflect circumstances in the real world.
• Can’t the terms of employment simply be made clearer up front? If the boundaries of employer control over workers were made clear from the start, workers could either consent or take a pass. But transparency can only address so much, e.g., the wages or the hours, and says little about the nature, pace, and intensity of the work. And are workers empowered enough to motivate their bosses to provide transparency, or to refuse changes in terms once on the job?
• Are workers really so unhappy? The critics dispute Anderson’s statistics about worker discontent, saying that most workers are happy with their workplace conditions or are willing to put up with some authoritarian control in exchange for higher wages and flexible schedules. But this point assumes that workers have the bargaining power to effect this exchange, and the evidence points to declines in worker bargaining power. Moreover, surveys reveal high levels of worker dissatisfaction with the quality of their jobs.
• Don’t we consent to enter unequal relationships all the time? We readily consent to sacrificing some liberties when we join a specific church, labor union, or book club. But an important distinguishing feature of an employment relationship is its centrality to our life and the ability to thrive.
• Won’t the proposed reforms to employer control distort the smooth operation of the economy? Likely outcomes of fettering managers’ authority, the critics say, are greater inefficiencies in firm management, higher unemployment, a shift to black markets, and lower growth. But must managers have unfettered authority? It seems reasonable to assume that some limits could be placed on managers’ arbitrary decision-making power without making a dent in the smooth running of the firm.
• Don’t labor markets empower workers to exit undesirable employment relationships? A majority of the criticisms of Anderson’s argument share a common feature: They assume away unemployment and take full employment as a given. But the economy has business cycles, and it is rarely at full employment.

This analysis begins with an overview of Anderson’s criticisms of the present structure of employer–employee relations. Each of the subsequent sections summarizes a distinct economic claim made to rebut Anderson’s arguments and assesses the kinds of questions we would need to answer in order to empirically verify those claims. The final section before the conclusion discusses the crucial economic assumption about full employment that underlies several of these economic claims.

Anderson’s argument in Private Government

Anderson delivers her critique of the contemporary workplace in two lectures. The first explains why we talk “as if workers are free at work, and that the only threats to individual liberty come from the state” (Anderson 2017, xxii). The second suggests how we can correct this way of talking about workers’ economic situation and the sources of oppression. Her overarching goal, she says, is ideology critique. By “ideology” she means a simplified picture that we use to comprehend and traverse our world. Anderson’s target is the free market ideology which holds that the state is the source of coercion and oppression and that markets liberate us from it. Lecture 1 begins by explaining the structure of the pre-industrial economy and how it led to us embracing this ideology, and then details why the Industrial Revolution rendered this model of the world obsolete. Lecture 2 offers an updated version of this model as well as solutions to the problems identified by it.

Anderson starts Lecture 1 by sketching the history of free market thinking. The early champions of free markets, Anderson notes, were egalitarian liberals, not the libertarians and classical liberals who are the free market’s most fervent defenders today. She explains this surprising fact by charting the development of pro-market thinking that emerged out of feudal practices prior to the Industrial Revolution. An important factor during this period was the rise of the Levellers, who fought to reform the English monarchy by calling for representative government. Their program included universal male suffrage and religious liberty, all revolutionary ideas at the time, and they saw property rights and markets as being equally crucial to liberating people from oppression. While this thinking is antithetical to the contemporary view that egalitarian justice should focus on redistribution, it was seen as integral to securing genuine freedom from hierarchy. As Anderson explains:

The personal independence of masterless men and women in matters of thought and religion depended on their independence in matters of property and trade. If the king held title to all property, then subjects with land were reduced to mere copyholders, whose customary property rights could be extinguished by laws made without their participation, such as those calling for enclosures and expulsions of residents from fens. If the church could fine dissenters in its own courts for violations of church decrees in restraint of trade, it would destroy their freedom of religion as well as their ways of making a living. (Anderson 2017, 14)

Along with the Levellers, Anderson focuses on two other egalitarian defenders of markets and property rights. The first, Adam Smith, saw the eventual liberalization of the market as crucial for securing freedom and security for all. As government-sanctioned workers’ guilds gave way to self-employment as the primary mode of employment, many peasants and domestic workers moved to cities to take up craft and tradesmanship, a transition that enabled them to escape the dominion of their landlords. The liberating effect of such self-owned forms of work is what led Smith to endorse markets. Once again, this thinking contrasts with the mainstream view of Smith today as an advocate of markets because of their efficiency and conduciveness to economic growth.

Like Smith, Thomas Paine saw self-employment as a way to protect against an oppressive state. He viewed the state as the source of all oppression and correspondingly endorsed a broadly libertarian economic view, rejecting, for instance, high taxation and state regulation of wages and limiting the role of the state primarily to protecting the “peace and safety” of private individuals.1 As Anderson explains, these reforms made sense given that taxation and wage regulation were used to keep people in poverty. The poor had to pay heavy taxes, and so removing the taxes would liberate the poor. As the dream of self-employment came to fruition in the late 18th century, endorsing state regulation of markets and property seemed unnecessary when many controlled their own labor.

However, once the Industrial Revolution came into full swing, the promise of markets and property rights vanished. Economies of scale allowed large factories and production houses to generate more at lower costs. As large firms ate up more of the labor-market share, opportunities for artisanal work that had flourished previously began disappearing. Anderson highlights a perhaps subtle but important effect of this phenomenon. Prior to the Industrial Revolution, independent contractors learned their trade by serving as apprentices, working alongside their masters, and performing the same work as their masters. This arrangement meant that masters were less likely to impose harsh work requirements. By contrast, factories employing thousands separated workers from their bosses, an arrangement that led to harsher working conditions. This transformation of the relationship between worker and boss completes the arc that connects the two quotes concerning the market with which Anderson begins the chapter, one by Smith and one by Karl Marx.2

Smith imagines the market as an equalizing force in which self-employed workers freely transact with consumers for mutual benefit. Marx’s focus is on the labor market. In his view, any appearance of equality and freedom in the labor market is a facade. As Anderson points out, “if one looks only at the conditions of entry into the labor contract and exit out of it, workers appear to meet their employers on terms of freedom and equality….[I]f one looks at the actual conditions experienced in the workers’ fulfilling the contract, the workers stand in a relation of profound subordination to their employer” (Anderson 2017, 35). The Marxist view of the market accurately reflected what the market had become as a result of the collapse of the ideology that initially fueled its rise under influences like the Levellers, Smith, and Paine.

Anderson’s second lecture supplies an alternative model to make sense of the effects of the market and property rights on workers’ lives. She begins with an evocative thought experiment that asks us to imagine life under a communist government that had extensive control over our lives, that imposed severe restrictions on both the conditions of our work as well as our lives outside of it, and that was not accountable to our choices and interests in any way. Moreover, most people could not really exit the dictatorship because the only feasible alternative would be to enter another one. She asks if the reader would consider persons in this situation to be free. She then reveals this scenario to reflect the lives of most workers in the U.S. If we would reject life under communist dictatorship as unfree, then we must accept the same verdict about the modern American workplace. This is the model Anderson wants us to adopt for how we should talk about the economic system for workers. According to this model, most workers today are subject to “private government,” that is, the arbitrary, unaccountable will of their bosses.

What makes such rule “private” is not that it functions in the private sector. Instead, Anderson uses public and private to distinguish between spheres that require accountability and those that do not. The private sphere is private because it is one in which we are not answerable to others. We can do as we wish. In the public sphere, however, our conduct can be held accountable to others. The state is traditionally viewed as public because state actors are accountable to the people—to those who are governed. However, in lording over their workers as they see fit without being answerable to them, most employers act as private governments that rule workers’ lives.

Anderson focuses on arbitrary, unaccountable control because it restricts the kind of freedom with which she takes egalitarians to be primarily concerned: republican freedom. Such freedom can be distinguished from two other popular conceptions of freedom, namely, positive and negative freedom. Positive freedom consists in the freedom to choose from a range of options, whereas negative freedom consists in freedom from interference. Republican freedom, by contrast, consists in freedom from the arbitrary, unaccountable will of others (or freedom as nondomination). All three forms of freedom are important, she notes. The private government regulating employees serves to restrict all three kinds of freedom, but more pertinently republican freedom. And just as we may impose restrictions on private property rights to ensure that the duties of noninterference (on third parties) that they entail do not impose too great a cost on employees’ negative freedom, we might similarly impose restrictions on private governments (i.e., large firms) by, say, providing legal protections for workers so they cannot be fired on the basis of their sexual preferences. Such regulation would enhance all three freedoms.

What is the evidence that firms exercise control akin to a communist dictatorship? Anderson discusses several examples. In the early 20th century, Ford paid its workers only on the condition that they kept their personal lives in order by complying with a variety of directives: “kept their homes clean, ate diets deemed healthy, abstained from drinking, used the bathtub appropriately, did not take in boarders, avoided spending too much on foreign relatives, and were assimilated to American cultural norms” (Anderson 2017, 49). Ford supervisors periodically visited workers’ homes unannounced to ensure compliance. The Affordable Care Act permits employers to impose a 30% premium penalty on workers if they fail to abide by firm-mandated fitness programs. Penn State University threatened to increase workers’ health insurance premiums by $100 per month if the workers did not complete a survey on sexual, marital, and reproductive choices. Or take the case of Amazon and its brutal treatment of warehouse workers, who are not allowed to take breaks, are expected to generate extremely unrealistic output numbers, are verbally abused and threatened on a regular basis, and are even forced to sign waivers absolving the company of work-related injuries. On top of all this, at least in nonunion environments, it is not uncommon for workers in today’s firms to be fired for being too attractive, for failing to show up at a political rally, or for engaging in certain social media activity. Only a minority are protected from such employer authority.

Anderson then discusses how our failure to update our assessment of the market economy and its relation to freedom has led to the creation of a legal framework that has ossified private government. For instance, the system of at-will employment means that no contract need be signed binding employers to particular terms. Such employer freedom may have made sense when most workers were self-employed farmers, craftspersons, and tradespersons and had a chance at a decent living. But in the current system of monolithic firm rule, employers are free to rule over workers as they please. Consequently, many employers require their workers to sign noncompete contracts, preventing them from working for a competitor firm in the same industry. Such agreements severely limit workers’ options if they wish to escape workplace dictatorship. Anderson also rebuts the suggestions from theorists of the firm that the wide latitude of control exercised over workers by employers is efficiency-enhancing by pointing to three things: (1) that this claim does not justify the extent of authoritarian control employers frequently exercise; (2) that it does not justify their oversight over workers’ nonwork lives; and (3) that Ronald Coase’s solution to the problem of private government, namely, the signing of a pre-work agreement clarifying and limiting employer control, does not obtain in actual employment contracts except in collective bargaining cases (which have declined greatly with the dismantling of unions in recent decades).

Anderson’s solution to the problem of private government is to make it public, that is, to render firms accountable to those over whom they rule. She proposes four ways of doing so: (1) making exit a meaningfully viable option, (2) ensuring that the workplace is subject to the rule of law, (3) providing constitutional rights for workers, and (4) increasing worker voice through structures like a co-determination firm model. She is ultimately most partial to the last of these solutions, since the success of the first three ultimately depends on effective enforcement and, even if enforcement is effective, the changes only prevent employers from tyrannizing workers. They do not make employers accountable to workers.

How have Anderson’s arguments been received? The next six sections will provide an overview of the claims made in opposition to her critique of the contemporary market order. While this paper does not provide a complete assessment of these claims, it does assess whether the analysis of and evidence offered for them are persuasive or not. In particular, each of these sections will raise the pertinent questions that defenders of these claims would have to answer along with the types of empirical evidence they would have to provide to back up these answers. The goal here is to set the stage for further investigation into the veracity of these claims and, in turn, the overall merits of Anderson’s work.

Is the gig economy a liberator from workplace oppression?

The first criticism of Anderson’s work focuses on the impact of the “gig economy” on workers’ economic freedom. The gig economy refers broadly to a labor market where workers are self-employed and hired for short-term, task-specific jobs, often through a digital marketplace.3 Unlike regular employment, gig workers are able to contract with employers for specific tasks, such as driving a passenger through Uber’s ridesharing services or completing a programming assignment for a tech company. They are not employed on a permanent basis or beholden to employment contracts. The nature of such employment is said to offer greater freedom to workers compared to more traditional employment forms, in which workers are hired on work schedules dictated by their employers; gig workers, at least in theory, are able to choose when and for how long they work. In addition, they are not restricted to any particular employer. Instead, they may freely choose to contract with any employer offering specific, short-term tasks. Flexibility in these areas is in stark contrast to the conditions that motivate Anderson’s criticism of more traditional forms of labor.

Presumably, as Sandrine Blanc notes in her review of Anderson’s book, the availability of gig work enables workers to choose something other than the exploitative form of employment Anderson identifies (Blanc 2018). Blanc points out that, in the present gig economy, working conditions seem “closer to preindustrial self-employment than employment in large firms” (Blanc 2018, 222). “Preindustrial self-employment,” of course, refers to the post-feudal economic forms that emerged in the 18th century. These modes of employment realized the Smithian ideal of a labor market populated by self-employed workers. As Anderson highlights, the Industrial Revolution shattered this regime, and the subsequent ossification of worker disempowerment led to the oppressive conditions facing most workers today. To some, the rise of the gig economy brings back the prospect of widespread self-employment. If workers now have the ability to take on jobs that grant them greater power relative to their employers, is Anderson’s critique still relevant? Blanc takes the emergence of the gig economy to problematize Anderson’s criticism of the current market order.4

How might we evaluate Blanc’s claims? If the gig economy is to liberate people from the dictatorship that exists within monolithic firms, then certain things must hold. But before we examine what these things are, we first need to determine what exactly constitutes the gig economy, what kind of scale it has, and whether such work is free from exploitation.

The term “gig work” has been used to describe both a very specific, narrow group of workers—those working through online platforms such as ride hailing transportation (Farrell, Greig, and Hamoudi 2018)—and anyone doing informal work, including and going beyond all self-employment.5 As Bureau of Labor Statistics (BLS) economists have written:

No clear consensus currently exists on what constitutes gig work. Most definitions include many self-employed workers, temporary workers, and independent contractors. Many definitions also include people who do gig work as their primary source of income as well as employed people who supplement their earnings with gig work. (Dorinda Allard and Polivka 2018)

Regarding the scale of the gig economy, Mary Dorinda Allard and Anne Polivka (2018) note that, contrary to the perception that self-employment now constitutes a sizable proportion of the entire workforce, “data from the Current Population Survey (CPS), the nation’s monthly labor market household survey, show that the percentage of workers who are self-employed has actually trended down over the past two decades.” In fact, a special survey BLS designed to measure nonstandard work shows that in 2017 the self-employed (on their main job) were just 6.9% of total employment, the same or lower share as in 2005 and 1995 (BLS 2018). To address the possibility that the questions used by the CPS to quantify self-employment are outdated and do not reflect how gig workers would classify themselves, Dorinda Allard and Polivka, examining data from the American Time Use Survey, found that gig work has not increased relative to traditional forms of employment.6 Evidence from tax records confirms that overall self-employment has grown modestly; according to Brett Collins et al. (2019, 3), the “share of earners participating in the 1099 workforce grew by 1.9 percentage points from 2000 to 2016, and now accounts for 11.8 percent of the workforce.” Moreover, the tax data show that “more than half of this increase occurred over 2013 to 2016 and can be attributed almost entirely to dramatic growth among gigs mediated through online labor platforms. We find that the rise in online platform work for labor is driven by earnings that are secondary and supplemental sources of income” (Collins et al. 2019, 3).

The scale of the online demand platform workforce in 2016 was fairly small, according to the tax data, as “the share of workers with labor OPE [online platform economy] income…was approximately 1 percentage point of the workforce” (Collins et al. 2019, 3). These data sources also indicate that the percentage of workers earning their main living through self-employment has not grown in several decades and that the smaller group of online platform workers has been growing but remains far too small—less than 2% of employment—to provide a meaningful alternative to private government. This is especially so since most of the online demand workers are seeking income to supplement another job: “a majority of participants only derive small amounts of income from labor OPE—fewer than half earned more than $2,500 in 2016” (Collins et al. 2019, 3–4). It seems unlikely that such work will soon become extensive enough to liberate workers.

But even if it constitutes only a small share of the economy, is gig work free from exploitation? Does it provide high-quality employment preferable to current employment opportunities? We have already seen that much of gig work is primarily part time and thus not an alternative to regular full-time work. And the analysis of tax data showed that there is no evidence that traditional work arrangements are being supplanted by independent contract arrangements reported in 1099s. An analysis of Uber driver earnings, taking into account the commissions Uber deducts, the extra payroll taxes that the self-employed must pay, auto and other driver expenses, and the need to supply one’s own pension, health, and worker compensation benefits, indicates that earnings are very low, less than $10 an hour, an amount that “falls below the mandated minimum wage in the majority of major Uber urban markets” covered by the study (Mishel 2018, 2). Uber recognizes it provides low-wage work; as it stated in its public offering, “we aim to provide an earnings opportunity comparable to that available in retail, wholesale, or restaurant services”—all sectors that provide below-average wages. Finally, it is not certain that Uber and other gig employers provide independent contractor opportunities or rather just simply misclassify a W-2 employment situation (Mishel and McNicholas 2019). Uber has been able to provide an alternative to some jobs and it has attracted millions of workers, enough to offset the very high turnover (Uber drivers last, on average, about three months) and to expand. Nevertheless, it is far from clear that the gig economy, in which transportation and ridesharing are predominant, provides an alternative to the traditional labor market for middle-wage or high-wage workers.

If the gig economy is to be a liberator for workers, then it seems that the following should hold: As a proportion of the entire economy, the gig economy must be reasonably large, for otherwise only a very small percentage of those working today would be able to avail themselves of the putative liberties of being a gig worker. Alternatively, there must at least be evidence of the gig economy expanding such that it will predictably constitute a reasonably large percentage of the labor market in the near future. However, the data suggest otherwise.

Is exit a deterrent to workplace dictatorship?

A second objection to Anderson focuses on her claim that the lack of power employees have in the workplace is in part due to their absence of viable exit options. Were it easier for workers to quit, they could leverage their right to exit to convince employers to improve working conditions. However, for most workers the alternative to leaving one “communist dictatorship,” she argues, is joining another, and so no alternative at all. Furthermore, contractual restrictions such as noncompete clauses, which prohibit employees from working with another employer within the same industry, make exiting not merely pointless but costly, since the only possible way to find alternative employment would be through significant retraining and a switch of career paths, both of which are infeasible for most workers. These two factors reduce the ability of workers to use their exit rights to pressure employers to provide greater workplace freedoms. Tyler Cowen, in his response to Anderson, contends that this point is overblown because (1) the “monopsonistic” control that Anderson alleges large firms have over the labor market is empirically unsubstantiated, and (2) large firms have profit-related incentives to provide greater workplace freedom to employees even if they are monopsonies. Let’s look at each objection in turn.

In Cowen’s first objection, concerning the suggestion that workers are effectively unable to leave their firms, he understands Anderson to be painting a monopsonistic model of the labor market. A monopsony occurs when there are many sellers but only one buyer (it is the inverse of a monopoly). If a firm exercised a monopsony, then workers would have few alternatives regarding to whom they can sell their labor, and thus exiting their firm would not be a viable option. However, Cowen argues that Anderson provides insufficient evidence to show that the monopsony model holds.7 For instance, he claims that, despite being the largest employer in the private sector, Walmart does not have monopsony power except in a few small parts of the U.S.8 As a general matter, he suggests that “most economists assign [the monopsony model] only a secondary status in explaining labor markets” (Cowen 2017, 109) and supports this claim by citing a short book review by Peter Kuhn (Kuhn 2004). Anderson, he says, does not provide sufficient evidence to counter this general perception, and without adequate evidence we have little reason to assume the monopsony model or, by extension, the view that exit is unavailable as a means of securing greater workplace freedom.

Yet even if large firms like Walmart functioned as monopsonies in the labor market, Cowen doubts that they would be incentivized to assert authoritarian control over workers. His justification is both theoretical and empirical. The theoretical claim concerns what firms have reason to do given their profit motive. It is in the financial interest of firms to provide workers with greater freedoms since doing so can allow the firms to lower wages.9 For instance, “an employer who would like to lure in more workers, but without bidding up wages for all workers, would be well-served…[by]…offering employees selective workplace freedoms” (Cowen 2017, 110). Even if large firms were monopsonies, it would be rational for them to increase rather than decrease workplace freedom, and so the existence of monopsonies is not a threat to greater workplace freedom.

Cowen thinks that this theoretical point against Anderson’s monopsony model is strengthened by the fact that it is backed up by empirical evidence. In reality, he contends, large firms do provide workers with more freedom, partly to protect the firm’s reputation among consumers. Many firms, like McDonald’s, are willing to abstain from discriminating against historically oppressed groups to avoid bad publicity. This public relations aspect aside, granting greater workplace freedom is a way to “wage discriminate” when employing new staff; what we actually see, he suggests, is “employers catering to the job-quality preferences of the incumbents, rather than the marginal new hires, really quite often” (Cowen 2017, 110).

To be sure, Cowen does concede to Anderson that the cost of exit for most workers is very high. However, he views the cause of this problem to be “bad government decisions rather than…markets or the nature of the corporate employment relationship” (Cowen 2017, 111). In particular, he argues that legal reform decoupling employment from health insurance, retirement benefits, and one’s immigration status would help make exit less costly, freeing workers to leave if they desired. Large corporations and the structure of the labor market, in his view, do not impede the feasibility of exit and might even improve worker conditions, making the need for exit less important. The monolithic firm structure, thus, does not contribute to the problem of private government.

Cowen’s defense of exit as a liberating force hinges on two claims: that monopsony does not exist, and that employers are incentivized to offer freedoms in the workplace because doing so allows them to pay lower wages. What would it take for these claims to hold true? First, the contention that today’s workers are at the mercy of large monolithic firms would need to be shown to be false. Cowen’s first claim that monopsony does not exist seems to lean heavily on a very narrow, outdated conception of monopsony, or employer power, and ignores the modern evidence on employer power. Monopsony power is a broader concept than the “labor concentration” model—few firms in a labor market—to which Cowen refers. Alan Manning’s important work, Monopsony in Motion: Imperfect Competition in Labor Markets, reestablished the broader view of monopsony and employer power (Manning 2003). Manning explains in the Handbook of Labor Economics that “from the worker perspective, it takes time and/or money to find another employer who is a perfect substitute for the current one and that, from an employer perspective, it is costly to find another worker who is a perfect substitute for the current one” (Manning 2011, 976). Therefore, dynamic monopsony can exist even where there is no labor concentration. Manning argues that “imperfect competition is pervasive in labour markets” (Manning 2011, 975), and he concludes that “one’s views of the likely effects of labour market regulation should be substantially altered once one recognizes the existence of imperfect competition. All labor economists should take imperfect competition seriously” (Manning 2011, 1031). Similarly, a recent paper examining the economic literature on monopsonies concludes that “significant monopsony power can explain a number of empirical puzzles, such as bunching in wages…or wage dispersion” (Sokolova and Sorensen 2018, 2). The paper finds that “overall, the literature provides strong evidence for monopsonistic competition and implies sizable markdowns in wages”—meaning that employers obtain a share of workers’ wages (Sokolova and Sorensen 2018, 31).

As for Cowen’s second claim—that employers have every incentive to offer workers freedoms in the workplace because doing so allows them to pay lower wages—there is no evidence offered for this proposition, and it appears to rely on the assumption of a perfectly competitive market with equal employer and employer power. In such a market, compensating wage differentials would provide higher wages if job attributes were negative (workers are provided fewer freedoms) or lower wages if job attributes were positive. Cowen’s contention essentially assumes away the problem of private government since, in his view, employers have no power, and they are incentivized to supply greater worker freedoms in order to obtain a lower-wage workforce. Critics have challenged whether compensating differentials observed in the labor market align with Cowen’s theoretical assertions. Peter Dorman and Les Boden demonstrate that the workers with the weakest bargaining power face the most risk for injury and fatality and receive the least compensating differentials—an observation confirmed by the experience of essential workers during the pandemic (Dorman and Boden 2021). A recent comprehensive examination of compensating differentials for workplace attributes indicates a more widespread failure of this theory: “While the theory on the relationship between job characteristics and wages is clear…the empirical literature documenting the existence and magnitude of such trade-offs has lagged behind, often finding the opposite relationship that theory would predict” (Maestas et al. 2018). Certainly, more evidence is required than the simple assertion that employers have incentives to supply workers freedoms in the workplace.

Cowen also neglects to acknowledge the pervasiveness and insidious impact of noncompete agreements. Noncompete agreements threaten to effectively consign workers to long-term unemployment if they are prevented through such agreements from finding work with other employers in the same industry. Short of going through significant retraining or downgrading to a lower-paying job, the affected worker would be forced to put up with bad working conditions, however oppressive they might be. What does the evidence say about the prevalence and nature of noncompete agreements? A study surveying 11,505 respondents found “38.1% of the sample report agreeing to a noncompete at some point in their lives, while 18.1%, or roughly 28 million individuals, report currently working under one” (Starr, Prescott, and Bishara 2020, 5). More importantly, the authors also observe the following:

61% of individuals with noncompetes first learned they would be asked to agree to the provision before accepting their job offer while more than 30% first learned they would be asked to agree only after they had already accepted their offer (but not with a promotion or change in responsibilities). This late notice appears to matter to employees. In a follow-up question for those who received late notice, 26% report that if they had known about the noncompete upfront, they would have reconsidered accepting the offer in the first place. (Starr, Prescott, and Bishara 2020, 8)

Workers also generally do not get a say over whether to accept the noncompete agreements. A 2019 report found: “Roughly half, 49.4%, of responding establishments indicated that at least some employees in their establishment were required to enter into a noncompete agreement. Nearly a third, 31.8%, of responding establishments indicated that all employees in their establishment were required to enter into a noncompete agreement, regardless of pay or job duties” (Colvin and Shierholz 2019, 1). Moreover, noncompete agreements are not imposed merely on high-skilled workers, contrary to what most economists assume. As Alan Krueger and Eric Posner point out, “a remarkably high 21 percent of workers who earn less than the median salary are currently or have been restricted by a non-compete agreement” (Krueger and Posner, 2018, 8).10 Thus, noncompete agreements plague a substantial proportion of workers, coercing them into staying in jobs regardless of how oppressive those jobs might be.

Can greater transparency help workers avoid dictatorial traps?

As mentioned, the problem of private government is the problem of arbitrary, unaccountable control that employers exercise over workers. A big reason why bosses are able to wield such arbitrary power is that workers’ terms of employment are drawn relatively vaguely and are, for the most part, difficult to specify in advance. What workers can be commanded to do is not precisely defined at the point of their employment, nor in their employment contracts (assuming they signed one). New instructions might be given after the fact and, worse, sanctions might be imposed for actions that were not mentioned in the terms of employment. Anderson details some of the most egregious of these sanctions, including punishments meted out for workers’ social media activity, choice of romantic partner, political affiliation, physical fitness levels, and consensual sexual activity in off-work hours.

To be sure, Anderson concedes that firm efficiency requires that employers wield some control over workers. The alternative to this system would be one in which firms contract with independent contractors to work on capital and with each other. Anderson writes that when factories in New England experimented with such a system in the second half of the 19th century, it turned out to be very inefficient, due to factors such as the hoarding of information by contractors, delayed innovations, insufficient coordination between different contractors, and greater wear and tear of machinery (Anderson 2017, 52). The hierarchical management structure of modern firms solves these problems through the open-ended authority granted to managers, who, as a result, are able to “redeploy workers’ efforts as needed to implement innovations, replace absentees, and deal with unforeseen difficulties” (Anderson 2017, 52). Despite this system’s benefits, what Anderson considers unacceptable is the extremely wide latitude of employer authority over workers in places like the United States. The hierarchical control that the theory of the firm justifies, she argues, is distinct from the private government that most employees are subject to.

In his video review and discussion with Anderson, Mike Munger suggests that the problem of employers exercising such wide, arbitrary control over workers can be addressed by increasing transparency about working conditions prior to the start of employment (Public Square 2017). While he agrees with Anderson that the various forms of control bosses exercise over workers are deeply problematic, he thinks that this stems from the fact that the boundaries of employers’ authority over workers is left unspecified. Had the boundaries been clearly defined at the start of the employer–employee relationship, then workers would be able to decide for themselves if they wished to consent to those terms. The implication here is that greater transparency about one’s working conditions would eliminate concerns about dictatorial practices, since workers would have consented to them: “workers have a lot of freedom,” he says, “before they sign an employment contract and enter into an employment relationship” (Public Square 2017). If greater transparency were introduced, then the imposition of any new rules not initially agreed to would constitute fraud.

Munger takes this solution to the problem of private government to be an extension of Anderson’s own call for the application of due process when workers are treated wrongfully. As mentioned, one of Anderson’s solutions to the problem of private government is better enforcement of the rule of law in the workplace to protect workers from unjust employer treatment. Munger does not elaborate on precisely how greater transparency would help secure due process, but a plausible interpretation is that, were employers required to make explicit the terms of employment, including the specific tasks required of workers, any later imposition of new work requirements would constitute a violation of the terms of the contract.

We may look to the work of Cynthia Estlund to expand upon Munger’s proposal here. Estlund focuses on whether the “general case for workplace transparency extends to information about wages and salaries” (Estlund 2014, 782). She concludes that “there is a fairly strong though not uncomplicated case to be made that mandatory disclosure of meaningful salary information would tend to produce less discrimination, less favoritism, and probably somewhat lower disparities overall” (Estlund 2014, 783). Along the way, she refutes claims to the contrary, namely, that increasing transparency in this area would (1) publicize vital trade secrets and proprietary information, (2) harm employee morale and productivity, (3) violate employees’ own preference for pay secrecy, and (4) promote employer collusion.11

More transparency would certainly seem worthwhile and would make workplaces conform to the assumption in labor economics that both parties are completely and perfectly informed. Which dimensions of the employer–employee bargain can be made more transparent and which must be left unspecified? Unlike with other commodities, the inherent nature of the employment relationship means that many important matters will inevitably be left undefined. As Julia Tomassetti notes:

Employment is an agreement to work for another. But what does it mean to work for another? Work is simply the use of one’s voluntary faculties. Working for another means deploying those under the direction of another. So, an employee agrees to agree to the employer’s commands when entering the relationship. Employment is a special kind of “agreement to agree”—it is an agreement to obey. What essential terms does employment leave open and permit the employer to determine after the parties enter the purported contractual agreement? The employer gets to determine the terms regarding “What, and for how much?” Take the example of an employee paid an hourly wage: The employer determines the quantity term—how much work the employee provides—by commanding the nature, pace, and intensity of the work. In agreeing to an employment relationship, the employee agrees to provide an indefinite amount of labor—whatever the employer can extract for an hour—in return for a definite amount of pay. (Tomassetti 2020)

The transaction over the nature, pace, and intensity of work will necessarily reflect the balance of power in the workplace, and the essential bargain cannot be specified in advance, suggesting that transparency cannot eliminate exploitation about these matters, at least not by itself.

That said, transparency can address the “how much” question in work agreements, the terms of employment frequently described as wages, hours, and working conditions. Employees would certainly benefit from such transparency. However, it is worth considering why employees are so ill-informed of their terms of employment as well as their rights under the whole range of employment laws (Freeman and Rogers 2006). This lack of awareness, in fact, may reflect the lack of power workers face in both the workplace, where they are unable to adequately assert their preferred employment terms or form organizations such as unions, as well as in public life, where they are unable to pressure schools to educate everyone about their employment rights and their employers to make sufficiently transparent their employment rights. Perhaps the kinds of arguments Estlund rebuts in her case for greater pay transparency are precisely the reasons why the current legal structure, in which employers have disproportionately greater influence, has not required such transparency.

It is worth considering why the law, at present, does not require transparency in contractual agreements. Transparency seems integral to contracts of other kinds, such as mortgage agreements. What explains the difference? We certainly do not see conservatives or libertarians, or employer trade associations, campaigning to require transparency of employment terms at the time of hire. In fact, we see employers opposing transparency. A requirement by the National Labor Relations Board (NLRB) under the Obama administration that employee labor rights be clearly and visibly posted in the workplace (Labor-Management Standards Office 2010) was challenged by the National Association of Manufacturers, and the Court of Appeals ruled in 2013 that such postings violated the employer’s freedom of speech (National Association of Manufacturers et al. v National Labor Relations Board et al. 2013). No outcry was heard from employers, conservatives, or libertarians. Oddly enough, the NLRB under President Trump in 2020 mandated that employers post information about NLRB procedures, and employers did not find this a constraint on their free speech. The mandated posting, however, served the employers’ interests, as it informed employees of their right to decertify—get rid of—a union. Specifically, the NLRB mandated a “voluntary recognition bar,” so that, when an employer voluntarily recognized a union (such as through a card check), “unit employees must receive notice that voluntary recognition has been granted and are given a 45-day open period within which to file an election petition” (National Labor Relations Board 2020). This requirement was portrayed by the NLRB as an effort to “better protect employees’ statutory right of free choice on questions concerning representation.”

This contradictory adherence to transparency aside, Munger’s proposal is potentially tautological. If transparency is a remedy for worker disempowerment, then how can workers motivate their employers to provide it? The only two ways in which they can do this is by either directly pressuring their bosses or by pushing for legislative change. But their present lack of power undermines both prospects, and so we are back to asking how we can increase the power of workers relative to their employers.

Another foundational issue concerns how Munger’s solution relates to the actual application of employment law. Currently, the law recognizes “contracts” formed between workers and their employers both prior to and after employment. But how do workers consent to new contracts formed after accepting a job? In a recent Supreme Court case looking at whether forced arbitration provisions (in which employees are forced to submit claims to private arbitration and to do so as individuals, not as a class) violated the National Labor Relations Act, the majority opinion contended that the employees freely agreed to the arbitration terms in a market transaction. But in fact, as noted in Justice Ginsburg’s dissent, the employees were informed about the terms of the forced arbitration agreement after already employed:

Petitioner Epic Systems Corporation e-mailed its employees an arbitration agreement requiring resolution of wage and hours claims by individual arbitration. The agreement provided that if the employees “continue[d] to work at Epic,” they would “be deemed to have accepted th[e] Agreement.”…Young similarly e-mailed its employees an arbitration agreement, which stated that the employees’ continued employment would indicate their assent to the agreement’s terms….Young’s employees thus faced a Hobson’s choice: accept arbitration on their employer’s terms or give up their jobs. (Epic Systems Corp. v. Lewis 2018, 138:1636).

Essentially, then, showing up to work legally constitutes consenting to any change in the terms of employment made by one’s employer. An agreement between employers and employees is treated as a spot market, continuously being renegotiated. Why should this be considered consent by workers in any meaningful sense? Further, how can transparency requirements overcome the unilateral imposition of such terms once already employed? Interestingly, libertarian philosophers are loath to consider tacit consent as being a legitimate form of consent when it comes to state coercion.12 They often argue that the mere fact that we comply with laws should not be taken to mean that we have consented to them, for we might have little choice but to go along.13 Consistency would seem to require that libertarians also not consider cases like the one above as constituting employee consent. And if such cases don’t, then it seems that legitimate consent to new employment contracts would require, as a precondition, that employees be meaningfully able to refuse them without significant cost to themselves (such as being fired or being forced to relocate after being employed). How would this be possible without first improving the worker’s bargaining position relative to the employer’s, say through better union representation, mandated legal requirements, or some of the measures that Anderson suggests? Thus, it seems that a plausible interpretation of Munger’s proposal would require rather than replace Anderson’s proposed solutions to the problem of private government.

Is worker discontent simply overblown?

In her argument, Anderson does not merely imply that workers wish to remedy their lack of freedom. Rather, she uses several statistics to demonstrate this point. Two in particular are important: (1) “25 percent of employees…understand that they are subject to dictatorship at work”; (2) “55 percent or so… are neither securely self-employed nor upper-level managers, nor the tiny elite tier of nonmanagerial stars (athletes, entertainers, superstar academics) who have the power to dictate employment contracts to their specification, nor even the ever-shrinking class of workers under ever-retrenching collective bargaining agreements” (Anderson 2017, 63). Members of the former group are aware of their oppressed conditions, whereas the latter is “only one arbitrary and oppressive managerial decision away from realizing what the 25 percent already know” (Anderson 2017, 63). The upshot of these two statistics is that the vast majority of workers are subject to the problem of private government and are either aware of it or likely to be so.

Tyler Cowen, Mike Munger, and Thomas Ferretti object to this empirical claim about worker unhappiness. They contend that many workers are either happy with their working conditions or are willing to put up with the authoritarian control they are subjected to in exchange for higher wages. Either way, they argue, it seems unlikely that there is widespread unhappiness about workplace dictatorship. A few of Cowen’s claims detailed above apply here. Specifically, firms have financial incentives to grant their workers greater workplace freedoms since granting such freedoms is cheaper than raising wages. In fact, this trade-off helps employers justify lowering wages. And this, Cowen contends, is what many firms actually do. Relatedly, firms have reputational reasons to not constrict worker’s liberties, as the aforementioned McDonald’s example illustrates. These reasons aside, the “desire to attract and keep talent is the single biggest reason why companies try to create pleasant and tolerant atmospheres for their workers, and why it is rare for businesses to fire workers for their political views or their (nondestructive) off-premises activities” (Cowen 2017, 114). Shifting to the employees’ perspective, most workplaces, he argues, are “sources of human dignity and fulfillment” (Cowen 2017, 114). Workers generally get too much satisfaction and fulfillment from their workplaces to work from home, despite the conformity the workplace might require.

Ferretti and Munger expand on Cowen’s comments, arguing that, to the extent that workers are displeased with their working conditions, they are willing to put up with them given the benefits these conditions bring. For instance, tolerating workplace dictatorship might be preferable to some workers “in exchange for other benefits such as higher wages, more flexible schedules, less responsibility and less risk” (Ferretti 2018, 280). Similarly, Munger claims that many workers prefer to receive higher pay than greater workplace freedom so they can “create lives outside of work that have meaning….if workers value personal voice over pay, some firms would be working on that margin already” (Munger 2018, 629). Where Munger diverges from Anderson is in focusing on the meaning workers might find not within but outside of work. In Munger’s view, Anderson errs by ignoring this fact and its impact on how workers weigh the concomitant effects of authoritarian employer rule. Nonetheless, Munger, like Cowen, takes Anderson’s concern about worker dissatisfaction with such control to be overstated given the motivations and practices of many employers on the one hand and the preferences of workers on the other.

We have earlier examined the theoretical claim that employers have incentives to provide workplace freedoms that would yield lower wages, and we found that the “compensating differential” claims of such competitive, equal power, labor market speculations do not fit the facts on compensating differentials for risk or other major work attributes. How should we evaluate these claims about worker dissatisfaction (or the lack thereof)? Two questions immediately arise. First, how much bargaining power do workers have relative to their employers and how has it changed over time? If workers have no way of pushing for their demands with their employers, then employers have no reason to please workers in any way, whether by granting greater workplace freedoms or higher wages. Second, what alternatives do workers have to accepting the terms offered to them by their employers? If they have no viable alternatives, then they have no choice but to accept those terms. Regarding the first question, empirical data suggest that worker power has declined over the past four decades. For instance, a 2016 report by the Council of Economic Advisers details how firms have sought to suppress workers’ wages through a variety of means such as collusion, which is only made possible by the fact that they have monopsony power over the labor market (Council of Economic Advisers 2016). Alan Krueger backs up the charge that firms’ monopsony power allows them to suppress workers’ wages. He notes that forces that previously kept such power in check, such as union representation for workers, collective bargaining, and better minimum wage laws, have fallen by the wayside, leaving firms free to reduce wages as they please (Krueger 2018). This power shift seems to help explain why “only the highest earners have seen steady wage gains; for most workers, wage growth has been sluggish and has failed to keep pace with gains in productivity” (Council of Economic Advisers 2016, 1; see also Bivens and Mishel 2015, 3). The discipline of economics is increasingly focused on the deleterious effects of monopsonies and employer power on workers’ wages (Smith 2019).

To be sure, we might wonder whether workers have been compensated for their increased productivity in other ways, say, through better employee benefits. But the evidence suggests otherwise. Josh Bivens and Lawrence Mishel point out that “benefits have grown far less than most people realize, rising from 18.3 percent of compensation in 1979 to just 19.7 percent of compensation in 2014” (Bivens and Mishel 2015, 14), and the hourly compensation, both wages and benefits, of the vast majority of workers has risen very modestly for four decades and far less than productivity growth. Increased employer power over the terms of work can readily explain this phenomenon. A recent paper by Anna Stansbury and Lawrence Summers goes even further, arguing that it is the loss of worker power that best explains the perplexing combination of economic trends over the past several decades, namely (1) increased profitability of firms, (2) sluggish wage growth and a falling labor share of income, and (3) low unemployment and inflation (Stansbury and Summers 2020). Richard Freeman and Joel Rogers’ earlier work also notes the existence of “substantial gaps between the importance of rights to workers and employer performance, with wide variation among the categories covered in the survey” (Freeman and Rogers 2006, 9).14 Such evidence seems to undermine the idea that workers have much bargaining power relative to their employers and that worker satisfaction is widespread. It is instructive that both major political parties, since 2016, have highlighted wage stagnation as a serious problem.15

What about workers’ alternatives to accepting the terms offered to them? Perhaps workers can easily leave, in which case those who choose to stay do so willingly (and maybe because they find their workplaces to be sources of dignity and fulfillment, as Cowen suggests). But even here, the evidence seems to point in the other direction. For instance, as Anderson mentions, firms have often colluded to suppress wages through methods such as noncompete or no-poaching agreements. Moreover, “agreements among independent firms to refrain from hiring each other’s workers or to set pay increases at a common level” are illegal but still occur (Krueger 2018, 5). And even if workers stayed in their jobs, they have little choice but to accept their fates. Krueger notes how legal changes permitting mandatory arbitration have undermined workers’ ability to file lawsuits against their bosses (Krueger 2018, 4). We have already noted the decline of both unions and collective bargaining weakening the ability of workers to shape their wages, hours, and working conditions. All this evidence combined suggests that workers’ decisions to stay in their jobs may be due more to powerlessness than to job satisfaction.

In response to Cowen, a third question is also worth asking to evaluate claims about worker dissatisfaction: In what sense are the detrimental psychological effects of unemployment indicative of workers’ satisfaction with their working conditions? Such evidence seems to suggest only that workers would prefer to work than not work, but it’s not clear how this is relevant to Anderson’s critique. After all, workers could both prefer to work than not work and still want better working conditions. Anderson’s arguments merely concern the latter. Perhaps the fear of unemployment, in combination with the plethora of considerations just highlighted, force workers to stay in their jobs, but this hardly shows that they are happy as a result.

Finally, what does empirical data say about current levels of worker happiness? The Gallup 2019 Great Jobs Survey concludes that:

40% of American workers are currently in “good jobs,” defined by high levels of satisfaction with the job characteristics workers care about most. Meanwhile, 16% of workers are in “bad jobs,” which are rated poorly across most key characteristics. The rest of the U.S. workforce—44% of employed Americans—are in “mediocre jobs,” which warrant satisfaction on some but not all dimensions….[F]ewer than half of workers tell Gallup that they are completely satisfied with their jobs, and even fewer express complete satisfaction with such key dimensions as pay, health insurance and retirement benefits. (Rothwell and Crabtree 2019, 6, 10)16

The study also found that “the largest sources of job quality disappointment (the gap between satisfaction and importance) are in pay and benefits, factors commonly rated as important but for which satisfaction ratings are especially low. Just 54% of workers overall are satisfied with their current pay level” (Rothwell and Crabtree 2019, 3). Another recent paper, by David Howell, finds a widespread decline in job quality: “there has been an astonishing decline in the number of decent jobs generated per dollar of GDP [gross domestic product] since the 1980s, particularly for young workers without a college degree, but it also appears for those with at least a college degree” (Howell 2019, 49). Importantly, Howell argues that globalization, computerization, and insufficient education funding cannot explain this trend. Instead, he points to “major shifts in institutions, policies and employer human resource strategies that have undermined worker bargaining power” (Howell 2019, 2) as the real cause.17 All in all, it seems clear that Cowen needs to provide better evidence to support his claims that workers are satisfied.

Even if unequal, isn’t employment just another contractual relationship?

Another criticism of Anderson’s work concerns the parallel she draws between state dictatorship and the dictatorship of the workplace. Anderson argues that what makes authoritarian control over workers morally equivalent to living under a communist dictatorship is that both deprive their members of republican freedom—the freedom from arbitrary, unaccountable control by others. In their comments on Anderson’s work, Jacob Levy and Jessica Flanigan argue that there is an important difference between state control and control by employers that renders the latter at least less morally problematic than the former (Levy 2019; Flanigan 2019). Specifically, the relationship between the worker and the employer is entered into voluntarily. By contrast, most people do not get to choose whether they are subjected to the state’s coercive authority. They must obey its commands whether they endorse its rule or not. Indeed, Levy and Flanigan argue that this distinction renders the employer–employee relationship equivalent to the ones we form in our private lives, and thus no more problematic.

In his comments, Levy levels this criticism using the metaphor of “islands of unfreedom in a sea of freedom.” By granting us our civil and political liberties, the liberal society allows us to live in a sea of freedom. However, within this space, we are free to form relationships that involve hierarchical structures and constitute “islands of unfreedom.” For instance, “churches are islands of internal religious orthodoxy and intolerance in a sea of religious liberty.” Similarly, “marriages are (aspirationally) islands of sexual exclusivity in a sea of free sexual choice among consenting adults” (Levy 2019). Other examples he mentions include families, households, universities, and labor unions. In all these cases, we often form relationships that are distinctly inegalitarian, and part of what it means to be free to form consensual relationships is that we may choose to form unequal relationships. Despite the power differential in many of the relationships we form with others, we ultimately do not consider them to be illegitimate. This tolerance in the personal sphere is in stark contrast to how we evaluate hierarchical control in state–citizen relations. We do not think it is permissible for the state to exercise control in the same stringent ways we might tolerate on our islands. To be sure, Levy does not claim that islands of unfreedom cannot be subject to criticism. His point is simply that we generally accept such a dualistic picture, that is, “general liberty in public and from the perspective of the state to do as we like with the freedom to form local islands of commitments to doing one thing rather than another” (Levy 2019).

Levy uses this dualistic picture to contest the parallel Anderson draws between state and workplace dictatorship. If the firm is just another island of unfreedom, then it is misleading to apply to it the standard we would apply to state–citizen relations. The two are importantly distinct, he argues. And yet, “the deliberate rhetorical force of Private Government is to blur that boundary, not only in the ‘communist dictatorship’ metaphor but in the turn to standards like republicanism and in a sense of surprise appealed to by the titular metaphor itself” (Levy 2019). Anderson’s argument that the power structures in the modern firm deprive workers of republican freedom thus overlooks the fact that we might choose to enter such associations with our employers.

Flanigan echoes Levy’s claims, asserting that so long as consent and rights to exit are present, there is nothing problematic about any relationship we enter into with others. She predicts Anderson’s likely reply to be that there are various legal barriers (such as noncompete clauses) that make it difficult for workers to effectively exercise their exit rights. She notes that Anderson’s preferred solution to this problem is legal reform to remove such barriers that disadvantage workers. Flanigan, however, favors a basic income system. She argues that if everyone were provided with a basic income, then the cost of leaving work would not be so costly. Indeed, she contends that “a basic income would make seemingly dictatorial workplaces look more like the voluntary patriarchal marriage I described, with genuine consent and rights of exit” (Flanigan 2019). Moreover, a basic income system would be fairer to employers, and this fairness, she argues, is important since employers benefit the economically needy more than other citizens do by providing them with jobs.

Given the fact that universal basic income is only beginning to gain political traction and is far from likely in the near future, the most obvious question raised by Flanigan and Levy’s responses are, what do we do in the here and now, given that we do not live under a more ideal world where all workers receive basic income? Flanigan rejects Anderson’s proposed fixes on the grounds that they will lead to bad economic effects, a point we will discuss in the next section. Thus, it seems that the success of her basic income solution to the problem of private government hinges on Anderson’s solutions being economically worse. For if they are not, then both sets of solutions would be on par (at least on economic grounds), and we would need some other way of adjudicating between them.

In the absence of a basic income solution, we need to determine whether workers are truly free to enter and exit the “island of unfreedom” that is the workplace. In the preceding sections, we investigated a variety of empirical considerations that appear to suggest that workers both lack a meaningful right to exit and, when they do exit, have little option but to end up in another unfree island. These restricted options aside, it is also unclear why we should think that most people can opt out of entering the workforce. For unlike a country club or one’s church, bare economic necessity forces one to obtain a job.18 Until this is no longer the case, it seems clear that we are forced to grapple with the hurdles facing an employee’s ability to exercise his or her autonomy in the workplace.

A different issue we might also raise concerns the plausibility of the parity Levy and Flanigan attempt to draw between the employer–employee and other relationships. An important distinguishing feature of an employment relationship is its centrality to our lives and overall identity. People tend to spend most of their waking lives at work, and it is, as Cowen suggests, a source of meaning and self-worth for many. This aside, our employment contract also determines a whole range of benefits we may seek, such as health insurance coverage, retirement security, time for holidays, sick leave, and of course our wages and income. Work determines the very ability to stay alive and be healthy. Thus, unlike the vast majority of relationships we might form, consensually or otherwise, our employment relationship is crucial to our ability to further our most fundamental interests. As a result, it seems all the more important that people are genuinely free to enter and exit workplace relationships. This importance justifies the close examination of and proposed reforms to workplace dictatorship. Not all islands are equal in moral significance in the sea of liberty.

Won’t the proposed solutions have distortionary economic effects?

The final objection to Anderson’s argument concerns the impact of her proposed solutions on the economy. A few of the aforementioned critics argue that the reforms she calls for, in particular, the application of the rule of law at the workplace, greater constitutional protections, and greater voice for workers in firm decision-making, are likely to have distortionary effects on markets and generate bad economic outcomes. Specifically, reforms to liberate workers from workplace dictatorship, they argue, are likely to lead to (1) inefficiencies in the running of firms, (2) increased unemployment, (3) shifting of labor to unregulated black markets, and (4) reduced economic growth.

The first economic cost of Anderson’s proposed reforms concerns efficiency. Cowen argues that “employer discretion” is needed to ensure the smooth running of firms. If employers are not able to dictate who gets fired and under what conditions, then they would not be able to address the effects of worker misconduct and noncompliance (Cowen 2017, 112). This powerlessness, in his view, is due to lack of legal or contractual means to delimit worker conduct in specific-enough ways. Employer discretion ensures that costly behavior on the part of workers does not harm others in the firm, including fellow workers. For instance, he points out that “a lot of workers put racist, sexist, or otherwise discomforting comments and photos into their Facebook pages.” When their bosses fire them, they might be doing it “to protect some notion of the freedom of the other workers” (Cowen 2017, 112). In their efforts to ensure the smooth running of the firm, employers often consider the overall preferences of workers, and might enforce such measures to preserve overall worker happiness. Anderson’s proposals to protect workers from such arbitrary firings, however, would prevent employers from doing what is necessary to keep workers generally happy. In this sense, her solutions might end up impairing worker autonomy rather than enhancing it. On the whole, Cowen argues, giving employers discretion in firing matters is more beneficial for workers than costly, and so worth preserving.19 Of course, this discretion might not be beneficial if employers misuse it, but, as we saw, Cowen rejects this suggestion. He contends that, while it is true “at the margins, that employer discretion leads to abuses…those abuses are relatively few in number, and the gains for workers and customers from the firing discretion—not just the gains for bosses—outweigh those costs” (Cowen 2017, 112–13).20 Since employers generally do not abuse the wide latitude in control they have over workers, and workers receive a net benefit from such control, it is worth preserving.

Cowen’s concerns about firm inefficiency feed into Levy and Flanagan’s contention that Anderson’s proposals are likely to lead to the second cost: higher unemployment. If firms suffer economic costs due to the new regulations, then they might be forced to fire workers to balance the books. Thus, Anderson’s attempts to protect the vast majority of workers she argues are vulnerable to authoritarian control would, in his view, lead to higher unemployment overall.

In his discussion with Anderson, Munger argues that prohibiting firms from exercising wide discretion over worker management is likely to lead to the third of the economic costs mentioned above: the creation of unregulated black markets (Public Square 2017). Though he raises this objection in a cursory manner, we can develop the line of thought here further. Consider the following possibility. Regulations of the forms Anderson defends cause employers to hire fewer workers after the employers deem such regulations to be detrimental to their efficiency and, in turn, profit margins. However, since workers would rather be employed than not, they search for work in unregulated markets, namely, in the underground economy. Employment here might involve both more demeaning and dangerous work, for lower pay, and with no legal protections. Munger worries that Anderson’s favored regulations are likely to push many workers into such a situation. In turn, he argues for alternative solutions to the problem of private government, such as the transparency-in-contract reform mentioned above.

The final cost, highlighted by Flanigan and Levy, concerns the sum effect of the previous three. A reduction in firm efficiency ultimately reduces both the profitability of firms along with their ability to expand and innovate. Likewise, increased unemployment means lower tax revenue and reduced spending on goods and services.21 Relatedly, black markets reduce government revenue (since black markets aren’t taxed) and are not reported in the national estimates on employment and the country’s GDP.

The plethora of economic claims made by Anderson’s critics here call for scrutiny on multiple fronts. First, we need to ascertain in precisely what way does limiting employers’ unlimited managerial authority lead to increased inefficiency. Why must a manager wield unlimited authority over workers? To be sure, managers have uncontested control over a wide variety of firm decisions, including pricing, marketing strategies, and investment plans, that employment legislation and collective bargaining do not constrain whatsoever. None of these domains are the target of Anderson’s criticism. Instead, she contests managers’ unfettered ability to decide whom a firm hires and fires and for what reason and how workers are paid. Relatedly, the debate seems to focus on whether managers should be able to unilaterally dictate employee benefits, including wages, sick pay, and family leave. There is also the matter of working conditions, such as safety and health standards and scheduling practices, all of which impact a worker’s overall well-being. These policies are central to ensuring worker freedom. Why should we think that managers’ need unconstrained authority in these realms?

This question aside, what evidence is there to suggest that limiting such authority, even partially, would lead to inefficiency? At least in theory, it seems that we could place some limits on the arbitrary decision-making powers managers have without making a meaningful dent in the smooth running of the firm. Anderson discusses the German co-determination model, under which decision-making powers in the firm are shared between shareholders and workers. Among her critics, only Cowen provides any evidence against this alternative to unlimited managerial control, and even if the single study he cites is correct in claiming that “this organizational form costs about 26 percent of shareholder value because of lower productivity” (Cowen 2017, 116), we should ask why, as Anderson points out, “this isn’t seen as a point in favor of the Germans, in that the people who actually do the work enjoy greater shares of the pie” (Anderson 2017, 142). Anderson also cites research suggesting that evidence about the productivity effects of co-determination models is mixed at best. A new study of the German co-determination model conducted by the National Bureau of Economic Research provides further grounds for dismissing Cowen’s claim. According to the researchers:

In sharp contrast to the canonical hold-up hypothesis—that increasing labor’s power reduces owners’ capital investment—we find that granting formal control rights to workers raises capital formation. The capital stock, the capital-labor ratio, and the capital share all increase. (Jäger, Schoefer, and Heining 2019)22

This aside, it is worth emphasizing that we already limit employers’ ability to discriminate according to race, gender, sexuality, disability, age, and other factors. Firms are still able to run very efficiently in spite of these restrictions. There has been extensive research on the impact of job-flexibility limitations, higher minimum wages, family leave, and sick pay, and their impact on economic performance such as unemployment and productivity levels.23 These claims cannot be settled based on assertions about the presumed need for unlimited managerial authority. Examining the empirical evidence concerning the kinds of policies that Anderson and others propose to protect worker freedoms seems central.

Assuming away unemployment

The majority of the criticisms discussed above share a common feature: They assume a certain idealized picture of labor market conditions and their impact on workers. For instance, the idea that employees possess equal bargaining power because of their ability to quit assumes that alternative sources of employment are readily available to them. In other words, it assumes that we are operating under full employment. Similarly, if unemployment rates are high, then many workers have fewer opportunities to avoid oppressive conditions at work. That they do not complain about their situation does not then imply that they are content with it or that they consider the workplace to be a source of dignity and fulfillment. The success of such criticisms is dependent on these idealizations mapping onto our economic reality. A satisfactory assessment of the merits of these criticisms of Anderson’s arguments thus requires an examination of what these idealizations consist in and how they undergird these criticisms.

The first assumption, as mentioned, is that we are operating under conditions of full employment. While economists disagree about how we should define full employment, a simple definition that suffices for the present discussion is the following: the situation in which anyone who wants to work is able to find work. To be sure, this definition should not be understood as being equivalent to an unemployment rate of zero. Even in the best of times, unemployment is never zero. For instance, during the period between when workers leave their jobs and find new ones, they are unemployed. Likewise, workers and employers might take time before deciding whether to contract with each other (formally or informally). These cases are instances of “frictional unemployment,” which occurs when workers switch jobs. In any case, the question at hand is whether we are ever at full employment such that finding work is feasible and making a transition to another job is not costly. The bottom line in the context of our discussion is whether the presumed situation is as competitive labor market theory assumes, that it is as easy for an employer to replace a worker as it is for a worker to quit and find a comparable or better job.

In reality, our economy has business cycles, we are rarely at full employment, and workers are far more likely to struggle finding employment than employers are to find workers. Indeed, these circumstances are policy choices, and the U.S. for the last several decades has chosen monetary and fiscal policies that tolerated, or propelled, excessive unemployment. As Josh Bivens and Ben Zipperer point out, “the Fed and other macroeconomic policymakers tolerated too high unemployment for most of the time between 1979 and 2007” (Bivens and Zipperer 2018, 13). We also know that the failure to maintain full employment has suppressed wage growth for workers, with low-wage and minority workers most adversely affected and middle-wage workers impacted more than high-wage workers.24 For instance, Bivens and Zipperer observe the following:

Tight labor markets can narrow not just absolute racial employment gaps, but also relative racial employment gaps (or ratios). We find that tighter aggregate labor markets lead to disproportionate gains in African American employment (as measured by employment-to-population ratios, or EPOPs) and average hours worked for African American households relative to white workers. (Bivens and Zipperer 2018, 20)

A recent paper quantifies the wage impact of lower unemployment:

Research indicates that a 1 percentage point drop in unemployment results in annual wage growth 0.5–1.5 percentage points faster for workers at the 10th percentile. For example, if annual real wage growth is 1%, then a 1 percentage point fall in unemployment would result in annual real wage growth rising to 1.5% to 2.5%. For workers near the median of the wage distribution, wage growth is faster by 0.4–0.9 percentage points, and for workers at the 90th percentile it is 0.3–0.5 percentage points faster. These estimates indicate that excessive unemployment generates increases in both the 50/10 and 90/50 wage gaps. (Mishel and Bivens 2021)

Black workers face twice the rate of unemployment every year as workers overall, whether unemployment is high or low and regardless of education level, including college (Bernstein and Jones 2020, 20). New research by Lawrence Mishel synthesizes all these points:

The pattern of unemployment over the 1979 to 2019 period amply demonstrates how excessive unemployment has been the norm in our economy. Consider that the unemployment rate averaged 6.2%, above a conservative estimate of full employment (5%) and far above the 3.7% rate achieved at the end of 2019 (without inflation becoming problematic). Over this period, however, Black and Hispanic workers faced recession-level rates of unemployment, respectively, of 11.9% and 8.6%. Digging further, combining race and “class,” we can examine the average unemployment of a relatively educated Black worker, someone with at least some years of college or an associate college degree but not a bachelor’s degree or more: about a third of Black workers had both more and less education over the last four decades. A Black worker with some college education faced an unemployment rate exceeding 10% for 43.1% of the months over 1979-2019 and enjoyed unemployment below 5% for only nine months of the forty-one years encompassing the 1979-2019 period. (Mishel 2020)25

To add to all this, we also know that when unemployment is high, employees are less likely to quit.26

In light of all this evidence, it is simply not reasonable to discuss workplace freedoms and power without taking the prevalence of excessive unemployment and underemployment (such as involuntarily working a part-time job when full-time work is desired) into account. The general employment level and its impact on people’s economic opportunities therefore seem particularly relevant to any discussion of Anderson’s assessment of worker power.

The persistent excessive unemployment that workers face, and which certain groups of workers face disproportionately, provides essential context for assessing Levy and Flanigan’s claim of parity between the employer–employee relationship and the many other relationships we form in our private lives. To recall, the claim here involves first recognizing that while many of our private relationships are unequal in nature (such as that between a religious leader and a member of a parish), we generally do not regard them to be problematic so long as they are entered into consensually. The next step is to argue that workplace relationships embody a similar structure, that is, they might be unequal in nature but are unproblematic if entered into consensually. This last conditional is where the truth value of the idealization concerning full employment matters. If we do not in fact operate under full employment conditions, then maintaining an economic relationship with our employer may be dictated by necessity and is probably not consensual. Again, high or even moderate unemployment levels raise the opportunity costs of not maintaining such a relationship. If workers are facing such pressures, then, as Anderson notes, the choice of whether to enter into an employment agreement with an employer is analogous to the choice that Victorian women had regarding whether to enter a marriage, and quite unlike the choice of whether to join a book club.

Conclusion

Ultimately, Anderson’s work serves as a call for a comprehensive reevaluation of the way we view work today in the United States and beyond, and it shines a spotlight on the subjugation of workers under a system that paradoxically views them as equal members in the economic bargain with their employers. Private Government highlights the myriad ways in which the market oppresses in much the same ways the state did. The various criticisms discussed in this essay only serve to reinforce the need for a deeper study into the current market order and how that order might be reformed. Relatedly, the assumptions that seem to underlie many of these criticisms mandate going beyond mere theoretical assertions to engage in deeper economic analysis of the actual economic circumstances facing workers.

Endnotes

1. “Government is nothing more than a national association; and the object of this association is the good of all, as well individually as collectively. Every man wishes to pursue his occupation, and to enjoy the fruits of his labours, and the produce of his property in peace and safety, and with the least possible expence. When these things are accomplished, all the objects for which government ought to be established are answered” (Philp 1998).

2. Smith claims that “When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A…spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and…endeavours by every servile and fawning attention to obtain their good will….But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer….It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love….Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens” (Smith 1981). Marx asserts that “[The] sphere…within whose boundaries the sale and purchase of labour-power goes on, is in fact a very Eden of the innate rights of man. There alone rule Freedom, Equality, Property and Bentham. Freedom, because both buyer and seller of a commodity, say of labour-power, are constrained only by their own free will. They contract as free agents, and the agreement they come to, is but the form in which they give legal expression to their common will. Equality, because each enters into relation with the other, as with a simple owner of commodities, and they exchange equivalent for equivalent. Property, because each disposes only of what is his own. And Bentham, because each looks only to himself….On leaving this sphere of simple circulation or of exchange of commodities, which furnishes the “Free-trader Vulgaris” with his views and ideas, and with the standard by which he judges a society based on capital and wages, we think we can perceive a change in the physiognomy of our dramatis personae. He, who before was the moneyowner, now strides in front as capitalist; the possessor of labour-power follows as his labourer. The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own hide to market and has nothing to expect but—a hiding” (Marx 1912).

3. A report by the Congressional Research Service defines the gig economy as “the collection of markets that match providers to consumers on a gig (or job) basis in support of on-demand commerce. In the basic model, gig workers enter into formal agreements with on-demand companies (e.g., Uber, TaskRabbit) to provide services to the company’s clients.” See Donovan, Bradley, and Shimabukuru 2016.

4. Cynthia Estlund’s review of Anderson is also relevant here. She notes that in recent decades major technological changes, including “faster and cheaper ways to reliably transport and monitor goods, services, and information…[have greatly reduced]…the operational advantages of direct hierarchical control over employees” (Estlund 2018, 820). This development has driven firms to outsource the process of hiring workers to third-party labor-supplying firms, a process sometimes referred to as fissuring (Weil 2019). Firms that would previously hire workers and retain them in a long-term capacity now prefer contracting with workers for task-specific jobs. As a result, “many workers today find themselves plagued less by employer domination than by the insecurity of having no employer at all” (Estlund 2018, 821). To be sure, Estlund thinks that the problem of private government persists despite this change, and that the problem is perhaps more serious for those employed by such supplier firms. Interestingly, this problem arises even though many workers are not operating under the monolithic firm structure that is the target of Anderson’s critique.

5. “The gig economy, with independent workers and short-term contracts, can also be a source of employment and income. Here, gig work covers three types of non-traditional activities: offline service activities, such as child care or house cleaning; offline sales, such as selling items at flea markets or thrift stores; and online services or sales, such as driving using a ride-sharing app or selling items online. This definition of gig work, encompassing both online and offline activities, takes a broad view of the gig economy and underscores the fact that such supplemental work predates the internet. Gig work is largely done in addition to a main job, so this is often distinct from those who work as contractors in their main job” (Board of Governors of the Federal Reserve System 2018, 18–19).

6. For instance, the reviewers point out that “about 1 percent of the population engaged in income-generating activities on an average day in 2003–07, and those who engaged in these activities spent 2.7 hours doing so. These estimates are similar to those for 2012–16. They do not support the claim that official estimates of employment have missed a large increase in gig or informal work that has occurred over the past decade.” Likewise, “In 2012–16, 1 percent of the employed, 2 percent of the unemployed, and 1 percent of those not in the labor force engaged in income-generating activities on an average day. Although these numbers indicate that there may indeed be misclassification of labor force status, they suggest the effect on overall levels of employment is small” (Dorinda Allard and Polivka 2018).

7. He says, “I am worried she, like others, doesn’t offer much evidence to back up her portrait, save for one footnote to an adequate but not very influential book” (Cowen 2017, 109).

8. Cowen cites Bonanno and Lopez 2009. Cowen says this is “the best study I know” on monopsonies (Cowen 2017, 109).

9. As he states, “the monopsony model does not itself predict workers will enjoy less freedom or fewer perks in the workplace. This sounds counterintuitive, as we associate monopsony with lower bargaining power for workers and thus inferior working conditions. But rest assured, I am offering the correct reading of theory” (Cowen 2017, 110).

10. For another report on noncompetes, see Federal Trade Commission 2020.

11. For instance, in response to the first objection, she notes, “conventional economic analysis suggests that ‘information disparities’ between contracting parties—for example, between an employer and employee regarding salary patterns within the firm—are an impediment to efficient bargaining” (Estlund 2014, 787).

12. “Tacit consent” here is to be contrasted with “explicit consent,” where the latter involves an overt action to signal one’s willingness to accept a situation or set of terms offered.

13. It is generally accepted, by philosophers and beyond, that one cannot be said to consent if one could not have chosen to do otherwise. This makes sense of why obeying a robber threatening to kill us if we do not hand over our wallets does not constitute consent. In much the same way, citizens who are effectively unable to leave their state are not in a position to refuse the state’s commands. Their continued residence within the state then cannot constitute their consent to its commands. Libertarian philosopher Robert Nozick famously contended that one cannot be bound through tacit consent since “tacit consent isn’t worth the paper it’s not written on” (Nozick 1977, 287). For a more developed libertarian refutation of the idea of tacit consent, see Huemer 2013, 22–28. Among other things, Huemer argues that tacit consent counts as a legitimate form of consent only if one has a reasonable way of opting out of a contract.

14. The authors used 2001 Hart poll survey results to arrive at this conclusion, and note that while “differences in questions make it hard to assess whether the Hart results show larger or smaller gaps than those in the WRPS [Worker Representation and Participation Survey]…the Hart survey finds large gaps, as did the WRPS” (Freeman and Rogers 2006, 9).

15. As the 2016 Republican Party platform asserts, “our economy has become unnecessarily weak with stagnant wages. People living paycheck to paycheck are struggling, sacrificing, and suffering” (Republican Party 2016, i). The 2016 Democratic Party platform, likewise, states that “too many Americans have been left out and left behind. They are working longer hours with less security. Wages have barely budged and the racial wealth gap remains wide, while the cost of everything from childcare to a college education has continued to rise” (Democratic Party 2016, 1).

16. The authors differentiated “good,” “mediocre,” and “bad” jobs by having workers “rate the importance of 10 dimensions of job quality, including [level of pay, stable and predictable pay, stable and predictable hours, control over hours and/or location, job security, employee benefits, career advancement opportunities, enjoying your day-to-day work, having a sense of purpose and dignity in your work, having the power to change things about your job that you’re not satisfied with]….[B]ased on those answers, workers are asked to rate their level of satisfaction with each dimension….[A] good job has an importance-weighted average score of ‘4’ or above; a mediocre job has an importance-weighted score that is less than ‘4’ but above ‘3.’ A bad job has a score at or below ‘3’” (Rothwell and Crabtree 2019, 9).

17. Howell’s paper employs “Current Population Survey data to document changes in job quality for 1979-2017 with measures of decent-, low- and lousy-wage jobs for groups defined by age, gender, education, race and nativity. These indicators are defined by two wage thresholds chosen to reflect the wage a full-time worker would need for a basic-needs budget: 2/3 of the mean wage for full-time, prime-age workers ($17.50 in 2017), which marks the cutoff between decent- and low-wage jobs; and 2/3 of the median full-time wage ($13.33), the boundary between lousy- and other low-wage jobs” (Howell 2019, 2).

18. We could in fact extend this point in the opposite direction to what Levy suggests. We could argue that few of the examples he brings up are really islands that we can opt out of entering. One’s family, one’s local religious community, school, and even the set of friends one has, are all islands that one is often compelled to enter given one’s geographical situation. Can one really choose to not associate with one’s classmates or the kids at the local playground? Granted that one possesses some degree of autonomy in such situations, there seems to be a marked difference between choosing to enter them and choosing to enter a choir. All of this is to say that there might not exist a clear distinction between the islands we can enter into freely and those we cannot.

19. He also argues that “economists in fact have a pretty good but not perfect explanation of why employers often have so much discretionary authority over workers. The employers (often, not always) have a more unique contribution to the value of the capital goods, and thus they own the property rights to that capital….Ultimately, most workers benefit from this arrangement, if only in their role as consumers; most people don’t want their co-workers in charge of the ultimate disposition of the capital goods” (Cowen 2017, 113).

20. The italics are Cowen’s.

21. As Flanigan says, “like many libertarians, I suspect that Cowen is skeptical because he thinks that to the extent that any feasible policies would curb workplace dictatorship, they also threaten economic growth or cause unemployment, and the costs associated with forgone growth and employment aren’t worth the costs of workers’ empowerment” (Flanigan 2019).

22. The researchers “studied a natural experiment in form of a 1994 reform in Germany that preserved worker representation on supervisory boards for some cohorts of corporations, while abolishing it for their slightly younger peers incorporated on or after August 10, 1994” (Jäger, Schoefer, and Heining 2019, 41).

23. For instance, see Dube 2019; OECD 2006.

24. Likewise, a report on the economic impact of Covid-19 on minority workers finds that “on every indicator of economic wellbeing, racial and ethnic minorities have larger-than-average responses to overall indicators; this means that indicators of labor-market slack (like unemployment or employment rates) deteriorate faster and further for people of color and, depending on the strength of the recovery, can take longer to make up lost ground” (Bernstein and Jones 2020, 1).

25. Mishel notes that “the racial categories are non-Hispanic Black, non-Hispanic White and Hispanic, mutually exclusive categories.” Mishel’s analysis of the monthly unemployment rate is based on data provided by the Economic Policy Institute State of Working America data library (Economic Policy Institute 2019). These data are themselves taken from the Bureau of Labor Statistics’ Current Population Survey, which is the basis of the regular monthly unemployment report.

26. “In the aggregate, quits, which are dramatically procyclical [meaning that they are higher during economic expansion and lower during a recession], comove nearly one to one with hires and job openings” (Mercan and Schoefer 2020, 101).

References

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Inequalities abound in the U.S. economy, and a central driver in recent decades is the widening gap between the hourly compensation of a typical (median) worker and productivity—the income generated per hour of work. This growing divergence has been driven by two other widening gaps, that between the compensation received by the vast majority of workers and those at the top, and that between labor’s share of income and capital’s. This paper presents evidence that the divorce between the growth of median compensation and productivity, the inequality of compensation, and the erosion of labor’s share of income has been generated primarily through intentional policy decisions designed to suppress typical workers’ wage growth, the failure to improve and update existing policies, and the failure to thwart new corporate practices and structures aimed at wage suppression. Inequality will stop rising, and paychecks for typical workers will start rising robustly in line with productivity, only when we enforce labor standards and embrace policies that reestablish individual and collective bargaining power for workers.

Between 1979 and 2017, the compensation of median workers trailed economywide (net) productivity growth by roughly 43%, leading to rising inequality. The effects have been felt broadly: During this time 90% of U.S. workers experienced wage growth slower than the economywide average, while workers at the top (mostly highly credentialed professionals and corporate managers) and owners of capital reaped large rewards made possible only by this anemic wage growth for the bottom 90%. Because the historical legacy of racism has concentrated Black and Latinx workers in the lower half of the wage scale more so than white workers, widespread wage suppression based on class position has inflicted disproportionate harm on them. Further, while women’s wages have grown faster than those for men in recent decades, women’s wage growth still has lagged the economy’s potential. In the fight for a piece of the ever-shrinking share of economic growth available to the bottom 90%, any one group’s gain can feel like another’s loss, leading to political divisions and hindering the formation of cross-racial coalitions based on common interests as workers. In other words, the disappointing wage growth of recent decades is an important economic and political issue.

Yet sluggish wage growth is not a political secret; it has been widely recognized across the political spectrum, even cited by both the Republican and Democratic Party platforms in 2016.1 The root causes of the trend have frequently been misidentified, however. One prominent interpretation is that disappointing wage growth is an unfortunate result of apolitical market forces that one neither can nor would want to alter. Since labor markets are generally competitive and workers and employers have roughly balanced degrees of market power, this argument naively assumes, fundamental apolitical forces like technological change and automation, as well as globalization, have mechanically shifted demand away from non-college-educated and middle-wage workers. But, as this paper will show, the premier research cited in support of an automation/technological theory has itself actually offered empirical metrics that demonstrate that automation/technological change fails to explain wage trends and wage inequality, especially in the period since 1995. Since the automation/technological change explanation is the preeminent explanation drawn from competitive labor market analyses based on equal bargaining power between employers and employees, the failure of automation/technological change to explain wage suppression and wage inequality represents the inability of competitive labor market analyses to adequately explain one of the most salient features of the economy over the last four decades.

Thus, we need to look further for more convincing empirical explanations of why, during a period of rising productivity, hourly compensation for the bottom 90% of all workers has risen so slowly in spite of overall income growth. Doing so requires explaining the key dynamics. The growing wedge between rising productivity and compensation growth for the typical worker financed the increased share of compensation going to top earners, especially those in the top 1% and 0.1%, along with a declining share of income going to labor. In addition, over the last four decades there has been a persistent disparity in the growth of earnings between those in the 90–99% range and those in the middle. Further, wage disparities by gender, race, and ethnicity from the late 1970s, reflecting systemic sexism and racism, remain with us and have sometimes even worsened. Any accounting of where we are and what policies we need must address these issues.

This paper offers a narrative and supporting evidence on the mechanisms that have suppressed wage growth since the late 1970s. We refer in this analysis to wage suppression rather than wage stagnation because it was an actively sought outcome—engineered by policymakers who invited and enabled capital owners and business managers to assault the leverage and bargaining power of typical workers, with the inevitable result that those at the top claim a larger share of income. These policy changes and the change in business practices they enabled have systematically undercut individual workers’ market (exit and voice) options and the ability of workers to obtain higher pay, job security, and better-quality jobs. These corporate and policy decisions had the most adverse consequences for low- and middle-wage workers, who are disproportionately women and minorities, the groups whose legacy of being discriminated against in labor markets means that they especially need low unemployment, unions, strong labor standards, and policy supports for leverage when bargaining with employers.

Neither slow productivity growth nor inevitable economic forces can explain U.S. wage problems. Rather, wage suppression reflects the failure of economic growth to reach the vast majority. It was a “failure by design” (Bivens 2010), engineered by those with the most wealth and power. The dynamics are primarily located in the labor market and the strengthening of employers’ power relative to their rank-and-file workforce (which increasingly includes those workers with a four-year college degree). In other words, the dynamics that have challenged the growth of living standards for the vast majority are based on workers not sharing in economic gains, not, as some have argued, on consumers suffering from monopolistic prices. Changes in product market monopoly and corporate structures have had an impact, but primarily by squeezing supply chain profits and wages rather than by spurring higher consumer prices through much wider profit margins.

As we will discuss, six factors can collectively explain most of the growth of wage inequality and the erosion of labor’s share that resulted in wage suppression over the last four decades (specifically 1979–2017):

1. Austerity macroeconomics, including facilitating unemployment higher than it needed to be to keep inflation in check, and responding to recessions with insufficient force;
2. Corporate-driven globalization, resulting from policy choices, largely at the behest of multinational corporations, that undercut wages and job security of non-college-educated workers while protecting profits and the pay of business managers and professionals;
3. Purposely eroded collective bargaining, resulting from judicial decisions, and policy choices that invited ever more aggressive anti-union business practices;
4. Weaker labor standards, including a declining minimum wage, eroded overtime protections, nonenforcement against instances of “wage theft,” or discrimination based on gender, race, and/or ethnicity;
5. New employer-imposed contract terms, such as agreements not to compete after leaving employment and to submit to forced private and individualized arbitration of grievances; and
6. Shifts in corporate structures, resulting from fissuring (or domestic outsourcing), industry deregulation, privatization, buyer dominance affecting entire supply chains, and increases in the concentration of employers.

Concretely, our analysis attempts to account for the 43 percentage point divergence between the growth of productivity (net of depreciation) and median hourly compensation (wage and benefit) growth between 1979 and 2017. This 43 percentage point wedge excludes any impact of the differing measures of prices used to inflation-adjust productivity and compensation growth. Had median hourly compensation grown with net productivity it would have increased from $20.48 in 1979 to $33.10 in 2017 ($2019). In fact, median hourly compensation was $23.15 in 2017, a $9.95 shortfall from the net productivity benchmark.

We estimate that the first three factors—the impacts that are largest and best measured, i.e., excessive unemployment, eroded collective bargaining, and corporate-driven globalization—explain 55% of the divergence between growth in productivity and median hourly compensation, and specific other factors included above—a diminished overtime salary threshold, employee misclassification, employer-imposed noncompete agreements, and corporate fissuring-subcontracting and major-buyer dominance—explain another 20%. Together, the factors for which we have been able to assess their impact on the median wage can account for three-fourths of the divergence between productivity and median hourly compensation growth from 1979 to 2017. Other factors that we have not been able to empirically assess—increased wage theft and weak enforcement, anti-poaching agreements, increased discrimination, forced arbitration agreements, guestworker programs, and increased prevalence of employer-created “lawless zones” in the labor market where workers are deprived of effective labor protections because of their immigration status—have also contributed to wage suppression.

Our analysis also seeks to account for the falling wages at the 10th percentile and the growth of the wage gap between the 10th percentile and the 50th. We find that these are readily explained by excessive unemployment and the failure to maintain the real value of the minimum wage, factors that have lowered the earnings of the bottom third. Other factors for which we do not yet have good measures of their impact (increased wage theft, the increased share of workers without effective legally protected rights due to their immigration status, and employee misclassification) likely play a role as well. In contrast, our analysis of data (in a section below and in Appendix A) related to automation and skill-biased technological change finds that these factors have had no impact on the suppression of median wages for at least the last 25 years.

Centering power and policy, not apolitical ‘market forces,’ in debates over U.S. wages

The large increase in inequality in the U.S. economy coincided with a pronounced political movement that called for increasing the reach and influence of markets in American life. This movement, known as market fundamentalism and often shorthanded as neoliberalism, has a long history in both U.S. and international policy debates. By the late 1970s, it achieved great prominence, even within the Democratic Party. Neoliberalism’s belief that markets are more efficient and effective than alternative instruments for distributing resources and organizing economic life led it straight to many of the policy recommendations that drove the rise in inequality. Neoliberals, for example, see minimum wages as an inefficient friction in otherwise competitive and efficient labor markets. So, minimum wages have been allowed to be battered by inflation.

The neoliberal policy agenda has often had its most enthusiastic proponents among economists. Under the influence of neoliberalism the economics profession, encompassing both the liberal and conservative wings, shed many older but supremely valuable insights about the importance of institutional checks on markets (especially labor markets) and began analyzing all labor market developments through the lens of textbook competitive models. In these models, the great wage deceleration for the vast majority of workers after 1979 and the resulting rise in inequality could only have happened if impersonal market forces shifted relative demand or supply curves for different sorts of labor.

The mistake of assuming that markets are always well characterized by the simplest competitive models of textbooks proliferated well beyond the labor market. With regard to product markets, the assumption led economists to argue for a retreat from robust anti-trust enforcement and for the deregulation of industries in sectors such as trucking, airlines, interstate busing, and utilities. The assumption that financial markets were competitive led economists to argue for financial deregulation. The promotion of shareholder primacy, that corporations and executives should only advance the profit needs of shareholders, was an important component of this market fundamentalism.

But the greatest damage occurred in labor markets. The focus on labor market competition led to the promotion of “labor flexibility” to achieve growth; this policy agenda sought to weaken collective bargaining, worker protections, and the social safety net (e.g., unemployment insurance). If your model says that only apolitical market-driven shifts of demand and supply curves can explain wage and employment trends, then what might these forces be? As wage suppression took hold, the consensus of elite economists, both liberals and conservatives, excused it as the result of computer-driven automation, a factor we would neither want to nor could restrain. In this scenario, the sole answer is to provide more skills and college education for the workers who have skill deficits—or essentially telling workers that they themselves are to blame for their loss of quality jobs.

But these explanations just don’t fit the data, and when data and model conflict, the wise move is to follow the data. So, if the neoliberal analysis fails to explain wage trends, then the resulting neoliberal policy recommendations should be jettisoned. If we manage to do this, our analysis of just what has happened to U.S. wages and inequality will be stronger and provide a better basis for fixing these issues going forward.

A good example of how the policies we have adopted rather than markets explain wage trends can be found by looking at the wage gaps between workers of different races, genders, and ethnicities. Understanding wage suppression as the result of the exercise of power in labor markets widens our understanding of the potential sources of these long-standing race and gender disparities, gaps that widened during the coronavirus pandemic. The systemic racism that slots minority workers into lesser-paid jobs has made these workers the primary victims of the systematic weakening of worker power. Consequently, one of the key mechanisms to lessen racial and gender inequities is to restore worker power generally as well as to shape policy to ensure all workers have access to good jobs.

This paper’s analysis complements and points in the same direction as other recent research that has focused attention on worker power. For instance, Stansbury and Summers (2020) also argue that reduced worker power explains sluggish wage growth and a declining labor share of income. New empirical examinations of employer monopsony power have identified a growing (at least since the late 1990s) and pervasive employer ability to mark down wages from 20% to 50% and to exert more power over low-wage workers than others. This new monopsony literature provides a top-down analysis, estimating the aggregate potential employer power to suppress wages and then examining the contributing role of countervailing forces like unionization, high-pressure labor markets, and high values of minimum wages in explaining an aggregate net metric of employer power. In contrast, we provide a bottom-up analysis examining the impact of many specific factors and gauging their contribution to the overall divergence between productivity and median compensation growth.

Joseph Stiglitz (2012, 2021) has long focused on power in markets, emphasizing both product market monopoly power and the weakening of employee power relative to employers. He recently provided an analysis similar to the framework of this paper:

The commonsense statement that employers have power over their employees has long been heretical in the economics profession…. More and more, firms have demonstrated high and increasing levels of market power. At the same time, the bargaining power of workers has weakened…. [T]his imbalance of market power has consequences…. It enables firms to suppress wages of workers below what they would be in a competitive marketplace—contributing to the inequality crisis facing the country…. Employers and employees need to be able to bargain on more-equal footing. (Stiglitz 2021)

Our research and these other recent findings demonstrate that employer power is ubiquitous in labor markets, and that wages will be lower and wage growth suppressed absent institutions and policies that provide countervailing power. In other words, employer power is a constant of modern labor markets, but what has changed over the past generation or two is the erosion of institutions and policies—high-pressure labor markets, robust enforcement, unions, and meaningful minimum wages—that once provided that countervailing power.

The paper proceeds as follows. The first step is examining the wage and profit trends that any theory of wage suppression needs to explain. The second section assesses the conventional explanation of “skill-biased technological change”—namely, that in the face of rapid technological change or automation workers lack the skills necessary for more modern production systems. The third section identifies the six factors, from excessive unemployment and eroded collective bargaining to shifts in corporate structures, that we believe much better explain wage suppression. The final section reviews how this paper fits into the overall literature on wage inequality and draws on the estimated impact of the various factors to establish how much they explain the overall divergence between productivity and median hourly compensation as well as the growth of the 50/10 wage gap and changes of the 10th percentile wage.

Wage trends and patterns to be explained

There are three remarkable disparities in growth of wages by workers’ wage rankings that policymakers need to understand and economists need to explain: the one between the highest earners (the top 1% and top 0.1%) and other high-wage earners; the one between high-wage and middle-wage earners (the 95/50 or the 90/50 wage gaps); and the one between middle- and low-wage earners (the 50/10 wage gap). In addition, a theory about wage trends will need to explain the decline in the share of overall income accruing to labor, since this drop saps wage growth; the differing growth rates by educational credential, especially four-year college degrees; the growing divergence between typical workers’ pay (including both wages and benefits) and economywide productivity; and the widening wage gaps that appear between workers of different races, genders, and ethnicities.

Wage growth trends by percentile

Below we delve into some detail in these trends. The rough summary of inflation-adjusted wage growth, detailed below, is as follows. Between 1979 and 2019 (the end of the last business cycle), inflation-adjusted annual wages at the very top have grown tremendously. Those in the top 1% enjoyed 160% growth, and those at the very top—the top 0.1%—experienced growth of 345%. Growth was much slower at the 95th percentile—63% (using hourly wage data), slower still at the 50th (15%), and a snail’s pace at the 10th (3%)—though it is worth noting that growth rates at the middle and the bottom were not remarkably different since the late 1980s. Two key wage gaps have grown since the late 1980s: the one between the top and very top on the one hand and all other earners, including even those at the 95th percentile, on the other, and the gap between high earners and middle earners, illustrated by the ratio of wages at the 95th (or 90th) percentile and the median wage.

Wages at the top—the upper 1% and 0.1%

One of the trends that went unrecognized and unexamined in the mainstream labor economics literature for decades was the remarkable growth for those in the upper 1% and the even faster growth among those in the top 0.1% of wage earners. This growth in wages for the highest-earning households is a key cause of the better-known phenomenon of growth in the household incomes of the top 1%, a finding popularized by Occupy Wall Street and based on the well-known data developed by Thomas Piketty and Emmanuel Saez (2003). The headline Piketty and Saez data are for households (“tax units” to be precise, but importantly they are not for individual workers) and include both wages earned by household members but also other income such as dividends, capital gains, and business income. However, one can analyze data to focus solely on wage and salary income of individual earners. Such an examination also shows superlative growth at the very top and demonstrates the importance of the upward redistribution of wage and salary income to the overall growth of top 1% household incomes.

Figure A, based on Social Security Administration data (see Mishel and Kandra 2020 for details), shows wage growth by the differing wage groups, including those at the top and very top. The Social Security data include all W-2 earnings as reported by employers (including the value of realized stock options and vested stock awards received by executives). Between 1979 and 2019, annual wages for the top 1% grew 160%. The wage growth of the top 0.1%—345%—is listed but not represented on the graph because it is on such a different scale.

Figure A

In contrast, the wages of the bottom 90% grew by just 26% over those 40 years, with most of the growth occurring in a couple of brief and discrete periods of sustained low unemployment. The total wage growth in the 1995–2000 and 2013–2019 periods was 20%, roughly three-quarters of the cumulative wage growth for the bottom 90% over the entire 1979–2019 period. High earners in the 90th to 95th percentiles had wage growth faster than the vast majority (up 52%) but nowhere near that of those at the very top.

The share of all wages earned by those in the top 1% nearly doubled from 1979 to 2019, from 7.3% to 13.2%. Correspondingly, the share of wages earned by the bottom 90% eroded throughout this time, from 69.8% in 1979 to 60.9% in 2019 (Mishel and Kandra 2020). Had this redistribution not taken place, wages for those in the bottom 90% could have grown by 44.6%, 18.5 percentage points more than was the case.2 In short, the redistribution of wages from low and middle to high percentiles has greatly mattered for what the vast majority took home in their paychecks.

Wage gaps for most everyone else: The 95/50 and 50/10 gaps

Outside the top 1%, the clearest growth in wage gaps between percentiles in the wage distribution has been between high earners and middle-wage earners. This is often illustrated by the wage gap between the earners at the 95th percentile and the median (50th percentile) worker. Perhaps surprisingly to some, wage gaps in the bottom half of the distribution of wages (those between middle-wage and low-wage workers) have not grown for more than 30 years (basically since 1987–1988).

Figures B and C show the trends in the 95/50 and 50/10 wage gaps by gender. One striking dimension of the growth of wage inequality is the persistent, continuous growth of the wage gap between those higher up, the 95th percentile, and middle-wage workers since 1979, among both men and women (Figure B). The growth of the 95/50 wage gap has accelerated over time, growing faster in the more recent period (either 1995–2019 or 2000–2019) than it did earlier.3 The growth of the gap between those at the top and the middle of the wage distribution, and its acceleration after the late 1990s, is one of the key wage patterns that need to be explained.

Figure B

In contrast, there has been little change (or an actual decline) in the 50/10 wage gap since the late 1980s (Figure C). The log 50/10 wage gap (using the same data as in the figure) grew from 0.57 in 1979 to 0.75 in 1987 and then declined to 0.68 in 2000 and to 0.65 in 2019. There was a jump in this gap in the early and mid-1980s, especially among women. The fact that there was a much more modest increase in the 50/10 wage gap among men provides an important clue as to the source of this rising gap: the erosion of the real value of the federal minimum wage. Federal inaction on the minimum wage in the 1980s had a much larger impact on low-wage women than low-wage men because women are far more likely to earn wages low enough to be affected by the minimum wage. The importance of institutions (the federal minimum wage) in this case will become a pattern as we look at the data on wage gaps and their causes more generally. The decline in the 50/10 wage gap since 1987–1988 presents a severe challenge to explanations of wage inequality focused on skill or education premiums, since it appears that those with the least education fared somewhat better than those with middling educations. The fact that the 50/10 wage gaps were relatively constant since the late 1980s indicates that a similar, or related, set of forces were at work suppressing wages at both the bottom and the middle.

Figure C

Wage differences by education

The academic and policy debate about wage inequality has often focused on wage gaps across education groups, especially between those with a (four-year) college degree versus those without. Growing education wage differentials have been the basis of the premier conventional explanation of growing wage inequality, which attributes it to “skill-biased technological change.” This theory holds that labor markets are well characterized by competitive models and that an exogenous technology shock—often identified as automation driven by information technologies—has reduced the relative demand for workers without a college degree relative to their college peers, leading to widening inequality between wage earners. The policy corollary to this view has been a call for workers to get college degrees.

The automation-driven skills-gap narrative is critically examined in a later section and in Appendix A. In this section the basic contours of education wage gaps over time are examined. The key metric for capturing education wage differentials is the college–high school premium, or simply the college wage premium, the difference in hourly wages between a college graduate and a high school graduate, controlling for demographic characteristics such as gender, race, and experience. The trend in the college wage premium since 1979 is shown in Figure D.4

Figure D

The college wage premium grew sharply in the 1980s and early 1990s, the era when research arguing for a skills-based explanation of wage inequality grew in prestige. However, growth in the college wage premium has been quite modest since the mid-1990s: It rose by 17.5 log points over the 16 years between 1979 and 1995 but by only 6.4 log points in the 24 years from 1995 to 2019. In annual terms the premium grew 1.1% in the 1979–1995 period but just 0.3% between 1995 and 2019—and just 0.1% per year in the 2000s. The deceleration did not occur because there was an upsurge in the availability of college graduates; in fact, Autor, Goldin, and Katz (2020) show that the relative supply of college graduates grew more slowly in the 1999-2017 period than in the earlier 1979–1999 period.5

It is worth noting that other education wage differentials, such as that between high school graduates and those who left high school and between associate-degree holders and high school graduates, have been fairly stable since 1995. For example, the wage gap, regression-adjusted, between those with a high school degree and those not completing high school (or a GED) rose only slightly between 1979 and 1987—up 2.6 log points—hardly sufficient to explain the sharp rise in the 50/10 wage gap over that period. Between 1987 and 2018 this wage gap shrank by 3.0 log points, reversing the entire 1979–1987 rise and leaving the wage gap where it was in 1979. Since there was hardly any growth in education wage gaps among the bottom three education groups, any explanation for wage gaps in the bottom half that relies on education gaps has little explanatory power.

The gap between productivity and median hourly compensation

The last four decades have seen a systematic divergence between the growth of economywide productivity (the amount of income generated in an average hour of work) and the growth of hourly compensation (wages and benefits) for typical workers. We proxy the wages of “typical” workers as either wages for nonsupervisory workers (roughly 80% of the private-sector workforce) or wages for the worker earning the median wage. Figure E, which shows the growth of productivity and the typical worker’s hourly compensation since 1948, uses the hourly compensation of production-nonsupervisory workers because that is the only series available for the entire period since 1948.6 While productivity and a typical workers’ compensation grew in tandem over the 1948–1973 period, they diverged thereafter, splitting entirely after 1979. In the latter period productivity decelerated significantly, but much more rapid deceleration (or even stagnation) occurred in a typical worker’s compensation. Productivity grew 108.1% from 1948 to 1979, accompanied by 93.2% growth in a worker’s compensation. Between 1979 and 2018 productivity grew 69.6% (1.2% annually) further, but a typical worker’s compensation (wages and benefits) grew only by 11.6% (0.24% annually).

Figure E

This divergence was first pointed out in the early 1990s (Mishel and Bernstein 1994) to demonstrate that stagnant wages for the typical worker over the previous decade or so could not be explained solely by the slowdown of productivity growth. Bivens and Mishel (2015) examined the wedge between typical workers’ pay and productivity and decomposed the main factors generating it. Once technical influences like differing price deflators were accounted for, the remaining wedge between pay and productivity growth was driven by two facets of inequality: the decline in labor’s share of income (particularly in the 2000s) and the growth of inequality of compensation, such that compensation grew far faster at the very top, as shown above.7 In other words, the factors driving inequalities in the labor market are responsible for workers’ inability to make gains commensurate with productivity growth. Whether workers make wage gains commensurate with future productivity growth will depend on whether we prevent this ongoing, and eminently preventable, growth in wage inequality. These dynamics will, in turn, dictate the extent of inequalities across households.

What has this divergence meant for a typical worker’s compensation? Building on the Bivens and Mishel (2015) analysis, we calculate that between 1979 and 2017 economywide productivity rose 68.1% while median hourly compensation rose 13.0% (the median hourly wage rose 12.2%), yielding a 55.2 percentage point divergence. Excluding the impact of differing price deflators (using the same index to deflate both productivity and median hourly compensation) yields a 43 percentage point divergence. Thus, the pay for typical workers would be more than 40% higher today if inequality had not risen over the 1979–2017 period. In the final section we examine the impact of particular factors to gauge whether their cumulative impact can explain the productivity–median compensation divergence. We use the 1979–2017 period as the benchmark, since that period corresponds to some key estimates of the impact of particular factors on median wages.

The decline in labor’s share of income

One of the trends that alerted analysts to the erosion of worker bargaining power and the corresponding strengthening of employer bargaining power has been the erosion of labor’s share of income in the 2000s. The distributional conflict between workers and employers (or capital and labor shares) is best examined in the corporate sector, where all income is divided between compensation going to workers and income accruing to owners of capital. Focusing on the corporate sector hence avoids issues of having to decide whether some other form of income—”proprietor’s income,” or income of noncorporate businesses—is labor or capital (see Bivens 2019 for measurement details).

The trend in the labor share of corporate-sector income is presented in Figure F.

Figure F

The data clearly show a lowering of labor’s share in the 2000s, even when cyclical ups and downs are factored in. In business cycles before the 2000s, labor’s share generally rose during recessions, as profits fell, but then dropped sharply in early recoveries, as high unemployment weighed on wage growth even as the economy and profits recovered. By the time of each business cycle peak, labor’s share had generally recovered its previous peak. After 2000, though, labor’s share has often not recovered its previous peak following recessions. For example, it fell from 82.4% in 2000 to 77.9% in 2007, the last year before the Great Recession, and by 2016, when unemployment had reached levels comparable to what had prevailed in 2006 and 2007, it remained roughly 2.5 percentage points below its 2007 level. The fall in labor’s share from 82.4% in 2000 to 75.5% in 2016 is the equivalent of an 8.4% across-the-board cut in compensation for every employee; equivalently, it would require an across-the-board compensation boost of 9.1% to restore labor’s share to its 2000 level.8 This computation may exaggerate the impact of labor’s falling share, since 2000 was a near high point for it historically, driven in part by unemployment falling to its lowest level in decades (4.0%). However, the unemployment rate in 2018 and 2019 also averaged below 4.0%, and labor’s share ended 2019 at 77.3%, well below 2000’s level. This shift toward greater capital income and returns is even more impressive given that real interest rates have fallen sharply in recent years, a development that should (all else equal) be accompanied by a lower return to capital (Farhi and Gourio 2018).

Wage disparities by race and gender

Race and gender wage disparities have been persistent and insidious and reflect key dynamics that need to be understood in any analysis of the labor market.

Most measures of overall gender wage inequality have fallen over the last four decades. Figure G traces the gender wage gap over 1979–2019 in two ways, the percentage gap between the male and female median wage and the unexplained (log) percent of the gender wage gap (on average) after controlling for race and ethnicity, education, age, and geographic division. By both measures the wage disparities between men and women have substantially declined. The gap at the median has been cut in half, from 36.7% in 1979 to 15.8% in 2019, and the gap that is unexplained fell from 37.7 to 22.6 log points.

Figure G

Conversely, most measures of Black–white wage disparities have grown in the last four decades (Figure H) and have exacerbated the growth of overall wage inequality (Wilson and Rodgers 2016; Wilson 2020). The increase has not occurred along a straight line, however. During the early 1980s rising unemployment, declining unionization, and policies such as the failure to raise the minimum wage and lax enforcement of anti-discrimination laws contributed to the growing Black–white wage gap. During the late 1990s the gap shrank in part due to increases in the minimum wage and in part to tighter labor markets, which made discrimination more costly to employers. Since 2000 the gap has grown again. As of 2015, relative to the average hourly wages of white men with the same education, experience, metro status, and region of residence, Black men made 22.0% less and Black women 34.2% less. Black women earn 11.7% less than their white female counterparts. The median Black worker’s hourly wage rose only 5.3% from 1979 to 2019, lagging far behind the 20.0% hourly growth enjoyed by the median white worker. The 7.6 log point growth of the “unexplained” portion of the Black–white average wage gap suggests that the economic bite of discriminatory pay practices has grown and accounts for a large share of the relative wage growth disadvantage of Black workers.9

Figure H

The causal connection between racial, gender, and ethnic wage growth differences and wage growth differences by percentiles likely runs in both directions. On the one hand, because white women and Black workers tend to be disproportionately concentrated in the bottom 90% of the wage distribution, any force that suppresses wages for the bottom 90% will make them lose ground to white men and whites overall, all else equal. In a study of racial differences in household income, for example, Manduca (2018) finds that the percentile rank of the median Black household in the overall household income distribution climbed rapidly between 1968 and 2016, from the 24th to the 36th percentile. Yet because inequality concentrated gains in the top half of the income distribution over that time, and because white households were disproportionately concentrated in the top half, the income gap (measured in dollars or as a percentage) between white and Black households actually grew. So, a redistribution of income or wages to top and very top earners can increase gender and racial inequities even when Blacks and women achieve better equity among the bottom 90%.

Conversely, racial and gender differences in pay could in theory feed through to measures of inequality by percentile. For example, if the gap in wages paid to otherwise-equivalent Black and white workers can be pocketed entirely by the employers of Black workers, then this pay-setting discrimination would translate one-for-one into lower measured wages of typical workers of all races. If, on the other hand, pay-setting discrimination reflects employer preferences for white workers over Black workers, then some of this Black/white wage gap is a de facto transfer from Black workers to white workers. Less mechanically, if the maintenance of racial and gender wage gaps fosters division and hamstrings collective cross-race and cross-gender efforts to raise wages in workplaces, then these gaps could be a powerful force for employers looking to keep overall wages suppressed.

The failure of automation and skill gaps to explain wage suppression or wage inequality

That a huge proportion of U.S. workers have “skills deficits,” i.e., lack the skills necessary to deal with technological change (including primarily automation of the tasks performed by workers without a four-year college degree), has been the predominant explanation offered by economists, pundits, policymakers, and the media to explaining sluggish wage growth and inequality in the United States, at least until recently (see Box A for why we focus on “automation” rather than a more general “technological” explanation). This is the skill-biased technological change hypothesis, which points to the increased use of computer equipment in the workplace and the onset of the information age. One version, focused on education wage gaps, argues that computerized automation has made more-educated workers—generally referring to those with at least a four-year college degree—more valuable to employers and has correspondingly reduced the value of those without a college degree (Katz and Murphy 1992; Goldin and Katz 2007, 2008). This growing wage gap between college-educated and non-college-educated workers—the college wage premium—is used to explain rising wage inequality between high earners and the majority of earners who lack a four-year college credential (62% of earners in 2019, down from 82% in 197910).

A second version of the automation story, frequently referred to as the “job polarization thesis,” argues that technological change

has increased the value of abstract reasoning, of creativity, of expertise, of judgment and devalued a lot of skilled work that people did that followed well-understood rules and procedures. So that would be many clerical jobs, phone answering jobs, calculating, accounting, bookkeeping, copying, and filing, but also many production jobs, which often involved skilled, repetitive tasks. But increasingly once we understand the rule book for that type of work, it’s feasible to encode it in software and have it executed by machines or by computers.” (David Autor, interviewed by Greenhouse 2020)

This type of automation sees the replacement of human labor by computers or other modes of automation as not just falling along the lines of greater/fewer education credentials (whether a worker has a college degree or not). Instead, occupational susceptibility to having tasks automated is said to be “polarized”—middle-wage occupations specializing in routine, automatable tasks shrink while employment expands in both higher-wage “abstract reasoning” occupations and in lower-wage non-routinized occupations.

These versions of skill-biased technological change portray the cause of wage suppression and wage inequality as due to a factor, automation, that is both inevitable (one can’t stop technology’s forward march) and desirable (after all, technological change is a key driver of rising living standards). Thus, the resulting economic adversity for some workers is the unfortunate byproduct of a dynamic that one would neither want to nor could change. Given this view, the only appropriate remedy is to adapt to automation, primarily by upgrading workers’ skills and education and perhaps by providing a more adequate safety net for workers temporarily displaced.

The skills narrative is the premier explanation of wage inequality that relies on the existence of competitive labor markets and sees a role for policy only in fostering skills development—not in boosting workers’ bargaining power or mandating changes in corporate practices. As such, the failure of the skills narrative to explain wage suppression and wage inequality also reflects the failure of analyses based on equal bargaining power between employers and employees and competitive labor markets to adequately address one of the most salient features of the economy over the last four decades.

As examined in detail in Appendix A, skill-biased technological change has always been a weak explanation for the wage trends since 1979, but is a prima facie implausible explanation for the trends since the mid-1990s or since 1999. None of the basic indicators of automation’s impact and of skill deficits used to establish these narratives has been evident over the last 25 years. Consequently, there is no basis for considering automation-driven skill-biased technological change as a significant factor in wage suppression or the growth of wage inequality since the mid-1990s—and we assign it an impact of zero since 1995 in our analysis below.

The extreme weakness of the hypothesis is why the consensus, at least of center-left economists, no longer highlights it in discussions of wage problems. Lawrence Summers went so far as to say:

I am concerned that if we allow the idea to take hold that all we need to do is there are all these jobs with skills and if we just can train people a bit then they will be able to get into them and the whole problem will go away. I think that is fundamentally an evasion of a profound social challenge. (Summers 2015, 75–76)

The following sections, drawing on Appendix A, offer some critiques of the skills narrative, focusing particularly on its inability to explain wage trends since the mid-1990s.

Omissions in the skills-based wage-gap story

One problem with the automation narratives is that they ignore, or perhaps fail to address, important dimensions of wage suppression and wage inequality. For instance, they sidestep the superlative wage growth of the top 1% (and the top 0.1%) and the corresponding upward shift of 6 percentage points of aggregate earnings to the top 1% between 1979 and 2019 (Mishel and Kandra 2020). The growth of wages for the top 1% primarily reflects the growth of executive compensation and the expansion of the financial sector (and its high earners). Similarly, the narratives accord no attention to the erosion of labor’s share of income, and the data show that the link between automation and the decline of labor’s share is at least as inconsistent with real-world data as is the link between automation and wage inequality (Stansbury and Summers 2020). These are substantial oversights.

Evidentiary problems with the skills-gap, or automation, hypothesis

Recent research by the leading proponents of the skill-biased narrative (Autor, Goldin, and Katz 2020) demonstrates the failure of this hypothesis to contribute to our understanding of wage suppression since the mid-1990s. The three biggest evidentiary failures are the following.

There has been little growth in the college wage premium

Autor, Goldin, and Katz (2020) note that “returns to a year of college rose by 6.5 log points, from 0.076 in 1980 to 0.126 in 2000 to 0.141 in 2017.” Yet note the slowdown from the 1980–2000 period to the 2000–2017 period. In the former period, the log college wage premium rose 0.0325 percentage points each year, far faster than the 0.0088 percentage point increase each year between 2000 and 2017. This represents a 70% reduction in growth. Given that the log 95/50 wage gap grew faster between 2000 and 2019 than in 1979–2000 (see Appendix Figure A), it is evident that the education wage gap has not driven wage inequality in the top half since 2000.

There has been a sharp deceleration in automation-driven relative demand for college graduates since the mid-1990s

The substantial deceleration in the college wage premium, even as the supply of college graduates slowed, implies a dramatic slowing in the growth of relative demand for college graduates. As Autor, Goldin, and Katz (2020) note:

[T]he model’s results…divulge a puzzling slowdown in the trend demand growth for college equivalents starting in the early 1990s. Rapid and disruptive technological change from computerization, robots, and artificial intelligence is not to be found though the impact of these technologies may not be well captured by this two-factor setup.

Their results (based on Autor, Goldin, and Katz, Table A2) show a deceleration in growth of relative demand for college graduates in the 1999–2017 period relative to earlier periods: a 45.8%  deceleration relative to the 1979–1999 period and a 41.8% deceleration relative to the longer 1959–1999 period. The period since 1999, therefore, has been one featuring a historically small impact of automation on (relative) demand for college graduates.

Autor (2017) provides similar findings in an update of the Katz and Murphy (1992) metric of relative demand for college graduates and dates the slowdown to the mid-1990s.

If automation’s impact has been far less in the last 25 years than in earlier decades, it cannot explain the ongoing strong, even faster, growth of wage inequality in the top half, illustrated by the growth of the 95/50 wage gap.

There has been no expansion of the wage gap in the bottom half since 1987

In the skills-gap story, the more education workers have, the more they are in demand and the higher their wages. Yet over the last three decades there have been no increases in the wage gaps between those with some college, those with a high school diploma, and those who left high school. Similarly, that the wage gap between median (50th percentile) workers and low-wage (10th percentile) workers has been stable or declining since 1987 stands as a long-standing critique of the education wage-gap hypothesis (Mishel, Bernstein, and Schmitt 1997a; Card and DiNardo 2002; Acemoglu and Autor 2012).

Evidentiary problems with claims that ‘occupational polarization’ of labor demand can explain wage patterns

As mentioned earlier, a recent twist on the traditional story of skills-driven wage trends is the idea of labor market “polarization.” In this view, labor demand has not been rising commensurately with every level of education; rather, there has been an increase in labor demand for high-skill occupations but also for nonroutine manual occupations generally associated with low wages. The losers are those with routine, nonabstract skills that have traditionally been associated with middle-wage occupations, such as in manufacturing.

There are two clear empirical problems with the polarization narrative as an explanation for the wage trends over the full 1979–2019 period.

There has been no occupational employment polarization since 1999

Most strikingly, Autor (2010) and Acemoglu and Autor (2012) document that job polarization has not been evident since 1999:

[G]rowth of high-skill, high-wage occupations (those associated with abstract work) decelerated markedly in the 2000s, with no relative growth in the top two deciles of the occupational skill distribution during 1999 through 2007, and only a modest recovery between 2007 and 2012. Stated plainly, the U-shaped growth of occupational employ­ment came increasingly to resemble a downward ramp in the 2000s. (Autor 2014)

A “downward ramp” and the absence of a “U-shaped growth of occupational employ­ment” amount to an acknowledgment, although offered in a less-than-direct fashion, that job polarization was not present between 1999 and 2012.

Occupational employment patterns do not correspond to wage patterns

The job polarization narrative relies on mapping occupational employment patterns to explain wage trends. But surprisingly, the polarization literature has never presented evidence that these occupational employment shifts directly affect wages. And indeed, they don’t. Mishel, Shierholz, and Schmitt (2013) show that in the 1980s, 1990s, and 2000s, changes in occupational employment shares (whether employment in an occupation expands or contracts relative to other occupations) were not related to changes in relative wages by occupation (whether wages rose or fell in that occupation relative to wages of other occupations). It is also worth noting that middle-wage occupations have shrunk and higher-wage occupations have expanded since the 1950s, but median wages and wage inequality have risen and fallen over this time with no apparent correspondence to employment polarization trends.

If occupational employment patterns do not directly correlate with occupational relative wages, then the narrative that employment polarization reflects a shift in the relative demand for specific types of skills makes little sense; shifting relative labor demand curves should cause both employment and wages to move together. Moreover, if occupational job polarization does not shape relative occupational wages, then it is certainly not much of an explanation for wage inequality.

A more convincing theory of sluggish wage growth and inequality in the U.S.: Policy-driven wage suppression

If forces unrelated to policy decisions, particularly automation, do not seem to be driving wage trends, what are the factors leading to wage suppression? Our answer is that there has been an intentional policy assault—including policy forbearance in the face of new anti-worker business practices—that diminished the institutional sources of leverage and bargaining power for typical workers in the labor market. The point was to suppress labor costs. This policy assault (acts of commission and omission, such as failing to update labor law or the value of the minimum wage) either directly undercut these institutional sources of power or accommodated employers’ efforts to undercut them. Business forces were secure knowing that policymakers (legislators, executive branch officials, and judges) would not change legislation, enforcement priorities and effectiveness, or legal interpretations to countermand this assault on a typical workers’ power in the labor market.

Why this policy and corporate assault began when it did, and why it was successful politically, are questions mostly outside the bounds of this paper. (See two relatively recent books by Hacker and Pierson (2011, 2020) for the political science explanations.) Among academic and policy economists starting in the 1970s, policies promoting wage suppression were forwarded as the solution to decelerating productivity growth, accelerating inflation, and high unemployment, where the goal was to improve aggregate efficiency and growth. But it did not work: Economic growth between 1979 and 1995 was historically slow, and the brief pickup between 1995 and 2000 was driven by a burst of business spending to connect to the internet and the decision by the Federal Reserve to shunt aside inflation fears and allow unemployment to fall to historically low levels. Slow productivity growth reasserted itself quickly in the 2000s as the burst of information-technology investment receded.

The opinions of academic economists aside, the larger political dynamics of why this wage-suppression campaign began and became a key priority for corporate and business interests in the 1970s are clearly important. Levy and Temin (2007), Bivens (2010), and Mishel, Rhinehart, and Windham (2020) provide an overview of this period and document the concerted shift of the corporate sector away from the “Treaty of Detroit” regime established in the early 1950s that tolerated (or even encouraged) collective bargaining and toward policies maximizing shareholder value and deregulation. The falling profitability of the corporate sector in the 1970s was clearly a part of this dynamic, as was the rising ease of moving production offshore.

While the root causes and the political support behind the policy assault on bargaining power are not addressed here, a growing body of evidence shows that the specific policies launched in this attack can explain the overwhelming majority of wage suppression experienced in recent decades. This section examines these policies and estimates the impact of each. When added together, as we do in the final section, the impact is large enough to explain the lion’s share of the 43% difference since the late 1970s between the growth of median hourly compensation and economywide productivity.

Austerity macroeconomic policy: Excessive unemployment

The Federal Reserve Board’s dual mandate is to pursue the maximum level of employment consistent with stable inflation. However, since 1979 the Fed’s actions suggest that it took the inflation mandate more seriously, thereby tolerating (by failing to lower) or actually generating excessive unemployment for extended periods in the name of keeping inflation tame. Whenever an economic expansion pushed unemployment down, the Fed often feared that tighter labor markets would mean that workers, endowed with more leverage since they were now in a better position to quit or strike, would demand higher nominal wages, in turn putting upward pressure on inflation.

Wage growth resulting from tight labor markets can indeed feed into price growth, and so sufficiently empowered workers may demand even higher wages, allowing wage/inflation momentum to build. The policy recourse for stopping the wage/price spiral has traditionally relied on the Fed raising interest rates to slow the expansion and stop the downward movement of unemployment.

Presumably in this policy vision there is a sweet spot where workers can experience decent wage growth without fostering unsustainable inflationary pressure. But nobody knows for sure beforehand where that level is, and efforts to empirically identify the economy’s “natural rate of unemployment” are notoriously imprecise (Staiger, Stock, and Watson 1997). Given this uncertainty, the Fed must exercise judgment in weighing the benefits of tighter labor markets against the risks of inflationary pressure. Too often in the post-1979 period, Fed policymakers have been so worried about the inflation risks and not impressed enough by the benefits of full employment that they have raised interest rates prematurely and cut expansions short before they generated decent wage growth. The result has been unemployment higher than it had to be to ensure stable inflation.

Historically, the anti-inflation orientation of the Fed was quite political and conscious of the institutional determinants of wage growth. Specifically, past Fed chairs, determined to keep wage growth “moderate,” explicitly saw the use of high unemployment as a means to restrain union-negotiated wage increases or even to seek union wage concessions.

Mitchell and Erickson (2005) characterized this policy orientation during the era of Paul Volcker’s chairmanship of the Fed (1979–1987), when there was a deep recession and a sharp reduction in unionization (40% of the erosion of unions over the 1979–2017 period occurred in 1979–1984):

Volcker viewed affecting union wage determination through monetary restraint as important for the Fed’s disinflation campaign. One commentator characterized the Fed chair’s view as founded on the idea that “inflation would not be securely defeated…until all those workers and their unions agreed to accept less. If they were not impressed by words, perhaps the liquidation of several million more jobs would convince them.” …Others at the Fed apparently had similar wage-push ideas. To Volcker, direct intervention in particular wage settlements was not desirable (and clearly not the province of the Fed). But a monetary squeeze that forced the union sector to hold down nominal wages in the hopes of preserving jobs was an appropriate policy instrument. Squeeze the unions and other wages (and prices) would fall into line.

Hooper, Mishkin, and Sufi (2019, 25) note that “since the 1980s the Fed focused much more on avoiding labor market overheating in order to stabilize inflation.” The discussion in Appendix B provides a further analysis of the Federal Reserve policy that maintained excessive unemployment.

Bivens and Zipperer (2018), analyzing the links between excess unemployment and wage growth, note that full employment (at least by the too conservative measure of matching actual unemployment to preexisting estimates of the “natural rate”) was the norm after World War II but became the exception after 1979. Between 1949 and 1979, the cumulative difference between the actual unemployment rate and estimates of the unemployment rate consistent with stable inflation—the “natural rate” or the NAIRU, the nonaccelerating inflation rate of unemployment—was negative 15.3 percentage points, meaning that on average actual unemployment was 0.52 percentage points below the estimated NAIRU each year. In contrast, between 1979 and 2017 the cumulative difference was positive 35.7 percentage points, meaning that actual unemployment was persistently above the estimated natural rate. This trend was not driven only by the Great Recession: Between 1979 and 2007 the cumulative difference was a positive 15.5 percentage points. Put another way, unemployment was 1 percentage point higher each year in 1979–2007 than in 1949–1979.

This consistent excess unemployment was deeply damaging to wage growth. Research indicates that a 1 percentage point drop in unemployment results in annual wage growth 0.5–1.5 percentage points faster for workers at the 10th percentile. For example, if annual real wage growth is 1%, then a 1 percentage point fall in unemployment would result in annual real wage growth rising to 1.5% to 2.5%. For workers near the median of the wage distribution, wage growth is faster by 0.4–0.9 percentage points, and for workers at the 90th percentile it is 0.3–0.5 percentage points faster. These estimates indicate that excessive unemployment generates increases in both the 50/10 and 90/50 wage gaps.11

Using the lower bound of the Bivens and Zipperer estimates to assess the impact of excessive unemployment on median and 10th percentile wages in the 1979–2017 period, we find excessive unemployment had lowered the median hourly wage by 12.2%. These estimated impacts of unemployment are far below those of Katz and Krueger (1999, Table 8), whose Phillips curve estimates using a 1973–1998 time series were double those of Bivens and Zipperer at the median and three times those at the 10th percentile.

However, to err on the side of caution we make an adjustment to our estimates of the wage impact of higher unemployment to account for the “flattening” of the Phillips curve in recent years (a lessening of the relationship between unemployment and wage growth): We apply one impact for the 1979–2007 years and a lesser impact for the 2008–2017 years.12 The coefficient on unemployment levels in regressions explaining wage growth is notably smaller in the time period after 2008.13 It should be noted that, as Hooper, Mishkin, and Sufi (2019) found, the “wage-Phillips curve…flattened significantly less and retained greater nonlinearity” than the price Phillips curve. However, one should be clear what is driving the flattening of the wage Phillips curves in the post-2008 period: the failure of high unemployment to force actual reductions in nominal wages in just a small number of years (2008-2014, mostly), a finding highlighted in Bivens (2019). If one removes this subset of years from the sample, the regression coefficient for the overall post-1979 sample is far closer to what one obtains from running the regression over the period from 1979 to 2007. It seems clear that this is the issue of “downward nominal wage rigidity bending the Phillips curve,” as expressed by Daly and Hobijin (2014). This implies that we are overcorrecting in our markdown of the impact of unemployment on wages post-2008; that is, we are understating the negative impact of high unemployment.

Taking this flattening of the Phillips curve into account we find that, if unemployment over 1979–2017 had averaged just the “natural rate” of 5.5% rather than 6.3%, median wages would have been 10.0% higher in 2017. If the unemployment rate had been held even lower, say 5.0%, median wages would have been 18.3% higher by 2017.

About a fourth of this impact is the result of the corrosive effects of the extended period of high unemployment following the Great Recession. In those years, the real culprit for keeping labor markets too soft to generate decent wage growth was not the Federal Reserve Board (the Fed actually tried hard to boost economic growth in those years). Instead, fiscal policymakers—both the Republican-led Congress and state and local governments after 2010—imposed historically contractionary degrees of spending austerity.

As analyzed in the final section, excessive unemployment’s impact on the median wage of 10.0% can explain nearly a fourth of the productivity–median compensation divergence of 43.0% and is a sizable factor expanding the wage gaps in both the bottom and top halves of the wage structure. For instance, excessive unemployment had a larger impact on low-wage workers, lowering the 10th percentile wage by 11.6% by 2017 and raising the 50/10 wage gap by 2.7 percentage points. If our analysis uses 5.0% rather than 5.5% as the full employment target, then the 10th percentile wage would have been 21.2% higher in 2017 absent excessive unemployment.

Because Black workers are disproportionately concentrated in the bottom half of the wage distribution, the corrosive effect on wage growth of excess unemployment falls more heavily on them. Wilson (2015) has found that the wage-depressing effect of each additional percentage point of unemployment is roughly twice as large for the median Black wage as for the median white wage. Wilson and Rodgers (2016) find that the wage penalty for the median Black worker relative to the median white worker increased by nearly 9 percentage points between 1979 and 2014. This growth in the Black–white wage gap could be entirely explained by excessive unemployment over this period, given the differing responsiveness of Black and white wages to unemployment.

Erosion of workers’ rights to form unions and bargain collectively

The erosion of collective bargaining has been a major factor that has depressed wage growth in the middle and drove the growth of wage inequality over the last four decades. In fact, the only factor having a larger impact is the excessive unemployment perpetrated by policymakers. The impact has been especially adverse for men because they were far more likely to be unionized in 1979 than women (31.5% versus 18.8%), so men had more to lose from the subsequent attack on unions and collective bargaining.14

That collective bargaining leads to more equal wage outcomes was firmly established by research by Richard Freeman and James Medoff in the late 1970s and popularized in their important book, What Do Unions Do?, published in 1984 (Jake Rosenfeld’s 2014 book, What Unions No Longer Do, provides an update of the issues). Consider first the ways that collective bargaining leads to more equal wage outcomes among unionized workers and in unionized industries and occupations.15 First, unions make wage differences between occupations more equal because they give a larger wage boost to low- and middle-wage occupations than to high-wage occupations. Second, unions have boosted wages for low-wage workers the most, and increases have been larger at the middle than at the highest wage levels, larger for Black and Hispanic workers than for white workers, and larger for those with lower levels of education. This pattern of wage increases narrows wage inequalities. Third, unions make wages of workers with similar characteristics more equal in union settings because wages are “standardized,” meaning that wages are set for particular types of work and do not vary across people doing the same work to the same degree as exists in nonunion settings. Fourth, unions have historically been more likely to organize middle-wage than high-wage workers, which lowers inequality by closing gaps between, say, blue-collar and white-collar workers.16 The union impact on inequality is even greater with compensation than with wages alone (Pierce 1999).

Research from the early 1990s documented that the erosion of collective bargaining was responsible for around a fifth of the rise in wage inequality among men in the 1980s (Card 1991; DiNardo, Fortin, and Lemieux 1996; Freeman 1991) but had a more modest impact on women’s wage inequality.

More recent research has incorporated an assessment of the impact of unions on nonunion workers’ wages—sometimes referred to as “spillover effects”—and finds a much larger impact. When the share of workers who are union members is relatively high, as it was in 1979, wages of nonunion workers are higher. For example, had union density remained at its 1979 level, weekly wages of nonunion men in the private sector would have been 5% higher in 2013, equivalent to an additional $2,704 in earnings for year-round workers; among those same workers but without a college education wages would be 8% higher, or $3,016 more per year (Rosenfeld, Denice, and Laird 2016; Denice and Rosenfeld 2018).17 Consequently, estimates of the impact of eroded collective bargaining on wage inequality that incorporate union spillover impacts find a larger role of the impact of unions on wage inequality. For instance, Western and Rosenfeld (2011, Table 2 and analyzed in Mishel et al. 2012, Table 4.38) find that the weakening of collective bargaining explains a third of the increase in male wage inequality and a fifth of the rise of wage inequality among women over the 1973–2007 period. Such research demonstrates that the erosion of collective bargaining has been the largest single factor driving a wedge between middle- and high-wage male workers, which, as established above, is the main dimension of wage inequality that grew among men other than the soaring of earnings for the top 1% (keep in mind that the wage gap between middle- and low-wage men has not grown).

The most recent research provides a more up-to-date analysis that incorporates a spillover impact and provides additional insight because the results directly report on the impact of eroded collective bargaining on the wage gap between high-wage (90th percentile) and middle-wage (50th percentile) workers by gender. These results from Fortin, Lemieux, and Lloyd (2021) are shown in Table 1.

Table 1

The erosion of unions (column 3) can explain from 28.8% to 36.7% of the growth of male wage inequality as measured, respectively, by the standard deviation of log wages and the Gini coefficient. The most salient finding is that eroded unionization explains 37.3% of the growth of the 90/50 wage gap over the 1979–2017 period. As discussed earlier, this is the only source of growing wage inequality among men in the bottom 90% of earners. Fortin, Lemieux, and Lloyd (2021) show a smaller impact of eroded unions on women’s wage inequality; the erosion explains 6.7% to 8.8% of the growth of women’s wage inequality as measured by the standard deviation of log wages and the Gini coefficient and only 13.0% of the growth of the 90/50 wage gap.

Using an (unpublished) analysis by Thomas Lemieux, who relied on the model in Fortin, Lemieux, and Lloyd (2021), we can examine the impact of deunionization on the median and the 90th percentile wages for men and women combined over the 1979–2017 period. Deunionization raised the log 90/50 wage gap by 7.7 log points, almost entirely by reducing the median hourly wage by 7.6 log points, or by 7.9% (0.2% annually). The impact on men alone is larger, with deunionization lowering the male median wage by 10.9 log points, or 11.6% (0.29% annually). Deunionization therefore explains 33.1% of the 23.2 log point growth of the 90/50 wage gap over the 1979–2017 period.

The Fortin, Lemieux, and Lloyd (2021) results are very comparable to those of Stansbury and Summers (2020). In particular, we have benchmarked the Fortin, Lemieux, and Lloyd estimates of the impact of deunionization on the median wage with the estimate of Stansbury and Summers of the impact on the non-college-educated wage. Once one aligns the time periods, one finds that the Stansbury and Summers estimate is even larger.18 The Fortin, Lemieux, and Lloyd results for how much deunionization explains the growth of wage inequality also align with those by Western and Rosenfeld (2011).19

Newly developed historical data from the early postwar period affirm that collective bargaining was a strong force for greater equality of wages. For instance, Callaway and Collins (2017), using data from a survey of men living in Philadelphia; New Haven, Conn.; Chicago; St. Paul, Minn.; San Francisco; and Los Angeles in 1951, found “the [union] wage premium was larger at the bottom of the income distribution than at the middle or higher, larger for African Americans than for whites, and larger for those with low levels of education,” findings that are “consistent with the view that unions substantially narrowed urban wage inequality at mid-century.” It follows, of course, that the consequent erosion of collective bargaining would increase wage inequality and have the most adverse impact on nonwhite workers, those with the least education, and low- and moderate-wage workers.

Likewise, Farber et al. (2021, 33), who developed data on union households from Gallup surveys going back to 1936, find that “mid-century unions [were] a powerful force for equalizing the income distribution.” This happened because unions disproportionately represented “disadvantaged” workers (nonwhite or less educated), raised the wages of low- and moderate-wage workers the most, and had a large, stable impact of raising wages for union workers by roughly 15–20 log points over the last 80 years.20

Some pundits and analysts, skeptical about the impact of weaker unions on wages or wage inequality, claim that the decline of unions reflects a decline in worker interest in unions or is due to globalization and automation, i.e., endogenous factors. Neither objection is well founded.

Kochan et al. (2018) examined the level of interest in joining a union among unorganized workers and found that the “demand for unions” has risen substantially since the late 1970s. Kochan and Kimball (2019) described these results as

differences in the percentage of non-union workers who indicated a preference for union representation in nationally representative surveys in 1977, 1995, and 2017. Note that the 1977 and 1995 results were nearly identical: approximately one third of the non-union workforce indicated they would vote to have union representation if given an opportunity to do so on their current job. In 2017 that number increased to 48 percent. This number translates into an under-representation of unions of approximately 58 million workers.

Mishel, Rhinehart, and Windham (2020) assess the endogeneity of union decline and find that manufacturing employment decline can account for only a small part of it, perhaps 15–20%. Ongoing automation of manufacturing and globalization surely contributed to the shrinkage of manufacturing employment and the loss of union jobs in manufacturing, but the authors point out that the share of workers covered by collective bargaining declined strongly across the private sector in sectors not heavily affected by globalization, including construction, transportation, communications, utilities, supermarkets, hotels, and mining. So, any focus limited to manufacturing will not capture the full picture. Moreover, the erosion of unions in manufacturing is not due only to automation and globalization.

An Organisation for Economic Co-operation and Development (OECD 2019b) analysis of the cross-country decline in collective bargaining across advanced nations found:

Contrary to a commonly held belief, the combined contributions of demographic changes and structural shifts, such as the shrinking of the manufacturing sector, are small and leave most of this declining trend [in collective bargaining] unexplained.

This confirmed an earlier analysis by Schmitt and Mitukiewicz (2012) that: “The observed patterns suggest that national politics are a more important determinant of recent trends in unionization than globalization or technological change.”

The primary reason that collective bargaining eroded was a concerted corporate attack on unions starting in the 1970s that exploited weaknesses in our labor laws to suppress the ability of workers to choose collective bargaining and organize (Windham 2017). The scale of union organizing collapsed, dramatically, in the 1970s as the share of nonagricultural workers in private-sector National Labor Relations Board elections fell from 1.0% to 1.2% each year in the 1950s and 1960s to just 0.3% each year in the 1980s and to 0.1% each year in the early 2000s (Mishel, Rhinehart, and Windham 2020). As Windham (2017) documents, this collapse of organizing was due to increased employer aggressiveness and use of both legal and illegal tactics, including captive audience meetings, threats of shutdowns or relocation, firing of union organizers, use of a rapidly expanded group of anti-union consultants, and process delays.

McNicholas et al. (2019), analyzing union representation elections that took place in 2016–2017 and building on earlier work by Bronfenbrenner (2009), have recently documented the pervasive lawlessness prevailing in union organizing attempts:

Employers are charged with violating federal law in 41.5% of all union election campaigns. And one out of five union election campaigns involves a charge that a worker was illegally fired for union activity. Employers are charged with making threats, engaging in surveillance activities, or harassing workers in nearly a third of all union election campaigns.

Other developments, enabled by employer aggressiveness and changes in the rules governing collective bargaining, limited collective bargaining power by eroding coverage and weakening unions’ ability to strike (Mishel, Rhinehart, and Windham, 2020).

Managing globalization on capital’s terms

Evaluating the impact of globalization on wages has been controversial because it has inevitably been intertwined with the politics of trade agreements. Some analysts contend that globalization has a barely measurable impact, while others see it as an all-encompassing force shaping everything, limiting our ability to have higher wages or pursue regulatory or tax policies. In fact, globalization has indeed put substantial downward pressure on wages for the vast majority, but its effects are likely not just driven by the mechanical impacts it has on demand and supply curves for different types of labor in a competitive model. Instead, it is as likely that globalization has played a powerful role in disempowering workers and giving capital owners and managers a much-improved fallback position in their bargaining with workers.21 As such, the way that globalization has proceeded from U.S. workers’ perspective has been profoundly shaped by intentional policy decisions that maximized its wage-suppressing effects.

Bivens (2017a) presents a summary of globalization’s wage impacts, based on his own calculations and on the wider economics literature. He finds:

The challenge of globalization for American workers is often painted as a problem of industrial workers losing their jobs to imports. Because manufacturing employment is now a small share of overall employment, these trade-induced losses are often described as “small and concentrated”.… But this assessment of the situation is wrong—growing trade (particularly with poorer nations) actually inflicts losses on the majority of the American workforce.… [T]he big damage is the permanent wage loss resulting from America’s new pattern of specialization that requires less labor and more capital. Further, this wage loss is not just suffered by workers in tradeable goods sectors who are displaced by imports; it’s suffered by all workers who resemble these workers in terms of credentials and labor market characteristics. A simple way to say this is that while landscapers may not be displaced by imports, their wages suffer from having to compete with apparel (and auto, and steel) workers who have been displaced by imports…. The wage-suppressing effects of globalization hit all workers without college degrees, across the country. Workers of all races and ethnicities are affected, and communities of color are disproportionately harmed. The harm of globalization is absolutely not a niche issue affecting only white working-class workers in the upper Midwest.

Globalization has contributed significantly to wage suppression. The first round of the academic debate about trade and wages was spurred by debate over approval in 1993 of the North American Free Trade Agreement, and accordingly the debate relied largely on data from the late 1980s or early 1990s. The majority view of economists coming out of this debate was that trade was not putting significant downward pressure on wages. But this view persisted even as the underlying reality changed significantly. For example, Bivens (2013) found that the implied wage effects of trade expanded rapidly after 1995, as trade with lower-wage nations (particularly Mexico and China) picked up significantly. He also found that, by 2013, trade flows with low-wage nations were likely reducing wages for workers without a four-year college degree by roughly 5.6%. For a non-college-degreed worker making the median hourly wage and working full time, full year, the earnings reduction translated into just under $2,000 annually.

This estimate is nearly identical to what Autor, Dorn, and Hanson (2013) found in a regression-based investigation of the wage impacts of imports from low-wage countries. Their results indicate that each $1,000 in imports per worker from low-wage countries lower American wages by 0.7%. Imports from all low-wage countries in 2016 stood at roughly $8,000 per worker, implying a wage reduction of roughly 5.6%, or about $2,000 annually, for a full-time worker earning the median wage.

Policy decisions have amplified globalization’s downward wage pressure. Much of the conventional wisdom among Washington policymakers has assumed that the trade agreements signed in the past 20-odd years have been exercises in good-faith liberalization of trade and have greatly expanded access by the world’s poor to U.S. markets. But this is not the right way to think about these agreements. Instead, these agreements have been the result of corporate capture creating selective and regressive protectionism that has severely restricted the policy space of our trading partners.

Even globalization that was driven solely by changes in communications and transportation technology and political change among our trading partners would have been likely to depress wage growth for the majority of American workers. But U.S. policy failures significantly amplified these damaging effects, turning globalization from a manageable challenge into a deep economic wound for workers—and a political disaster for the country. These policy failures include failing to secure any reasonable compensation or countervailing domestic boost to bargaining power and leverage in labor markets for those on the losing end of globalization; failing to address currency misalignments that have led to large trade deficits and hemorrhaging employment in manufacturing; and passing trade agreements that have consistently aimed to undercut workers’ economic leverage while carving out ample protections for corporate profits. This unbalanced feature of trade agreements has encouraged U.S.-based employers to substitute imports for the production formerly made by U.S. workers, and thus their jobs.

Weakened labor standards

Recent decades have seen the steady weakening of a number of key labor standards that once provided leverage and bargaining power for workers to improve job quality. The rapid erosion of the federal minimum wage’s purchasing power is the most dramatic and most consequential; others are the erosion of overtime protection for salaried workers, weaker labor-standards enforcement and rising wage theft, the increased share of the workforce with no effective labor protections because of its immigration status, and more extensive misclassification of workers as independent contractors.

Erosion of the federal minimum wage

The failure to update the value of the minimum wage in line with wage or productivity growth is a premier illustration of policy choices, made on behalf of capital owners and corporate managers, that have had a huge impact on wage growth for low-wage workers and is the primary explanation for any growth in the wage gap between low- and middle-wage workers over the last four decades. Specifically, the failure to raise the federal minimum wage to an adequate level (defined for our purposes as $15 an hour by 2025) has lowered the wages of at least the bottom 22.2% of earners and a full 31.0% of earners if one includes those benefitting from state and local minimum wage increases since 2017.22

In 2019, the federal minimum wage of $7.25 was worth 16.3% less, after adjusting for inflation, than when it was last raised in 2009—the longest period of history without a minimum wage increase—and 25% below its peak inflation-adjusted value in 1968. In contrast, productivity doubled (up 103.3%) and the average wage grew by 65% from 1968 to 2019.23 Thus, the value of the minimum wage fell while the labor market became far more capable of paying higher wages overall. This lag in the minimum wage occurred despite low-wage workers being older (and therefore likelier to have greater work experience) and significantly more educated than their counterparts in 1968 (Mishel 2014).

Another way of illustrating how low the minimum wage has fallen is by examining the impact of raising the federal minimum wage to $15 in 2025, which represents a 79.0% real increase24 over its current value and a 25.6% increase in purchasing power from the 1968 peak. This is a substantial, bold increase from the current policy, yet still falls short of updating the minimum wage to correspond to the growth of average wages or productivity (projected in 2025 to be 119% greater than in 1968), and would barely make up for its shortfall relative to median wages. Yet, increasing the minimum wage to $15 in 2025 (Cooper 2019) would have a tremendous impact.

The growth of the minimum wage shapes the entire wage distribution of the bottom half, essentially setting the scale of the gap between the lowest-wage workers at the 10th percentile and the wages at the median. In 1968, the federal minimum wage was equal to roughly half (52.8%) of the wage of the typical (median) U.S. full-time worker. In 2019, that share was less than a third (31.7%). An increase of the minimum wage to $15 in 2025 would reset it to 55.1% of the typical or median worker’s wage, restoring the wage standard achieved in 1968.25 This outcome implies that the declining value of the minimum wage more than explains the increase in the 50/10 wage gap over the 1968–2019 (or 1979–2019) time frame, and the rise to $15 in 2025 would totally reverse the increase in wage inequality in the bottom half, despite the modesty of the $15 proposal.

The work by Fortin, Lemieux, and Lloyd (2021), presented earlier in Table 1 (see the “changes in wage measure” column), provides further evidence. The 50/10 wage gap among women grew by 21.2 (log) percentage points from 1979 to 2017, and three-fourths (73.6%) of that increase can be explained by the erosion of the inflation-adjusted value of the minimum wage. Among men there was essentially no increase in the 50/10 wage gap, which is not surprising since men’s wages at the bottom have been less affected by a falling or rising minimum wage.

Using (unpublished) analyses provided by Thomas Lemieux based on the Fortin, Lemieux, and Lloyd (2021) model, we can pinpoint the impact of the decline in the minimum wage on the 10th percentile wage and on the 50/10 wage gap for men and women combined (Table 2). Over the 1979–2017 period the fall in the real value of the minimum wage meant that the 10th percentile wage fell 0.022 log percentage points instead of rising by 0.133 log percentage points, a 0.155 log point impact of the failure to maintain the value of the minimum wage. The impact of the declining minimum wage threshold was comparably as large among both men and women at the 10th percentile. Breaking out the 1979–1988 period shows that it was the dramatic fall in the minimum wage in the 1980s (a 0.179 log point decline in the 10th percentile wage) that explains the impact over the longer-term 1979–2017 trend.

Table 2

These results are echoed in the 50/10 wage gap. Among men and women combined the 50/10 gap grew 0.091 log percentage points from 1979 to 2017 but would have fallen by 0.047 log points had the minimum wage been maintained. The 50/10 wage gap’s increase of 0.214 log points among women would have been just 0.060 log points absent the fall in the minimum wage. Again, the results over the entire 1979–2017 period were driven by the developments in the 1979–1988 period.

The timing and pattern of changes in the wage gap in the bottom half (the 50/10 wage gap) seems to be entirely explained by changes in minimum wage policy—the choice to not maintain the real value let alone restore it to its 1968 peak. This can also be seen in Figure C above, where the growth of the 50/10 wage gap was limited to the 1979–1987 period. The 50/10 wage gap has been stable or falling since the late 1980s as the minimum wage was raised moderately26 (in 1990–1991, 1996–1997, and 2007–2009) and periods of persistent low unemployment boosted the lowest wages.

Other research confirms the major impact of the fall in the minimum wage on the expansion of the wage gap in the bottom half. For instance, the analysis of Autor, Manning, and Smith (2010) in Mishel et al. (2012, Table 4.41) shows that the fall in the minimum wage explains 65.5% of the 25 (log) percentage point increase in the 50/10 wage gap between 1979 and 2009. The wage gap at the bottom half grew very little among men (as they are far less likely to be affected by the minimum wage) over the 1979–2009 period, rising just 5.3 (log) percentage points.

That analysis, however, understates the degree to which policy changes have adversely affected the earnings in the bottom half if the standard applied is restoring the real value of the minimum wage to its 1979 value. Other reasonable counterfactuals would yield substantially higher estimated effects of a lower minimum wage. For instance, one could hold the ratio of the minimum to the median at its 1979 level or even benchmark to the 1968 peak rate. Further, using the standard of the ratio of the minimum wage to the median wage understates the impact of policy since the median itself was suppressed. That is, the minimum wage could be raised substantially more if median wage growth had not been suppressed. In this light, the fall of the median due to rising inequality of wages and the falling labor share of income—what we estimate to be a 43% decline—also adversely affected low-wage earners. If, for example, the minimum wage had kept up with economywide productivity growth after its high-water mark of 1968 (as it roughly had for the first 30 years of its existence), the federal minimum wage would be roughly $20 today.

The erosion of overtime protection among salaried workers

To be exempt from the minimum wage and overtime protections of the Fair Labor Standards Act under the “white collar” rule, a worker must be paid a salary (i.e., not be paid by the hour), must have bona fide “executive, administrative, or professional” duties (i.e., be an executive or a highly credentialed professional, or have supervisory duties), and earn above a specific salary threshold. Without a strong salary threshold, salaried workers who spend only a small share of their time actually doing exempt/”professional” work can be required to do hourly-worker-type duties (e.g., a store “manager” stocking shelves, unloading trucks, doing checkout at the cash register) for most of their worktime, including those beyond 40 hours in a week. Those hours beyond 40 are essentially unpaid.

The eroded share of the salaried workforce eligible for this overtime protection (i.e., receiving 150% of regular hourly wages when working more than 40 hours a week) is another example of a labor standard that was substantially weakened in the last four decades. The share of the salaried workforce automatically eligible for overtime based on its pay was whittled down from roughly half (49.6%) in 1975 to just 9.9% in 2014 (Kimball and Mishel 2016).

This issue gained prominence in the latter years of the Obama administration when the Department of Labor issued a rule that raised the annual salary threshold from $23,700 to $47,476 (an increase that still fell short of returning it to its 1975 level) (Department of Labor 2016). The benefit to workers of receiving overtime protection is a combination of higher hourly and annual wages and more leisure (as overtime hours are scaled back by employers when they are required to pay for them). The Department of Labor’s analysis (2016) of the 2016 rule showed that raising the salary threshold increased hourly wages by 1.1%, 2.8%, and 1.4% for salaried workers directly affected by the rule who, respectively, occasionally worked overtime, who regularly worked overtime and were newly covered by overtime protections, and who regularly worked overtime and remained exempt.27 However, because these groups comprised only about 40% of the 4.2 million workers directly affected by the higher threshold, the overall impact would be to raise hourly wages of directly affected workers less than 1.0%.

A broader group, however, is affected by the salary threshold. The Department of Labor estimated that another 8.9 million workers would have had their “overtime protection strengthened in Year 1 because their status as overtime-eligible will be clear based on the salary test alone without the need to examine their duties.” Eisenbrey and Mishel in two analyses (2015, 2016) presented evidence that much of this broader group had actually already lost overtime protections due to court cases and changes in rules introduced in the early 2000s and therefore would be directly affected by the new, higher salary threshold.

The changes in overtime eligibility affected middle-wage workers but not low-wage or higher-wage (90th percentile) workers. How much has the erosion since 1979 affected median wages? This depends on the impact on hourly wages of those affected and the share of middle-wage workers, say the middle fifth, affected by these overtime rules. The impact on the hourly wages of those affected by eroded protections would likely be about 1%.28 But not all mid-level earners have been affected by changes in overtime protections. In 2017 there were 160 million wage and salary earners, so the middle fifth comprised 32 million earners. As noted, the changes in the 2016 rule might have affected 13.5 million workers and, even if they all fell within the middle fifth, they would comprise only about 42% of middle-wage earners. In fact, the workers affected by the lowered overtime salary threshold fall between the 20th percentile and somewhat above the 60th percentile of the overall wage distribution.29 One should add in those who would have been covered if the 2016 rule had restored the 1979 salary threshold: That measure would increase the total affected by 22%.30 If one-third of middle-wage earners lost 1% of wages due to lost overtime protections, then the overall impact would be a 0.3% reduction of hourly wages for the middle fifth.

Wage theft and weaker enforcement of labor standards

Many workers, particularly low-wage workers and the women and men of color who are disproportionately in this category, frequently fail to receive the wages they are owed.31 This is referred to as “wage theft” and reflects workers being paid below the minimum wage, not being paid for all hours worked, not being paid time-and-a-half though legally eligible for overtime, experiencing illegal deductions from pay, and having their tips stolen by employers or supervisors. A recent example involved Amazon, which agreed to pay the Federal Trade Commission $61.7 million because it shorted its drivers tips over a two-and-a-half-year period starting in late 2016 (Greene 2021).

How extensive is wage theft? The available information shows the problem is pervasive. The best analysis is from a 2008 study of 4,387 workers in low-wage industries in Chicago, Los Angeles, and New York; it found that two-thirds of workers surveyed experienced at least one pay-related violation in any given week. The average violation amounted to 15% of earnings (Bernhardt, Milkman, and Theodore 2009).

Another study (Cooper and Kroeger 2017) examined the wage theft affecting minimum wage workers in the 10 most populous states (accounting for more than half the national workforce); it found that total wages stolen from workers due to minimum wage violations alone exceeds $15 billion annually on a national basis. The average minimum wage violation amounted to $64 per week or $3,300 per year for a year-round worker—nearly a quarter of the worker’s earned wages—and affected 17% of low-wage workers. The authors detail who was affected:

Young workers, women, people of color, and immigrant workers are more likely than other workers to report being paid less than the minimum wage, but this is primarily because they are also more likely than other workers to be in low-wage jobs. In general, low-wage workers experience minimum wage violations at high rates across demographic categories. In fact, the majority of workers with reported wages below the minimum wage are over 25 and are native-born U.S. citizens, nearly half are white, more than a quarter have children, and just over half work full time.

A back-of-the-envelope estimate, extrapolating from the Bernhardt, Milkman, and Theodore (2009) study, suggests that by 2016 aggregate wage theft was on the order of $52 billion annually (McNicholas, Mokhiber, and Chaikof 2017). This estimate does not include the stealing of tips where the wage received is nevertheless the minimum or violations of prevailing wage laws. This understated estimate of aggregate wage theft is, nonetheless, four times greater than the FBI’s $13 billion estimate of the total annual value of all robberies, burglaries, larceny, and motor vehicle theft.

Other insights can be gleamed by identifying the amounts recovered in wage theft suits and enforcement actions by the U.S. Department of Labor, by states, and through class action settlements. McNicholas, Mokhiber, and Chaikof (2017) did so and found $880.3 million in 2015 and $1.1 billion in 2016, for a total of $2 billion over both years. This estimate, according to the researchers, likely dramatically underrepresents the problem of wage theft, since probably only a fraction of victims actually file government complaints or are involved in class action settlements.

Shierholz (2021) details the reasons for the prevalence of wage theft:

One reason is workers’ diminished bargaining power relative to their employers. The fact that this unlawful employer behavior is not being “competed away” underscores that, for a variety of reasons, workers do not have the ability to quit these jobs as a de facto form of enforcement.

Another reason is that government resources devoted to combating violations of workplace protections are insufficient and have diminished. For instance, at the federal level, Shierholz writes: “In 1978, there were 69,000 workers per wage and hour investigator on average, but today that ratio is 175,000 to one.” The increased use of forced arbitration agreements, as detailed in a later section, has prevented workers from holding their employers accountable both in court and in the private arbitrations they are forced to use (frequently without the ability to do so as a class). As Shierholz (2021) notes:

To underscore the importance of class-action lawsuits in our enforcement framework: in 2015 and 2016, the top 10 private wage and hour class-action settlements alone exceeded the combined total wages recovered by all state and federal enforcement agencies. Forced arbitration with class and collective action waivers make it virtually impossible for low-wage workers to get any meaningful type of remedy.

Last, declining unionization enables more wage theft to go unchallenged. In effect, nearly every option workers have of holding employers accountable for stealing their wages has eroded in recent years: There is less protection through government enforcement, weaker access to legal recourse, and far less union advocacy in workplaces.

How much does wage theft affect wages in the middle and at the bottom? We do not have an estimate of aggregate wage theft across the wage spectrum or for middle-wage workers, so it is not possible to assess the impact of wage theft on the median wage. Among low-wage workers, Bernhardt, Milkman, and Theodore (2009) found that 68% experience wage theft violations averaging 14.95% of earnings. This translates into an average loss across all low-wage workers of 10.2%.32 Even this estimate omits certain types of wage theft, and we do not know how representative the study’s sample is of the national low-wage workforce. Nevertheless, the Bernhardt, Milkman, and Theodore study indicates that wage theft drains a substantial amount of low-wage workers’ earnings. We also do not know the extent of wage theft’s growth over the 1979–2017 period, though researchers judge that there has been substantial growth. A speculative estimate is that if wage theft has doubled to the 10.2% level implied by the Bernhardt, Milkman, and Theodore study, then it caused low-wage workers’ earnings to fall 5% over the 1979–2017 period due to weaker wage standards enforcement, less access to legal recourse, and eroded unionization. For mid-level wages, theft of overtime pay, unpaid worktime, and the undercutting of prevailing wages likely also had an adverse impact.

Misclassifying employees as contractors

Employers in an array of industries have increasingly (and illegally) misclassified employees as independent contractors or are paying workers “off-the-books.” This practice cheats workers of fringe benefits, social insurance protection (Social Security, unemployment insurance, workers’ compensation), labor protections (regarding safety/health and race, age, and gender discrimination), and union rights. The point of this misclassification is to lower labor costs, and it undercuts labor standards and “undermines other, more responsible employers who face costs disadvantages arising from compliance with labor standards and responsibilities” (Weil 2017).

It is difficult to quantify the extent of misclassification, since it is an illegal activity, and the extent to which it lowers wage and benefit costs. The fact that venture capitalists force this model on gig economy upstarts provides practical confirmation that the business strategy lowers labor costs and shifts risks to workers.33 Uber, a prominent example of a firm whose business strategy is built on misclassifying rideshare drivers, acknowledged in its registration for an initial public offering (Uber 2019) that misclassification provides substantial cost savings:

If, as a result of legislation or judicial decisions, we are required to classify Drivers as employees (or as workers or quasi-employees where those statuses exist), we would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, social security contributions, taxes, and penalties.

David Weil, who has studied misclassification and has served as the administrator of the Wage and Hour Division of the Department of Labor (which oversees this issue), has noted:

Week after week, it seemed, I was witness to an investigation from our district offices involving the incorrect classification of all types of workers: janitors, home health aides, drywall workers, cable installers, cooks, port truck drivers, and loading dock workers in distribution centers. In one telling case, construction workers went home at the end of the week as employees only to be informed on the following Monday that, perhaps by the magic of some unknown force, they had become “member/owners” of hundreds of limited liability companies, effectively stripping them of federal and state job protections…. At the Department of Labor…we saw long-standing practices of employment undermined as misclassification spread quickly across sectors like restaurants, residential construction, and trucking and logistics. (Weil 2017)

Indications are that the practice has greatly increased. The last comprehensive federal estimate of independent contractor misclassification, a General Accounting Office (GAO) examination of tax year 1984, “found that 15% of employers nationwide and across industrial sectors engaged in misclassification of a total of 3.4 million workers” (Carré 2015). There is no national estimate for recent years, but Carré’s review (2015) of state audits of unemployment compensation data across 21 states completed as of 2012 showed that “the prevalence of misclassification ranges from 11% to 30% depending on the method used by state unemployment insurance agencies to select companies for audits…. [T]here is remarkable consistency in the prevalence of misclassification found across states using similar audit methods.” Weil’s (2017) interpretation is that “anywhere from 10% to 20% of employers misclassify at least one employee.”

Industry analyses provide information, too, on the numbers of workers affected. Ormiston, Belman, and Erlich (2020) estimate that in construction “between 1.30 and 2.16 million workers were misclassified or working in cash-only arrangements in an average month of 2017.” The major rideshare companies, whose business model incorporates misclassification, have between 1 million and 2 million drivers. Other online demand firms also rely on misclassification. A newspaper investigation by Locke and Ordonez (2014) analyzing payroll records for government-backed construction housing projects across 28 states found that “companies using stimulus money routinely snubbed labor law and the Internal Revenue Service by treating workers as independent contractors in a clear violation of what’s allowed.” These companies “listed workers as contractors instead of employees in order to beat competitors and cut costs….Scofflaws can save 20% or more in labor costs by treating employees as independent contractors.”

Misclassification is common in trucking. Following deregulation, large transport companies “sold their trucks to the drivers, then contracted with them on a per-load basis” (Bensman 2009, cited in Carré 2015). Appel and Zabin (2019) summarize the history:

The trucking firm practice of contracting with drivers for their services became a standard strategy across many parts of the commercial trucking industry by the mid-1990s. Contracting allows companies in many instances to shift responsibility for equipment to truck drivers, reduce payroll expenses such as employment taxes and employee fringe benefits, and retain the same effective control over the transporting of loads. Some trucking firms transformed their business model after deregulation entirely, becoming brokers by selling their trucks to former employee drivers and leasing those drivers’ services on an exclusive basis….For twice as much measurable output today, long-haul truckers now make 40% less in wages than they did in the late 1970s, when trucking was considered highly desirable blue-collar work.

A series of articles in USA Today in 2017 focusing on port truck drivers, who haul goods from ports to warehouses, found that

a good chunk of the port trucking industry relies heavily on a modern-day form of indentured servitude. The abuse starts when a trucking company pressures its drivers to sign lease-to-own contracts on their tractor-trailer rigs. Often, these drivers speak little English and do not understand what they are getting into. Once under contract and in debt, these short-haul drivers are at the mercy of the companies they’ve signed on with. The truckers can work days on end without making enough to cover expenses the companies charge them. If they complain, they are fired or given less profitable routes.

Precise estimates of the impact of rising misclassification are not possible with available data, but one can speculate about a range of possible impacts. To gauge the impact we assume that the 3.4 million misclassified workers found by GAO in 1984 (4.4% of nonagricultural wage and salary employment) have risen to 9.0 million (a 7.4% share), and that misclassification lowers wages by either 15% or 30%. Further, we will assume that misclassification is either spread throughout the private nonagricultural wage and salary workforce or, more likely, targeted at the bottom two-thirds; in the former case the share of misclassified workers in total employment rises by 3.0 percentage points, while in the latter case it rises by 4.5 percentage points. The impact is likely to have been on both low-wage and middle-wage workers. These parameters provide a range of impacts: Misclassification lowered wages by between 0.5% and 0.9% if applied across the whole workforce and between 0.7% and 1.4% if affecting and applied to only the bottom two-thirds.34 If one included all workers, including those in the public sector, then the estimated impacts would be proportionally less. We take a 1% decline in the median wage as our ballpark estimate.

Immigration policy that creates ‘labor standard free zones’

Employers have increasingly hijacked immigration policy to create zones in the labor market where workers’ ability to obtain enforceable basic labor standards is compromised by their immigration status. Note that the issue is not just the presence, or supply, of immigrants, but the legal situation that makes undocumented workers exploitable. In our economy, if you can be exploited, you will be. This exploitation of a sizable share of the workforce lowers the wages of migrants as well as those of the workers in their occupations and industries.

Costa (2019) has examined this issue and argues:

[I]n certain local labor markets and industries where a significant share of workers are migrants who do not have access to worker protections and basic labor rights—either because they are unauthorized immigrant workers or because they are migrants employed through nonimmigrant, temporary work visa programs (i.e., “guestworkers”)—the migrant workers’ lack of rights makes it difficult for them to bargain effectively for decent wages, and their weak leverage spills over to undercut the leverage of U.S. workers—i.e., citizens and immigrants who are lawful permanent residents.

Unauthorized immigrants comprise nearly 5% of the U.S. labor force, and these nearly 8 million workers (Krogstad, Passel, and Cohn 2019) are not fully protected by U.S. labor laws because of their precarious immigration status.35

As of 2013 approximately 1.4 million guestworkers were employed through temporary work visa programs, and they accounted for roughly 1% of the labor force (Costa and Rosenbaum 2017); the Organisation for Economic Co-operation and Development recently estimated that 1.6 million full-time equivalent jobs in the U.S. were filled by guestworkers in 2017 (OECD 2019a).36 Although they are legally authorized to work, guestworkers are among the most exploited laborers in the U.S. workforce because the employment relationship created by the visa programs leaves workers powerless to defend and uphold their rights.

Combining the estimates of unauthorized immigrants and guestworkers means that 6% of the workforce is vulnerable to exploitation due to its legal status. The presence of these exploitable migrants is greatest in various service industries—hospitality, restaurants—as well as in construction and agriculture. But there is also evidence that skilled, college-educated guestworkers are underpaid and have been subjected to financial bondage and even human trafficking (Costa and Hira 2020; Smith, Gollan, and Sambamurthy 2014; Stockman 2013). Costa and Rosenbaum (2017) estimate that there were roughly 800,000 skilled guestworkers employed in the United States in 2013.

Wage theft is a common form of exploitation of migrants, and estimates are that it occurs to an extreme degree. As Costa (2019) notes:

The exploitation described here is not theoretical. A landmark study and survey of 4,300 workers in three major cities (Bernhardt et al. 2009) found that 37.1% of unauthorized immigrant workers were victims of minimum wage violations, as compared with 15.6% of U.S.-born citizens. Further, an astounding 84.9% of unauthorized immigrants were not paid the overtime wages they worked for and were legally entitled to.

Research by Apgar (2015) comparing the wages of comparable migrant Mexican workers who were undocumented, had legal permanent resident status, or were temporary guestworkers in the H-2A and H-2B visa programs,37 found that unauthorized workers earned about 13% less than legal permanent residents; temporary foreign workers (i.e., guestworkers) earned about 11% less than legal permanent residents, and their wages did not significantly differ from unauthorized workers’ wages.

Apgar concluded: “Wage gaps suggest that employers use fear of deportation to pay lower wages—not just to unauthorized immigrant workers but to temporary foreign workers as well.”

The presence of exploitable migrant workers therefore undercuts labor standards in immigrant-intensive occupations and industries and thereby depresses wages and benefits of nonmigrants. This exploitation is likely to affect wages in the bottom two deciles more than those at the mid-level, although there are probably some impacts in the middle and further up the scale, where technology-sector guestworkers depress labor standards.

While there is not a deep economic literature that quantifies this type of spillover effect, much qualitative and historical research highlights that it is exactly the intent of many employers in expanding the pool of workers in the U.S. who lack basic worker rights because of their immigration status. Nevertheless, the conscious policy decisions to allow these circumstances clearly contribute to wage suppression.

Failures to police or check new forms of employment ‘contracts’

Employers are increasingly requiring employees to relinquish various rights when they accept employment or even after they are already employed. Noncompete and forced arbitration agreements are chief among these restrictions, and employers within various franchise chains also collude against employees through anti-poaching agreements. All of these agreements limit workers’ options by limiting access to courts and the ability to readily find another job or even to know the basic terms of their employment arrangement. This works to suppress wages.

Noncompete agreements

Employers have increasingly required employees to sign noncompete agreements, which limit options for future employment and are now widespread. The practice suppresses worker mobility and suppresses wages, and it depresses firm entry and dynamism because employees are prohibited from starting their own firms.

This section draws heavily on the Federal Trade Commission testimony of Evan Starr (2020) and Starr’s recent review (2019b) of the evidence on noncompete agreements. John Lettieri’s recent American Enterprise Institute study provides an additional useful analysis.

An example of a noncompete agreement is the one Amazon requires its employees to sign (Woodman 2015):

During employment and for 18 months after the Separation Date, Employee will not, directly or indirectly, whether on Employee’s own behalf or on behalf of any other entity (for example, as an employee, agent, partner, or consultant), engage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon (or intended to be sold, offered, or otherwise provided by Amazon in the future) that Employee worked on or supported, or about which Employee obtained or received Confidential Information.

This is a remarkable agreement for the breadth of its scope (Amazon sells a wide array of goods) and for the fact that it applies to low-wage warehouse workers, even seasonal ones, and that Amazon is one of America’s largest private-sector employers.

How widespread are noncompete agreements? According to a national survey of private-sector American business establishments with 50 or more employees in 2017 (Colvin and Shierholz 2019), “roughly half, 49.4%, of responding establishments indicated that at least some employees in their establishment were required to enter into a noncompete agreement. Nearly a third, 31.8%, of responding establishments indicated that all employees in their establishment were required to enter into a noncompete agreement, regardless of pay or job duties.” The researchers estimate that “somewhere between 27.8% and 46.5% of private-sector workers are subject to noncompetes.”

These data indicate that noncompetes have grown in their use since a survey (Starr, Prescott, and Bishara 2020) of employees in 2014 showed just 18% of the U.S. workforce covered by them, though 38% were subject to one at some point in their careers. The precise extent of the increased incidence of noncompetes is uncertain, however: The Colvin and Shierholz employer-based survey probably captures more noncompete use than the earlier employee-based survey, since many employees are unaware of having signed a noncompete agreement.

Noncompetes are intensively used in establishments with high pay or high levels of education, but they are also common in those with low pay and low education credentials. The 2014 employee survey found that 53% of those covered by noncompetes were paid by the hour and had median earnings around $14 an hour; 33% of the surveyed workers earning under $40,000 reported signing a noncompete agreement during their careers.

Job-to-job mobility is critical for earnings growth—employers don’t have to pay as much if they know workers don’t have good outside options—and so noncompetes, especially enforceable ones (not every state allows their enforcement) can be expected to lower wages. Some workers will be pushed to industries in which they are paid less. There is evidence that employers require employees to sign noncompete agreements even in states where they are not enforceable and that even in those states the agreements hamper wage growth and mobility.38

The contrary view is that noncompetes must be advantageous to employees or they would not have signed them. This “freedom of contract” paradigm presumes employees and employers have equal power and options in a competitive labor market. Lettieri (2020) rejects the freedom of contract interpretation:

The vast majority of noncompete agreements are not subject to any negotiation between the employer and employee, suggesting that the employee is unlikely to receive any benefits in return for their signature. A large share of these agreements are pre­sented for signature only after the employee has already accepted the job offer—often on the first day of work. Employers frequently exploit work­ers’ lack of knowledge and resources when crafting noncompetes. For example, employers commonly request that workers sign noncompetes even in states where they are completely unenforceable—and work­ers nevertheless sign the agreements assuming they are valid. Likewise, employers often craft extremely broad provisions knowing that employees generally lack both an understanding of what is enforceable and the wherewithal to challenge the terms in court.

In fact, Starr (2019b) reports that “less than 10% of workers reported negotiating over non-competes”; 83% of affected workers simply read and signed the contract. “When you ask workers, what did you—what were you promised in exchange for signing a non-compete, 86% of them say nothing, and roughly a third of non-competes were delayed until after the worker accepted the job without any change in responsibilities or a promotion.”

Starr (2019b), assessing studies examining the relationship between noncompete enforceability and wages, found:

[W]orkers in states that enforce non-competes earn less than equivalent workers in states that do not enforce non-competes. One recent study finds that the Hawaii ban on noncompetes for technology workers increased new-hire wages by 4%. The same study also documents that technology workers who start jobs in an average enforceability state have 5% lower wages even eight years later relative to equivalent workers in non-enforcing states. Another two studies looking at broader segments of the labor market document that the negative wage effects of non-compete enforceability are generally borne by those with less education.

Simply put, noncompetes lower wages and mobility for both technical and low-wage workers, whether they reside in states where the contracts are enforceable or in those, such as California, where they are not. Moreover, “where non-competes are really common and highly enforced, the whole labor market suffers” (Starr 2019b), as wages, job mobility, and job satisfaction decline even among those not directly affected.

In his testimony to the Federal Trade Commission, Starr (2020) noted that noncompetes are frequently accompanied by other restrictive agreements, such as nondisclosure, nonsolicitation of clients, nonsolicitation of co-workers, intellectual property assignment (giving the firm ownership of any intellectual property created on the job), and forced arbitration. That noncompetes are included in this cluster of agreements provides further evidence that their purpose is to restrict employee options rather than to protect beneficial investments in and information held by employees. Colvin and Shierholz (2019) also find a strong correlation between the presence of noncompete and forced arbitration agreements.

What is the impact of increased use of noncompete agreements on median wages, low wages, and various wage gaps? The best evidence regarding noncompetes and wage levels is the Lipsitz and Starr (2020) examination of the relationship between Oregon’s 2008 ban on noncompetes for low-wage workers and the average hourly wages of hourly paid workers. The finding that the ban raised wages for hourly workers by 2.2% to 3.1% reflects the impact on those directly affected (about 14% of hourly workers are subject to noncompetes) and the spillover effects on other comparable workers. It is important to note that these results are for hourly, not all, workers, and hourly workers comprised 67% of Oregon earners. Two indications in the Lipsitz and Starr research provide clues to the impact on the median worker. One is that the ban’s impact was comparable across the 20th to 80th wage percentiles of hourly workers, suggesting that the impact on the median would be comparable to the 2–3% average effect (if hourly workers comprise the bottom 67% of earners, then the overall median is the 75th percentile of hourly workers). On the other hand, Lipsitz and Starr report that the impact of the noncompete ban was higher for two occupation groups with wage levels close to the overall median: In construction occupations and installation, maintenance, and repair occupations wages rose by 4.9% and 4.3%, respectively.39 The ban’s impact on wages in construction occupations occurred even though the incidence of noncompetes in construction was below average.40 The ban had basically no effect on a low-wage occupation, food service preparation. These differences across occupations reflect both the incidence and direct impact of noncompetes. In sum, these results suggest that the impact of noncompetes on the median is in the 4.3% to 4.9% range, there is little if any impact for the lowest-paid workers, and noncompetes actually narrow the wage gap (50/10) in the bottom half by depressing the median wage but not affecting the lowest-wage workers.

Another study, Johnson, Lavetti, and Lipsitz (2020), analyzed how the legal enforceability of noncompetes affects wages and labor market mobility. Using a newly constructed state–year panel of noncompete enforceability spanning 1991 to 2014, the authors found that enforceability of noncompetes leads to a decline in workers’ earnings and mobility and increases racial and gender wage gaps (“the earnings effect among women and black workers is twice as large as the effect among white men”). They estimate that average earnings would increase by 8.5% nationally if noncompetes were made unenforceable. We do not draw on these results for our assessment of noncompetes on the median wage, but the 4.3% to 4.9% range we do rely on is far below that of these results. Johnson, Lavetti, and Lipsitz also show that noncompetes lower the wages of college-educated workers more than non-college-educated workers, suggesting that noncompetes narrow the 90/50 wage gap, especially since there is a greater incidence of noncompetes among college-educated workers (25% compared to the average incidence of 18%, according to Starr, Prescott, and Bishara 2020, Figure 3). Elimination of noncompetes would also drain the business profits that accrue to upper-income households, so the overall impact of eliminating them or scaling back their use and enforceability on overall income inequality is uncertain.

Assessing the impact of the increased use of noncompetes on median wage growth since 1979 requires quantifying that increased use. Unfortunately, there is no historical series on noncompete incidence. The agreements have been used for many years, especially among higher-wage professionals and executives, and use has increased as evidenced by the increased public and policymaker attention to the agreements, particularly for middle-wage or lower-wage (e.g., Jimmy John’s sandwich shop workers) workers. If, say, the incidence among hourly workers has doubled since 1979 and the wage impact is roughly 4.5% in recent years, then noncompetes have lowered the median wage by about 2.25%. The impact might be lower if we base the assessment on the 2.2% to 3.1% overall wage effect identified by Lipsitz and Starr (2020) or if the rise in incidence is less than double. It seems equally plausible to us, however, that “doubling” is an underestimate, since we know the incidence of forced arbitration agreements has enormously increased since the early 1990s (from 2% in 1992 to more than 50% in 2017), and firms insisting on forced arbitration also tend to insist on noncompetition agreements. So, we take the 2.25% impact on median wage growth as a rough estimate.

Forced arbitration and class action waivers

Employers increasingly requiring their workers to sign arbitration agreements is another clear example of policy decisions, this time from court decisions starting in 1991, limiting workers’ options to resist workplace exploitation and contributing to wage suppression and inequalities. As noted above, forced arbitration is among a suite of agreements being forced on workers as a condition of employment (Colvin and Shierholz 2019). This trend accompanies the weaker enforcement of labor standards and workplace civil rights by public authorities, as discussed in the wage theft section. Forced arbitration suppresses claims, makes them less likely to succeed, and reduces awards. The consequence is the undermining of the enforcement of employment rights ranging from minimum wage and overtime pay to rights to equal pay and freedom from discrimination or harassment based on race, gender, or religion (see Stone and Colvin 2015, Colvin 2018, and Deutsch et al. 2019).

The incidence of forced arbitration agreements took off after key Supreme Court decisions in 1991 and 2001 made clear “that an American employer may, with near total impunity, require an employee, as a condition of hiring and continued employment, to use private arbitration as the means of resolving public claims against the employer that involve a statutorily protected right” (Lipsky 2007). In 1992, just over 2% of the workforce was covered by forced arbitration agreements, but that share rose to almost a quarter by the early 2000s. By 2017 the share was 56.2% (Colvin 2018).

Of the employers who mandate arbitration, some 30.1% also mandate class action waivers, meaning that besides losing the right to file a lawsuit on their own behalf employees also cannot pursue even their private arbitrations through collective legal action. Colvin (2018) found that “23.1 percent of private-sector nonunion employees, or 24.7 million American workers, no longer have the right to bring a class action claim if their employment rights have been violated.” Individual lawsuits are often unrealistic for low-wage and even middle-income workers because the cost of legal representation may exceed their lost wages. In contrast, class and collective actions allow workers to aggregate claims, making litigation cost-effective (Deutsch et al. 2019). The Supreme Court’s 2018 Epic Systems v. Lewis decision held that employers can require employees to give up their right to sue either as an individual or on a collective basis, a development expected to lead to a further surge in the incidence of mandatory individual and class forced arbitration agreements.

Mandatory arbitration agreements are required across the wage spectrum but have the highest incidence among low-wage workers: Workplaces paying less than $13 per hour mandated arbitration 64.5% of the time, while those with higher wages did so 48–54% of the time (Colvin 2018, Table 4). The largest employers mandate arbitration most often: Those with at least 5,000 employees mandate it 67.7% of the time, while employers with fewer than 500 employees do so 49% of the time (Colvin 2018, Table 1).

There’s a catch-22 to the mandatory arbitration scheme, as illustrated by this example (Deutsch et al. 2019):

Low-wage employers like Chipotle have demonstrated that they never intended arbitration to be a viable alternative to class-action litigation. After being sued for systemic wage theft, Chipotle forced workers to sign arbitration clauses to prevent them from joining the suit. Then when individual workers filed for arbitration, Chipotle blocked the arbitrations from proceeding by refusing to pay its share of the fees.

It is not possible to assess the wage impact of the spread of forced arbitration agreements. The practice is intended to and does undermine the enforcement of employment and civil rights workplace protections, further limiting employee options to resist employer exploitation.

Has any harm done by forced arbitration agreements been offset by the gains made by workers in agreeing to such terms? The majority opinion in Epic Systems asked, “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?” and assumed that when employers and employees have a “freedom” to contract they will both obtain optimal outcomes. Justice Ginsburg in her dissent noted the incongruity of such a claim given that these forced arbitrations were imposed on already-employed workers given “a Hobson’s choice: accept arbitration on their employer’s terms or give up their jobs.” Justice Ginsburg asked:

Were the “agreements” genuinely bilateral? Petitioner Epic Systems Corporation e-mailed its employees an arbitration agreement requiring resolution of wage and hours claims by individual arbitration. The agreement provided that if the employees “continue[d] to work at Epic,” they would “be deemed to have accepted th[e] Agreement.” Ernst & Young similarly e-mailed its employees an arbitration agreement, which stated that the employees’ continued employment would indicate their assent to the agreement’s terms.

Employer collusion and anti-poaching agreements

Do employers collude to suppress pay and restrict competition in the labor market? Adam Smith is often cited as recognizing extensive collusion, writing that employers “are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.” This behavior cannot be readily studied since, as Smith also said, “We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of” (quoted in Krueger and Ashenfelter 2018). A remarkable case of collusion did come to light in recent years when a class action civil suit on behalf of more than 64,000 software engineers and other employees of Apple, Google, Adobe, Intel, Intuit, Pixar, and Lucasfilm was settled in 2015 for half a billion dollars.

We do not know the extent of collusion among employers and how it has changed over time. It is, after all, illegal. There is research on explicit collusion in franchising, however, because this is a gray area in the law.41 Krueger and Ashenfelter (2018) report on anti-poaching agreements in franchises, agreements that limit a particular franchise of McDonald’s, for instance, from hiring a worker from another McDonald’s franchise. To be clear, this type of agreement differs from a noncompete, where employers limit a worker’s options. An anti-poaching agreement is a direct collusion among employers not to recruit workers from each other.

In discussing their findings, Krueger (2018) noted:

58 percent of franchise companies have a no-poaching clause that prevents or restricts the ability of one franchisee in a chain from hiring workers employed by other franchisees. This is up from 36 percent in 1996. The practice is particularly common in fast food chains. We find that 80 percent of the 40 largest Quick Service Restaurant franchise chains have a no-poaching requirement. Since the human capital would remain within the chain, there is little business justification for such a clause other than to restrict worker mobility and opportunities.

No-poaching agreements are more common in low-wage and high-turnover industries (Krueger and Ashenfelter 2018).

Krueger and Ashenfelter (2018) provide a quantitative example to illustrate the impact of no-poaching agreements to facilitate employer market power over workers within franchise chains. In Rhode Island, for instance, instead of 261 employers competing for Quick Service Restaurant workers, anti-poaching agreements effectively limit the competition to just six.

Of course, employers do not have to pay as much when workers have fewer options. Unfortunately, there is no systematic evidence of no-poaching agreements’ impact on workers’ pay and within-franchise job mobility. We do know that these agreements grew substantially over the 1996–2016 period, however, and disproportionately affect workers in low-wage industries and “potentially affect a large number of workers” (Krueger and Ashenfelter 2018).

Tolerating new business structures that disempower workers

In recent decades, employers have increasingly tried to build up concentrated power in product markets (as well as labor markets directly) and to leverage this increased product market power to augment their profitability and the pay of executives by lowering costs and suppressing wages. One mechanism has been to match market concentration with efforts to outsource key parts of their production or workforce to keep those costs from making a claim on the firm’s income. In past years, policymakers might have used industry regulation such as in airlines and trucking and antitrust enforcement to keep these changes in check. But in recent decades, the pushback against these changes in business structure has been rare and muted.

Fissuring: contracting out/outsourcing, temping, and franchising

Perhaps the most pronounced way that employers have attempted to shape labor market outcomes to their advantage through changes in business structure is the “fissuring” of workplaces. David Weil’s book, The Fissured Workplace (2014), as well as analyses by Appelbaum and Batt (2014), provide the details about what fissuring is and how it works to the advantage of employers.

In fissuring, Weil explains, companies seek to focus on the tasks that provide the greatest return while shedding those that are harder to reap extra-normal returns from. The “lead business” maintains tight control of the outcomes of the tasks it sheds by careful monitoring of the spun-off or contracted supplier firms. A classic example is universities: Many once hired employees directly to run student services like cafeterias, but they now hire outside firms instead. In retailing, detailed mechanisms of monitoring and control exist between the lead firm and contracted firms, including franchising agreements, supply chain monitoring mechanisms, and increasingly sophisticated software algorithms. Essentially, lead firms insist on a high degree of control over much of the contracted firms’ output, but abdicate any responsibility for the contracted firms’ employment conditions.

Weil points out that fissuring should be distinguished from contingent work or alternative work arrangements. “Fissured workplace arrangements can exist even though employment itself might be traditional (that is, ongoing and full time) when the worker is employed by a subcontractor, franchisee, or other business organization undertaking the work of a lead business.” In fact, as discussed below, traditional employment arrangements dominate the fissured workplace, and the increase in fissuring, as best as we can surmise, has primarily occurred through subcontracting to firms still using traditional employment arrangements. In short, most of the “fissured economy” does not reflect independent contractors, the gig economy, or other forms of contingent work.

Fissuring is a corporate strategy that emerged from the focus on shareholder value. It raises profits in part by squeezing the costs of subcontractors, who in turn cut wages, and shifting risks onto other firms and workers. Further, fissuring allows workers who may have once benefited from firm-specific economic rents to be cast out of the firm and forced to do the same work at a contracted firm that does not have access to these rents. In a real sense, part of the rationale for fissuring is to hire contracting firms to do the dirty work of cutting pay for workers who were once in the lead firm but who happened to not be performing tasks where rents could be extracted. Fissuring also redistributes profits from contractors to the lead firms. It does not reflect a new way of producing goods and services but rather a rearranging of the business hierarchy in which particular workplaces fit (Appelbaum and Batt 2014). As such, fissuring probably has no impact on aggregate productivity, or on making the production of goods and services more efficient. Instead, its effects are overwhelmingly distributional. Fissuring also does not reflect technological change in how goods and services are produced. Technology does, though, play a role in that communications and other connectivity better enable firms to monitor dispersed economic activity and the fulfillment of standards.42

Appelbaum and Batt (2014) argue that political and institutional factors have also enabled fissuring:

[F]inancial market deregulation gave investors and stockholders more power to pressure firms to maximize shareholder value, and the lax enforcement of labor laws and the decline of union power freed them from prior constraints to do so.

So, fissuring and domestic outsourcing should be interpreted is a business strategy choice and not a beneficial “market force” that satisfies consumer preferences or adapts to newfound abilities to improve efficiency.

Weil’s (2019) estimates show the fissured economy to be substantial:

[C]lose to 19 percent of the private-sector workforce were in industries where fissured arrangements predominate…prevalence could easily double, the presence of fissuring in one workplace spills over to the wage-setting decisions of other businesses and to the labor markets in which they compete for workers.

But estimating the size of the fissured economy is a major challenge researchers are only now undertaking. However, it seems clear that somewhere between a fifth and a third of the economy is characterized by fissuring as a dominant force. Moreover, where fissuring is present it can be extensive, as witnessed by the fact that “about half of Google’s workers are contractors who don’t receive the same benefits as direct employees” (Bergen and Eidelson 2018).

For fissuring to contribute to wage suppression in recent decades it would have to have grown in size and/or provided a more intense push downward on wages and job quality in this time. In terms of growth there is much we don’t know and some things we do. Bernhardt et al. (2016, 40) concluded that “available information points to rapid growth in domestic outsourcing in a wide range of industries since the 1980s.” Fissuring’s growth seems to have primarily occurred in its least-well-measured component, business-to-business subcontracting (frequently relying on traditional employment arrangements), and not through any substantial growth in other components that are better measured, such as use of independent contractors,43 staffing agencies,44 or franchising.45

In any case, there are likely to be downward wage pressures from fissuring. As Weil (2019) notes: “The fissured workplace has been accompanied by the erosion of wage and other workplace norms in many industries and occupations” (p. 160). This is because “[b]y shedding their employees in a variety of ways and making those workers the employees of other organizations, a wage-setting problem becomes a pricing problem. The janitor, maintenance person—or even lawyer—who no longer is a member of the company also no longer need be bounded by the pay considerations of that company’s wage structure” (p. 154).

Various studies confirm that workers in contractor firms earn less, including security guards and janitors (Berlinski 2008; Dube and Kaplan 2010); call center workers (Batt, Doellgast, and Kwon 2006; Batt, Holman, and Holtgrewe 2009; Batt and Nohara 2009); airline workers (Callaci 2019); and logistics (i.e., truck drivers, warehouse workers), cleaning, security, and food services workers (Goldschmidt and Schmieder 2017). Reviews of this literature all indicate the adverse impact of outsourcing on wages (Weil 2019; Appelbaum 2017; Bernhardt et al. 2016; and Rosenfeld 2021).

Moreover, outsourcing not only lowers wages; it also leads to greater wage theft and more dangerous working conditions (Weil 2014, 2019).

Fissuring, and particularly the outsourcing of particular tasks, is probably responsible for the fact that workers in the largest firms no longer receive higher pay than those in medium-sized firms. Where large firms once likely had a core competency that generated economic rents for workers but also directly employed many in occupations outside this core competency, fissuring has allowed lead firms to outsource these noncore occupations and restrict employment to only those jobs performing the tasks that generate or share rents. At the same time, large subcontracted firms dominated by the cast-offs of lead firms now provide relatively low-wage work concentrated in occupations where rents are harder to generate and protect.

As Bloom et al. (2018) show, those in firms with more than 2,500 employees were not paid more in the 2007–2013 period than those in firms that had 1,000 to 2,500 employees, a sharp drop from what prevailed in the 1980s. For instance, a firm with 10,000–15,000 employees paid 15 (log) percentage point more than a firm with 1,000–2,500 employees in the 1980s, but that differential was absent in the 2007–2013 period. The impact is felt beyond wages, since large firms also provide better-quality jobs overall, including higher benefits and better working conditions (Maestas et al. 2017). This erosion of the quality of jobs in large firms affected a large swath of the workforce, as employment in firms exceeding 2,500 employees comprised 39.0% of all jobs in 2014 compared to 37.0% in 1999 and 35.3% in 1979.46

Weil (2019) drives home the point in showing the wage disparities in delivery services: a traditional union employee at UPS earns $23.10 an hour, an “independent contractor” for FedEx earns $14.40, and an Amazon contracted worker (driving the “last mile” of a delivery scheme) earns $5.30, less than the minimum wage.47 In all three case the basic tasks are the same but the corporate structure differs.

A speculative gauge of the impact of fissuring might find that a shift of 15 percentage points of employment into fissured workplaces earning 15.0% less (Goldschmidt and Schmieder 2017) would yield an overall decline of wages of 2.25% overall but even more among non-college-educated and more vulnerable segments of the workforce.

Product and labor market concentration

There has been increasing interest in two key changes in corporate structure in recent decades: product and labor market concentration (sometimes referred to as monopoly and monopsony). We will not use the label “monopsony” here for labor market concentration, as modern labor economics has adopted the term “monopsony” to describe a wide range of influences—including but not limited to market concentration—that give employers power to set wages. It seems clear that there are many reasons for policymakers to be concerned about market concentration, and robust efforts (antitrust or regulation) to confront the malign effect of concentration should be part of the policy toolkit going forward.

Labor market concentration. Though labor market concentration is definitely associated with lower wages, evidence remains lacking that it has increased so as to greatly contribute to wage suppression. Key papers assessing the effect of labor market concentration include Azar, Marinescu, and Steinbaum (2017); Benmelech, Bergman, and Kim (2018); Rinz (2018); and Naidu, Posner, and Weyl (2018). Bivens, Mishel, and Schmitt (2018) surveyed the evidence presented in these papers and found it to show persuasively that labor market concentration is negatively correlated with average wages. The evidence also shows that the average labor market is highly concentrated but the average worker is not employed in a concentrated labor market. This is because concentration is prevalent in rural areas and other labor markets with lower population density, but most people work in labor markets with low to moderate degrees of concentration. The disproportionate labor market concentration faced by rural workers is a key source of the economic stress felt by such workers.

Evidence on trends in aggregate labor market concentration is harder to obtain. Labor market concentration within manufacturing shows a modest increase between 1979 and 2009. This time-series analysis also shows that the adverse wage effects of concentration within the manufacturing sector are greatly attenuated by unionization. If overall labor market concentration rose as fast as concentration within manufacturing over the 1979–2014 period, then rising concentration would have lowered average wages by roughly 1% over the period.

Rinz (2018) found that local labor markets (which he defines as industry by geography) have become substantially less concentrated over time, while national labor markets have become more concentrated. He explains this finding by noting that large players in local labor markets may have become bigger national players over time. For example, if 30 years ago regional fast-food chains dominated local labor markets but now just one or two national chains dominate all local labor markets, local labor market concentration would be unchanged (there was always only a small number of players in any local labor market) but national concentration would be greater. The effect of this pattern of concentration on earnings and wage inequality depends on what is more important—local or national labor markets.

Product market concentration—monopoly power in product markets. The growth of product market monopoly power over prices does not seem to have contributed to wage suppression, though firms may have leveraged their monopoly positions to suppress wages and profits in supplier chains. Key papers directly assessing the effect of product market concentration include Autor et al. (2017b); Barkai (2020); De Loecker, Eeckhout, and Unger (2020); Grullon, Larkin, and Michaely (2015); and an analysis by Goldman Sachs (Struyven 2018). Bivens, Mishel, and Schmitt (2018) surveyed some of the evidence presented in these papers and found that they demonstrated that product market concentration rose steadily across six sectors from 1982 to 2012 (manufacturing, retail, wholesale, services, finance, and utilities and transportation). The magnitude of this rise has varied substantially across sectors. Data after 2012 are not yet available from the Census Bureau. Other sources of data on industry concentration (for example, from Compustat, a private database of publicly owned firms) are often viewed with some suspicion by scholars of industrial organization.

The main channel through which increased product market concentration would affect wages in most textbook conceptions is through a shift in income from wages to profits. The increased concentration gives firms pricing power, and the higher prices increase profit margins while reducing the purchasing power of wages. Between 1997 and 2012, during the time when concentration in a number of industries increased, the overall share of corporate-sector income claimed by labor shrank significantly. However, labor markets were very different in 1997 as compared to 2012; the unemployment rate was 4.9% in 1997 and 8.4% in 2012. As labor markets tightened after 2012, labor’s share rose in the corporate sector.

To more rigorously test the hypothesis that there has been a secular decline in product market competition that has transferred income from wages to profits through higher prices, one would want to see the labor share in equivalently tight labor markets over time. Bivens (2018) notes that economists have often been too quick to declare declines in the labor share “structural” and hence not amenable to reversal by more expansionary macroeconomic policy. That is, the fall in labor’s share could be the result of firm monopoly power but could also be due to eroded worker power due to excessive unemployment. Many of the studies of monopoly’s impact on labor’s share cannot distinguish between these two competing, or complementary, explanations.48

The rise in labor’s share as unemployment fell in the recent recovery suggests a strong role for eroded worker power, since monopoly power is not expected to diminish with lower unemployment. For instance, labor’s share (in the corporate sector) rose from 75.6% in 2016, when unemployment was 4.9%, to 77.3% in 2019, when unemployment averaged 3.7%.49 Stansbury and Summers (2020) note in support of the eroded worker power explanation that “Greenwald, Lettau, and Ludvigson (2019) find that a reallocation of income from labor to shareholders can account for a large share of the rise in equity valuations from 1989 to the present.”

Barkai (2020) finds that increases in product market concentration in recent decades have reduced both labor and capital shares across detailed industries, with a concomitant rise in the “pure profit” share, which he interprets as evidence of declining competition and greater monopoly power. His framework of parsing out profit and capital shares separately is extremely useful. However, the capital share requires estimating a return to physical capital, and because this return and the pure profit return are bundled together in any observable data series, it is a real empirical challenge to do and no professional consensus exists on the scale of his estimates.

Autor et al. (2017b) estimate that the increase in product market concentration between 1997 and 2012 could account for a third of the decline in the labor share over that period. Bivens, Mishel, and Schmitt (2018) calculate that this translates into a reduction in overall wages of roughly 2.9% over that time. It is also possible that what Autor et al. are measuring reflects fissuring rather than product market concentration.

While the rise of profit shares is consistent with evidence of rising monopoly power in product markets, Stansbury and Summers (2020) note that this is also consistent with reduced labor market power of workers. They further note that textbook models of increased monopoly power in product markets should also see faster inflation, reduced output, and an increase in the unemployment rate consistent with stable inflation, i.e., the nonaccelerating inflation rate of unemployment, or NAIRU. Decreased worker power, conversely, should see slower inflation and a reduced NAIRU—and these seem more consistent with real-world macroeconomic evidence over recent decades. In short, rising monopoly power in product markets that has harmed U.S. households through excessive price growth seems unlikely to be a major channel through which concentration may be dragging on wage growth.

Product market concentration—dominant buyers squeezing suppliers. In traditional conceptions of the harms done by product market concentration, firms’ monopoly power is leveraged against consumers of their output, with prices being pushed above what would prevail in competitive markets. However, many real-world firms with substantial market share (Walmart and Amazon, for example) charge their own customers seemingly low prices while leveraging their market power instead against the firm’s own suppliers, coercing them into providing supplies at low prices. This in turn squeezes both profits and wages for the supplier firms.

Path-breaking research by Wilmers (2018) has identified and quantified the impact of these “dominant buyers.” He documents that dominant buyers have been able to squeeze profits and lower wages in their supplier chains, and their economic heft has grown over time. Using Securities and Exchange Commission filings of publicly owned companies to document the large increase in dominant buyers, Wilmers estimates that the share of nonfinance suppliers’ revenue obtained from dominant buyers increased from 5% in 1979 to 19% in 2014 overall and from 6% to 26% in manufacturing and logistics.50 The biggest increase in the role of dominant buyers came in manufacturing, wholesale and shipping, primary resource extraction, utilities, construction, and information and professional services. Over the course of the last four decades “the composition of these dominant buyers shifted toward large retailers [e.g., Walmart] and other intermediaries“ (Wilmers 2018, 221).

Wilmers argues that there was not only an increase in the role of dominant buyers but also an intensification of their wage impact:

[N]egative wage effects have intensified since the early 2000s, and in several years in the 1980s, reliance on dominant buyers had negligible effects. During the period of wage stagnation and the restructuring of buyer-supplier relations, the wage effects of dominant buyer reliance turned increasingly negative. (Wilmers 2018, 229)

Wilmers estimates that the increase in dominant buyers lowered the growth of average annual earnings by 3.4 percentage points over the 1979 to 2014 period among publicly owned nonfinancial firms. The impact among low- and moderate-wage workers almost surely was larger than this.51

Deregulation of industries

Starting in the late 1970s, Congress deregulated various industries, including airlines, trucking, interstate busing, telecommunications, utilities, and railroads.52 In each of these industries, deregulation had a strong adverse impact on the wages and compensation of blue-collar workers. Fortin and Lemieux (1997) showed that 9% of the workforce in the 1980s was affected by industry deregulation and that in such industries there was a much larger erosion of middle-wage jobs.53 According to their estimates, deregulation explained about 7% of the rise in male wage inequality between 1979 and 1988, especially for those above a low-wage threshold. Card (1996) showed a 10% decline over 1980–1990 in the relative earnings of airline workers after deregulation. Deregulation weakened the ability of employers to pay high wages and in many sectors, most notably trucking, led to a steep erosion of unionization (Viscelli 2016). A New York Times (2018) editorial noted, for example, that “the 1.7 million heavy and tractor-trailer truck drivers in the United States earned an average of $44,500 last year…and far below the $55,500 (in 2017 dollars) earned in 1979, despite drivers working longer hours.”

The aggregate impact of the policy choices generating wage suppression

This section draws on the earlier assessments of the factors generating wage suppression to account for the divergence between the growth of net productivity and median hourly compensation over the 1979–2017 period and the suppression of the growth of the 10th percentile wage and the wage gap in the bottom half (i.e., the 50/10 wage gap). We start by looking at the relationship between our analysis and that of other contributions to understanding wage inequality and, specifically, how our analysis complements and points in the same direction as other recent research that has focused attention on worker power.

Relation to other literature

Our analysis builds on what Stansbury and Summers (2020) referred to as a “long history of progressive institutionalist work exemplified by Freeman and Medoff (1984), Levy and Temin (2007), and Bivens, Mishel, and Schmitt (2018).”

An important recent marker in this tradition was the keynote address by former chairman of the Council of Economic Advisers and Princeton economist Alan Krueger (Krueger 2017) to the Federal Reserve Board Jackson Hole conference. Krueger said that certain economic models “give employers some discretion over wage setting” and, in a footnote, said, “Notice that I don’t call these features ‘imperfections.’ They are the way the labor market works. The assumption of perfect competition is the deviation from the norm of ‘imperfection’ as far as the labor market is concerned.”

Krueger’s speech reflects a shift away from the conventional labor market view that has been accepted by both liberal and conservative economists for decades: that competitive labor markets are the same as any other market and are characterized by equally empowered employers and employees. What is emerging, however, is an appreciation that labor is a distinct type of commodity and that unequal bargaining power is an inherent characteristic of the employer-employee relationship. This change of perspective has a profound impact on the analysis of labor market dynamics and which labor policies and economic policies in general are required to rebalance power in the labor market and thus obtain robust wage growth and better-quality jobs for the vast majority.

There has also been a growing acceptance that anemic U.S. wage growth can be explained by the “rigging of the system” against the typical worker. This framework was adopted by former President Trump, who picked up on themes earlier laid out by Senators Elizabeth Warren and Bernie Sanders.

That the economic system is rigged to create upward redistribution has been the theme of economists (e.g., Dean Baker, Josh Bivens, Jared Bernstein, Joseph Stiglitz, Lawrence Mishel, Heidi Shierholz, Elise Gould, and James K. Galbraith) and policymakers for some time, though articulations of how the system is rigged vary. President Trump, for instance, focused on immigration, trade treaties, and bureaucracy. Others focus on growing product market monopoly power affecting consumers. Some analyses focus on the need for more competition (Block and Harris 2021). The approach in this paper is to pinpoint and measure the impact of the factors that have empowered employers in the labor market to be able to suppress wage growth for the vast majority; these include maintaining excessive unemployment, weakening labor standards, diminishing unions and their economic and political power, leveraging monopoly power to lower labor costs through fissuring and subcontracting, and by adopting forced arbitration, noncompetes, and other contractual mechanisms to undercut worker options.

This paper returns to a mode of analysis, dominant in the 1990s but abandoned in recent literature, that focuses on empirically identifying the impact of specific causes of wage inequality and evaluating their contribution to explaining overall wage inequality trends.

Comparison to the new monopsony literature

The new monopsony literature reinforces our narrative in important ways and further highlights the need to identify the specific factors generating employer power over wages and ways this power has changed over time. A broad interpretation of employers’ “monopsony” power does not hinge on labor market concentration (i.e., the proverbial one-company town), but instead diagnoses labor markets as being affected by employers’ exercise of power that allows them to cut wages without fear of losing a large portion of their workforces—regardless whether the source of this power is market concentration or anything else.

A number of studies—including Webber (2015 and 2020); Dube, Giuliano, and Leonard (2019); Dube et al. (2020); Bassier, Dube, and Naidu (2020); Azar, Marinescu, and Steinbaum (2019); Langella and Manning (2020); Card et al. (2018); and the meta-analysis by Sokolova and Sorensen (2020)—show that employer power is ubiquitous in the modern U.S. labor market. These studies estimate the labor supply elasticities facing firms, i.e., the responsiveness of employees to exit following changes in wages offered by employers. For instance, Webber (2020, 18) notes:

The majority of firms (median labor supply elasticity=0.85) compete for workers in labor markets where the typical employee is highly unlikely to move in response to small or even modest changes in their wage. This gives these firms considerable latitude to pay lower wages without worrying about a mass exodus of employees.

The monopsony literature has identified a substantial amount of employer power such that employers are able to, as Bassier, Dube, and Naidu (2020) put it, “mark down” wages by anywhere from 20% to 50%. There is some evidence on the time trend of employer monopsony power; two studies have shown that employer power increased since the late 1990s (Webber 2020; Langella and Manning 2020), though Bassier, Dube, and Naidu (2020, Table 6) show stability over the 2003–2012 period. One consistent finding of these studies is that employers are able to exert more power over low-wage than other workers, affirming that employer power generates wage inequalities.

What these studies, which overwhelmingly focus on recent data, convincingly demonstrate is that employers wield power over U.S. wages. These studies also point to influences that seem to blunt the effect of employer power—like unionization, high-pressure labor markets, and high values of minimum wages. For example, Bassier, Dube, and Naidu (2020), examining the 2003–2012 period, find that monopsony power was greater in the 2007–2010 period of very high unemployment than in the preceding or subsequent years. Langella and Manning (2020) find monopsony power in the U.S. declining in recoveries (1996–2000 and 2002–2007) and increasing as unemployment escalates (2000–2002 and after 2008 but continuing through 2016).

What these studies suggest is that employer power is ubiquitous in labor markets and, absent institutions and policies that provide countervailing power, wages will be lower and wage growth suppressed. One way to interpret the review of evidence in the current paper is that employer power is the constant of modern labor markets, but what has changed over the past generation in the United States to generate anemic wage growth is the erosion of institutions and policies—high-pressure labor markets, unions, and binding minimum wages—that once provided countervailing power.

Naidu and Sojourner (2020) usefully place this shift into a broader context:

It is not clear that monopsony power has increased over time, but that is also not necessary to make monopsony an important force for explaining inequality…. It is clear that the scope that employers have to exercise the market power they do hold has increased over time, as argued by Erickson and Mitchell [2008]. In an economy without unions, without strong internal labor markets, and with low-cost worker performance monitoring, the forces that may have restrained employers from exercising the latent market power they held (collective bargaining agreements, implicit seniority rules, within-firm equity norms, and efficiency wages) have diminished. It may not be that monopsony has gone up, but it is certainly true that the countervailing forces have declined.

In this light, this paper’s analysis can be considered an examination of “what has changed” in the face of ongoing employer power in labor markets.

This new monopsony literature provides a top-down analysis, which has primarily focused on estimating the aggregate scale of employer power. Some of the recent contributions have started to identify the underlying factors, examining the role of unionization, high-pressure labor markets, and high values of minimum wages, in explaining an aggregate metric of monopsony power. In contrast, our study is a bottom-up analysis examining the impact of myriad specific factors and gauging their contribution to the productivity–median compensation divergence over the past four decades.

Explaining the divergence between productivity and median hourly compensation growth

In examining the corporate and government policy levers that have suppressed wages, our conclusion is that they can account for the vast majority of wage suppression. In the next section we find that these policies can account for the entirety of the fall in wages at the 10th percentile and the corresponding growth of the wage gap between low-wage workers and the median worker.

It can be difficult to assess causality and take interactions into account. But looking at the sum of the impact of the key factors supports the narrative that intentional policy decisions (either of commission or omission) have generated wage suppression. Analysts may differ on the assessment of particular factors, but our hope is that this compilation inspires further efforts, including ones for which we do not have sufficient empirical work to even make guesses.

How much needs to be explained? Above we estimated that by 2017 rising inequality and the erosion of labor’s share of income had lowered compensation of median workers by roughly 43% relative to net productivity growth. Table 3 summarizes the estimated impact on median hourly compensation of the factors that have driven rising inequality and the decline in labor’s share of income. The first panel details the productivity and compensation trends. Between 1979 and 2017 net productivity (economywide productivity net of depreciation) grew 56.0% while median hourly compensation (wages and benefits) grew 13.0%, leaving a 43.0% divergence. If we used hourly compensation of production workers (82% of payroll employment) as the pay measure rather than the median wage, the divergence would be even greater. Benefits are included in these analyses using the ratio of compensation to wages from the National Income and Product Accounts to convert wages to compensation. By deflating both net productivity and the pay measures by the CPI-U-RS index, we have stripped out the influence of differing deflators (for productivity and compensation) from our calculation of the divergence, leaving only the changes in labor’s share of income and changes in compensation inequality as drivers of the divergence (see Bivens and Mishel 2015).

Table 3

The impact of specific factors on the growth of the median wage is detailed in the second panel and discussed next. For purposes of the analysis we equate the impacts on median wages, identified above, with that on median hourly compensation: this is not a consequential decision since the 13.0% growth of median hourly compensation over the 1979–2017 period just slightly exceeded the 12.2% growth of median hourly wages.54

The share of the various factors in explaining the overall divergence of net productivity and real hourly compensation is presented in Table 4 and illustrated in Figure I (examining growth, in percent, of factors) and Figure J (examining growth, in dollars, of factors).

Table 4

Figure I

Figure J

Austerity macroeconomic policy (excessive unemployment)

The impact of excessive unemployment caused by contractionary macroeconomic policy, promulgated to control inflation, (suppressing labor costs in the name of controlling inflation) reduced wages for the median worker by 10.0% between 1979 and 2017. Adjusting for the “flattening” of the Phillips curve since 2008, as we do here, lessens the impact of higher unemployment on wage growth; without this adjustment the impact would have been 12.2%. These contractionary policies caused unemployment to remain 0.8 percentage points above even a conservative estimate of full employment (the NAIRU)—5.5%—between 1979 and 2017, a sharp contrast from the 0.51 percentage points that unemployment remained below the NAIRU in the prior 30 years. If the unemployment rate had been held lower, say to 5% on average, then median wages would have been about 18.3% higher by 2017.

Of course, a 5.5% target for full employment is a modest goal, and if policymakers had achieved a reasonable target of 4.5% the impact of excessive unemployment would be double the 10% presented in Table 3.

Erosion of collective bargaining

The erosion of collective bargaining had an adverse impact by lowering the wages of non-college-educated workers, particularly men, and has also lowered the wages and benefits of nonunion workers in sectors where collective bargaining had previously set wage patterns. Fortin, Lemieux, and Lloyd (2021) estimated that eroded unionization (including spillovers) explains 37.3% of the growth of the 90/50 wage gap (which rose 0.33 log points) among men over the 1979–2017 period, equivalent to a 0.32 percentage point annual decline and a 12% (log point) decline in wages over the entire period for the median male earner. Union coverage fell less for women (due to less unionization among women in 1979), so union erosion explains only 13% of the growth of the 90/50 wage gap (which rose 0.28 log points) among women, equivalent to a 0.10 percentage point annual decline and a 3.6% (log point) decline in wages over the entire period for the median female earner.

We relied on an unpublished analysis of the Fortin, Lemieux, and Lloyd (2021) model to pinpoint at 7.9% the impact of deunionization on the median wage of all workers (men and women combined) for the 1979–2017 period:

Deunionization raised the log 90/50 wage gap by 7.7 log points, almost entirely by reducing the median hourly wage by 7.6 log points, or by 7.9% (0.2 percent annually). The impact on men is larger, with deunionization lowering the male median wage by 10.9 log points, or 11.6% (0.29 percent annually). Deunionization therefore explains 33.1% of the 23.2 log point growth of the 90/50 wage gap over the 1979–2017 period.

Above we noted that Mishel, Rhinehart, and Windham (2020) show that automation and globalization can explain less than a fifth of the erosion in private-sector collective bargaining; the lion’s share has been due to changes in corporate practices enabled by lax legal protections and changing rules.

Globalization on capital’s terms

Bivens (2013) found that, by 2013, trade flows with low-wage nations were likely reducing wages for workers without a four-year college degree by roughly 5.6%. For a non-college-degreed worker making the median hourly wage and working full time, full year, this translates to about $2,000 annually. This estimate is nearly identical to what Autor, Dorn, and Hanson (2013) find in a regression-based investigation of the wage impacts of imports from low-wage countries.

Policy decisions have amplified globalization’s downward wage pressure. Trade agreements, for instance, have been the result of corporate capture that has engaged in selective and regressive protectionism that has severely restricted the policy space of our trading partners.

Impact of the top three factors

As summarized in Table 4 and Figure I, together these three factors alone—excessive unemployment, eroded collective bargaining, and corporate-driven globalization—can account for a 23.5% decline in the median wage from 1979 to 2017 and for 54.7% of the divergence between net productivity and median hourly compensation. Figure J shows that excessive unemployment, eroded collective bargaining, and corporate-driven globalization lowered the growth of median hourly compensation by $5.45: absent these factors median hourly compensation would have risen to $28.59 rather than to $23.59.

Weaker labor standards

The failure to update the value of the federal minimum wage is a premier example of policy action shaping the wage structure and undermining the wages of the bottom third of earners (heavily women and minorities), or 46 million workers. The minimum wage’s impact probably does not extend to the median, so we express that as zero in Table 3. The impact on the 10th percentile wage is considered below.

The erosion of other labor standards likely had an impact throughout the wage structure. Overtime protections for salaried workers declined precipitously and nicked median workers’ wages by 0.3%, while growing misclassification of workers as independent contractors lowered the median wage by 1.0%. Other practices and policies, like lax protections against wage theft, the increased presence of undocumented workers and guestworkers, and more extensive racial discrimination have likely lowered wages, but we are not able to provide an empirical assessment.

Employer-imposed contract restrictions

Employers have increasingly required employees to relinquish various rights when they accept employment, or even after they are already employed, through agreements regarding noncompetition and forced arbitration. Employers within franchise chains have also colluded against employees through anti-poaching agreements, which limit workers’ employment options. The effort to quantify the impact of these policies is still in the beginning stages. We estimate that noncompete agreements have reduced the median wage by 2.25%, but we have not been able to derive good estimates of the impact of forced arbitration (now covering more than half of nonunion employees) nor of anti-poaching agreements among franchisers.

Changes in corporate structure

Changes in corporate structure—from deregulation to fissuring to rising market concentration—likely pushed down wages by at least 5% by 2017. A speculative gauge of the impact of a shift of 15 percentage points of employment into fissured workplaces where wages are 15% less would imply an overall decline of wages of 2.25% and probably an even larger decline at the median. Wilmers’ (2018) estimated that the increase in dominant buyers lowered annual earnings by 3.4% over the 1979–2014 period among workers in publicly owned nonfinancial firms; the impact presumably fell disproportionately on low- and moderate-wage workers. Industry deregulation in airlines, trucking, interstate busing, telecommunications, utilities, and railroads permanently lowered wages for blue-collar workers in the affected industries. Fortin and Lemieux (1997) estimated that 9% of the workforce in the 1980s was affected by industry deregulation, and this explains about 7% of the rise in male wage inequality between 1979 and 1988. Increased product market concentration’s direct impact on prices and profits may not have added to wage suppression, though the leverage of monopoly enables fissuring and the dominant buyer’s ability to squeeze wages and profits in supplier chains.

There is likely to be some double counting when aggregating the fissuring and dominant buyer factors, but it is also likely that the unassessed components of corporate structures exerted at least as much downward wage pressure to offset it.

Automation/skill-biased technological change

As detailed earlier and in Appendix A, automation and skill-biased technological change are prima facie implausible explanations of the wage suppression or wage inequality experienced at least since 1995. It is notable that productivity and investments in capital, software, and information equipment—the footprints of automation—have all decelerated, at least since 2005. Moreover, the rate of change of occupational employment patterns has been historically slow. Indirect or deduced measures of automation-driven relative demand for skills (measured in terms of a college education) have also grown remarkably slower since the mid-1990s (Autor, Goldin, and Katz 2020; Autor 2017). In addition, occupational job polarization has not been present since the late 1990s (Autor 2010; Autor 2015; Mishel, Shierholz, and Schmitt 2013; and others). Given this deceleration of the salient indicators of automation and automation’s impact on key labor market metrics (relative demand for college education, occupational polarization), we assign no impact in Table 3 to automation or skills gaps in driving the productivity–pay divergence for the 1995–2017 period. Our discussion above did not cover the 1979–1995 period, so we do not assign any impact one way or another to automation and skills gaps then. We remain skeptical that there was any impact, though, following the analysis in Mishel, Bernstein, and Schmitt (1997a) and Card and DiNardo (2002).

Suppressed wage growth at the 10th percentile and growth in the 50/10 wage gap

We can also draw on our analyses of the various factors to explain the trend in the wage gap in the bottom half—between the median and the 10th-percentile earner—and the disappointing wage growth at the bottom. Recall that wages at the bottom fared similarly to those in the middle from about 1987 onward, and for low-wage workers wages plummeted in the 1979–1987 period, especially among women. The 50/10 wage gap grew only in the 1979–1987 period. Two factors, the lowering of the inflation-adjusted value of the federal minimum wage and excessive unemployment, can readily explain these trends.

Contribution of the eroded minimum wage

The failure to maintain the value of the minimum wage since 1979 greatly shaped the wage gap in the bottom half and the level of wages at the 10th percentile; this was discussed above and presented in Table 2, based on analysis of the Fortin, Lemieux, and Lloyd (2021) model (which includes spillover effects). Table 5 draws on these results and shows that the fall in the minimum wage lowered the 10th percentile wage by 16.7 percentage points between 1979 and 2017, far more than the actual 2.1% decline of the 10th percentile wage. Almost the entire growth—15.0 percentage points—of the 50/10 wage gap can be explained by a lower minimum wage (impact of 13.8 percentage points); absent that the 50/10 wage gap would have shrunk modestly (by 4.7 log points). It was primarily the lowering of the real value of the minimum wage in the 1979–1987 period that drove the growth of the 50/10 wage gap and the lowering of 10th percentile wages, especially among women.

Table 5

These estimates of the minimum wage’s impact on low-wage earners would be even greater if the counterfactual were maintaining the threshold relative to the median either as it was in 1979 or at the historic peak value in 1968. For instance, the ratio of the minimum wage relative to the median wage of all full-time, year-round workers fell from 52.8% in 1968 to 45.7% in 1979 and to 33.3% in 2017 (Cooper 2019, Figure C). Thus, the minimum wage in 2017 would have to increase by 37% to reach the 1979 level or by 59% to reach its level of 1968. In contrast, if the standard is the real value of the minimum wage, in 2017 it would have needed to be increased by 26% to attain its 1979 level. The minimum wage’s threshold could be targeted at a much higher level if not for the dramatic shortfall of the growth in the median wage relative to net productivity—the 43% shortfall highlighted in this paper.

Contribution of excessive unemployment

Excessive unemployment had a somewhat larger impact on low-wage than middle-wage workers. Had unemployment averaged 5.5% rather than the 6.3% that prevailed over the 1979–2017 period, the wages of the 10th percentile worker would have been 11.6% higher and the 50/10 wage gap would have been 2.7 percentage points lower (Table 4). As discussed above, these estimates take into account the “flattening” of the Phillips curve post-2008. We would note that the impact of higher unemployment would be double what is presented here if we assumed a baseline for full employment of 5.0%.

Summing up the factors

In all, the policy-driven factors delineated in Tables 3, 4, and 5 explain a vast share of the divergence between productivity and median hourly compensation and changes in the wage gap in the bottom half.

The best-measured impacts, those for excessive unemployment, eroded collective bargaining, and corporate-shaped globalization, can account for 23.5 percentage points (or 55% of the total) of the 43% productivity–median compensation divergence. The harder-to-measure impacts of other factors (lowering of the overtime threshold for salaried workers, misclassification, noncompete agreements, and changes in corporate structures like fissuring) can collectively account for another 9.2% of the erosion of the median wage and explain another 21.4% of the divergence. These sum up to explaining about three-fourths (76.1%) of the divergence (Table 4 and Figure I). This is an understated conclusion since there are many additional policy factors that we have not been able to empirically assess: wage theft, guestworker programs, racial discrimination, industry deregulation, exploitable immigrants, forced arbitration, and anti-poaching agreements.

Excessive unemployment and the erosion of the minimum wage more than fully explain the (limited) growth of the wage gap in the bottom half and the substantial shortfall in the growth of the 10th percentile wage (which fell modestly even though net productivity rose by more than half). Other factors such as exploitable immigrants with limited legal rights, increased wage theft, and employee misclassification also depressed wages at the bottom.

In short, without all of these policy-driven changes in the U.S. economy, the bulk of the gap between typical workers’ pay and economywide productivity would not have occurred, and wages at the 10th percentile would have risen instead of fallen. Limited access to courts, collective bargaining, and employment and the inability to rely on government labor standards have systematically weakened the options that workers have to improve their wages, hours, and working conditions.

There are reasons to believe that the impact of these factors is larger than the sum of their individual effects. One way of understanding what has happened is to gauge all the ways that an individual workers’ options to obtain better employment conditions or to affect their current employment have been increasingly foreclosed—limiting both exit and voice. When workers want to improve their conditions of work, they have increasingly limited options to organize a union, rely on adequate and enforceable government standards (e.g., the minimum wage, safety and health, overtime, anti-discrimination, correct classification), or make employers accountable through litigation. Exit is more limited because of anti-poaching agreements, noncompetes, and generally higher unemployment, and the downward pressure on their wages is intensified by globalization, fissuring, and dominant buyer power. Increasingly, resistance is futile.

The lessons here are simple. Wage growth has been greatly directed by policy decisions and is a political variable. It responds—robustly—to big policy changes. But for decades these policy decisions have gone in the wrong direction. Policymakers can deliver prosperity to the vast majority of U.S. workers based on faster wage growth. Whether workers obtain a fair share of the economy’s gains in the future will depend not so much on abstract forces beyond their control but on demanding that their political representatives restore bargaining power to workers, individually and collectively.

Acknowledgments

We gratefully acknowledge the assistance of people who provided information or commented on particular issues: Eileen Appelbaum, Danny Blanchflower, David Cooper, Daniel Costa, Nick Hanauer, Thomas Lemieux, Mike Lipsitz, Celine McNicholas, Suresh Naidu, Heidi Shierholz, John Schmitt, Andrew Sharpe, Anna Stansbury, Evan Starr, Marshall Steinbaum, Thea Lee, David Weil, Nathan Wilmers, and Ben Zipperer. Melat Kassa provided essential, excellent research assistance. We also are appreciative of the funding of the Economic Policy Institute’s Unequal Bargaining Power initiative by the Nick and Leslie Hanauer Foundation, the William & Flora Hewlett Foundation, and the Bernard and Anne Spitzer Charitable Trust.

Appendix A: The failure of automation and skill gaps to explain wage suppression or wage inequality

That U.S. workers have “skills deficits,” that is, lack the skills necessary to deal with technological change, including primarily automation, has been the predominant explanation offered by economists, pundits, policymakers, and the media to explain sluggish wage growth and inequality in the United States, at least until recently. This is the skill-biased technological change hypothesis, which points to the increased use of computer equipment in the workplace and the onset of the information age.

This narrative is sometimes presented as explaining the wage gaps between “skilled” and ‘‘unskilled” (meaning those without a college degree) earners and the disappointing wage growth for the vast majority. This appendix will show that the skills deficit/automation claim has always been a weak explanation for the trends since 1979, and, since the mid-1990s, all indications are that there is no basis at all for considering automation as a significant factor in wage suppression or the growth of wage inequality. For this reason, center-left economists have increasingly stopped highlighting these factors in discussions of the wage problems we face, though the narrative lingers among the punditry.

The conventional wisdom on automation and wage inequality

The general view of the last 30 years is that inequality and wage stagnation are the result of technological change in the workplace, meaning automation, and globalization driven by either technological advances or the political decisions of U.S. trading partners (China’s decision to join the world trading system, for example). These trends were seen as not only inevitable but desirable, in that the harm to workers is the byproduct of forces one would neither want to nor could change. The only appropriate remedy is to adapt, primarily by upgrading workers’ skills and education and perhaps by providing a more adequate safety net.

We examined in the body of the paper the impact of globalization for wage trends and drew two conclusions: Globalization played a nontrivial role in lowering the wages of non-college-educated workers, and this downward pressure has been strengthened by policy decisions creating selective and regressive shaping of the global rules. This appendix focuses on the automation/skills deficit dimension.

The automation narrative in the 1990s (the Clinton years)

In the 1990s center-left economists settled on skill deficits as the dominant explanation for growing wage inequality. As noted by President Clinton’s Council of Economic Advisers (1995):

The sluggish growth of incomes is due to dramatic changes in technology and in global competition that have affected industrialized economies around the world, reducing the relative demand for workers with less education and training…. [M]ost economists believe that a shift in the demand for labor in favor of more highly skilled, more highly educated workers has played a key role. Intensifying global competition is also cited as a factor in putting downward pressure on the wages of less educated workers. However, a number of studies have found that the easily measured direct effects of trade on the wage distribution were small….

An array of economists adopted the automation narrative in the 1990s. Conservatives drew on the work of Kevin Murphy, Gary Becker, and others to conclude that skills deficits explained wage gaps, pointing to higher returns to both education and other, unobservable (meaning not captured by specific variables in survey data) skills. The center-left drew on the work of Katz and Murphy (1992) and, later, an important book by Goldin and Katz (2008), The Race Between Education and Technology. While conservatives have produced little new empirical work on wage inequality in the last 20 years or so, the center-left has focused, until very recently, on developing a newer version of skill-biased technological change centered on the polarization of occupational employment patterns (Autor, Katz, and Kearney 2006; Autor 2010; Acemoglu and Autor 2011; Kearney, Hershbein, and Boddy 2015).

The automation narrative in the 2010s (the Obama years)

This narrative was the dominant one offered by the Obama administration, and President Obama (USA Today 2018) was still offering it in September 2018:

This change has happened fast, faster than any time in human history. And it created a new economy that has unleashed incredible prosperity. But it’s also upended people’s lives in profound ways. For those with unique skills or access to technology and capital, a global market has meant unprecedented wealth. For those not so lucky, for the factory worker, for the office worker, or even middle managers, those same forces may have wiped out your job, or at least put you in no position to ask for a raise. As wages slowed and inequality accelerated, those at the top of the economic pyramid have been able to influence government to skew things even more in their direction: cutting taxes on the wealthiest Americans, unwinding regulations and weakening worker protections, shrinking the safety net. So you have come of age during a time of growing inequality, of fracturing of economic opportunity.

In this story, rapid technological change has led to substantial growth overall and for those at the very top—the ones with “unique skills” and “access to capital”—while those without unique skills and access to capital experience diminished demand and are unable to push for higher pay.

Similarly, a leading conservative labor economist and chairman of the George W. Bush Council of Economic Advisers from 2006 to 2009, Ed Lazear, offered the automation story in the Wall Street Journal in 2019:

How are American workers doing? Neither the middle class nor the poor have fared well in recent decades—but don’t blame tax cuts, a too-low minimum wage or the greed of the 1%. In rich countries around the world, the top half of the income distribution has been pulling away from the bottom half. Productivity growth among high-wage workers, driven by technological change, is the reason…. The likely explanation is that changes in trade and technology have raised the productivity of highly trained, highly educated workers relative to the less skilled. Wages tend to move with productivity, so that if differences in worker productivity grow, wage differences will also grow. (Lazear 2019)

The skills deficit story sounds logical, but it’s not true. It fails to explain wage patterns over the last four decades, and it is a prima facie implausible explanation for at least the last 20 or more years (since 1995 or 1999). Contrary to President Obama’s contention, technological change (or at least automation) has not been especially rapid in the last dozen years or so (there’s actually been a substantial deceleration). Further, the contention that there has been a shift in the demand for labor in favor of more highly skilled, highly educated workers was not true in the late 1990s and has happened far more slowly in the 2000s than in earlier periods.

Automation: A flawed explanation

There have been two versions of the automation narrative, one based on education wage differentials, used to explain the trend in 1980s, and one based on “polarization” in occupational employment, used to explain the 1990s and beyond. Both versions were recently offered by economist David Autor as being among four explanations of wage inequality (Greenhouse 2020). Autor was asked, “[D]espite productivity gains of around 75% since the 1970s, the average American worker saw their wages increased by only 20% since then. There are numerous theories as to what has caused this…. How do you think this happened?” He responded:

There’s no single answer to that question. I would say there are four really important forces. One of them is educational attainment—the rate of growth of educational attainment in the United States actually slowed in the early 1980s. So the rate at which people were completing college, but the demand was growing for college-educated workers. And that led to a lot of rising inequality, just because the wages of the more educated rose relative to others….

A second force is the direction of technological change, which has increased the value of abstract reasoning of creativity, of expertise, of judgment, and devalued a lot of skilled work that people did that followed well-understood rules and procedures. So that would be many clerical jobs, phone answering jobs, calculating, accounting, bookkeeping, copying and filing, but also many production jobs, which often involved skilled, repetitive tasks. But increasingly once we understand the rule book for that type of work, it’s feasible to encode it in software and have it executed by machines or by computers. [Autor mentioned two other forces: “trade pressure” and institutional changes that eroded worker protections.]

This section will briefly review the failures of both versions of the automation narrative to explain the key wage patterns identified in the paper. Our discussion focuses on automation and not “technology” or “technological change,” since the latter terms imply a more general dynamic than one in which the implementation of new technologies in workplaces substitutes software and equipment for labor.

The education narrative

The automation story based on educational differentials sees wage inequality as being driven by increasing education wage gaps. The reasoning is that workplace automation has had a “skill bias” in recent decades, meaning that automation has largely just reduced the demand for a subset of workers—those largely without four-year college degrees. In most discussions skill is equated with what people obtain with four-year college degrees. If the supply of college-educated workers keeps up with the demand for college graduates driven by ongoing automation, then the wage premium for having a college degree will be flat and there will be no increase in wage inequality. If supply fails to keep up with automation-driven relative demand—leading to “skill deficits”—then the relative price of college graduates will rise and drive up wage inequality. Some have argued (as mentioned earlier) that the supply of college graduates faltered around 1980 and failed to keep up with growing demand from ongoing automation.

But for automation to cause a change in wage patterns, technology/automation has to outrace skills.55 It is not enough for automation to be occurring in workplaces or to continue in the same manner as before. Automation, after all, has been a force in workplaces for over 200 years, while education levels have also grown rapidly. Moreover, it is possible for automation to be a large and ongoing force in shaping the pattern of jobs/occupations (rising white-collar and declining blue-collar employment shares) without it generating wage inequality. For instance, automation was ongoing in the 1950s and 1960s when real median wages rose and wage inequality did not increase.

For a hypothesis to have resonance it should connect the major observations within its purview, and the theory that skill-biased technological change explains growing wage inequality fails across many dimensions.56

Top 1% wage growth. The leading research promoting education wage differentials as the driver of overall wage inequality (Katz and Murphy 1992, Goldin and Katz 2008) does not address the redistribution to the very top. Some might attempt to explain this as increased returns to the skills of executives and professionals in finance corresponding to the rise in the college wage premium. But there is no persuasive evidence to support a skill explanation for rising top 1% wages and income or, specifically, the superlative executive compensation growth and expansion in the financial sector that lays behind it (Bivens and Mishel 2013).

“The more you learn the more you earn.” The education story, at least as applied to the 1980s in Katz and Murphy (1992), offers to explain both the rising 90/50 and 50/10 wage gaps as reflecting the rising relative wage differentials between every level of education: college over some college, some college over high school, high school over less-than-high-school. Such an explanation, however, cannot explain why automation did not generate rising education wage differentials between dropouts, high school graduates, and associate college graduates after the 1980s. The flat or declining 50/10 wage gap in the 30 years after 1987 is inconsistent with the skills-gap narrative, since middle-wage workers who have more education than low-wage workers have not reaped a growing advantage since then. Acemoglu and Autor (2012) identified this as a major failure of the education narrative in their review of Goldin and Katz (2008). Mishel, Bernstein, and Schmitt (1997a) made that same point years earlier. (The changed behavior of the 50/10 wage gap in the 1990s—stable or flat rather than growing, as in the 1980s—has been cited by proponents of the occupational employment polarization story as a motivation for adopting this new framework; see Mishel, Shierholz, and Schmitt 2013 for the history.)

The sharp deceleration in automation-driven relative demand for college graduates in the mid-1990s. The college wage premium flattened in the early and mid-1990s. Several studies, all by proponents of the automation explanation, found that the impact of automation on the relative demand for college graduates substantially declined after the mid-1990s relative to earlier decades. Autor (2017) updated the Katz and Murphy (1992) model and showed that the automation-driven relative demand for college graduates decelerated by a third in the early to mid-1990s. Goldin and Katz (2007, Table 1) also showed a large deceleration in 1990–2005 relative to earlier decades going back to 1950, noting “a slowdown in demand growth beginning in the early 1990s” (p. 6).

Autor, Goldin, and Katz (2020), updating the Goldin and Katz (2008) metrics from The Race Between Education and Technology, confirmed the dramatic deceleration of automation’s impact:

[T]he model’s results…divulge a puzzling slowdown in the trend demand growth for college equivalents starting in the early 1990s. Rapid and disruptive technological change from computerization, robots, and artificial intelligence is not to be found though the impact of these technologies may not be well captured by this two-factor setup.

Their results (based on Autor Goldin, and Katz 2020, Table A2) show a deceleration in growth of relative demand for college graduates in the 1999–2017 period relative to earlier periods: a 45.8%  deceleration relative to the 1979–1999 period and a 41.8% deceleration relative to the longer 1959–1999 period. The period since 1999, therefore, has been one featuring a historically small impact of automation on (relative) demand for college graduates.

If automation’s impact has been far less in the last 25 years than in earlier decades, then it cannot explain the ongoing strong or even faster growth of wage inequality in the top half, illustrated by the growth of the 95/50 and 90/50 wage gaps.

It is ironic that just as the education narrative was becoming dominant in the mid-1990s the actual automation-driven relative demand for college graduates became markedly slower, negating the story that automation’s impact was accelerating and causing inequality.

Growing within-group wage inequality. The rise of education wage differentials is, at best, only a partial explanation of rising wage inequality because roughly 60% of the increase is due to greater inequality within education groups (Mishel et al. 2012, Table 4.20; Autor, Goldin, and Katz 2020). Autor, Goldin, and Katz (2020) acknowledge that growing within-group wage inequality is a challenge to the automation narrative.57

Stagnation of wages for college graduates. The story that automation-induced unmet demand for college graduates is lifting the wages of those with more education while punishing the wages of those with less is belied by the actual labor market experience of college graduates. For one, the inflation-adjusted wages of college graduates did not rise between 2000 and 2014, making the “lifting of the most educated” story not very convincing. The widespread use of unpaid internships for college students and graduates provides further evidence that employers do not have “unmet needs.” There is also ample evidence that the wages of entry-level college graduates slumped in the 2000s (Gould 2020) and that many young college graduates filled jobs that did not require a college degree (Abel and Dietz 2014). The median annual wage of recent college graduates, according to the New York Federal Reserve Board, rose by only 1% from 2000 to 2019, hardly a sign of winning in a race between education and technology/automation.

The slow growth of the college wage premium since 1995 or 2000. This fact makes the education wage-gap narrative a prima facie implausible explanation for the growing wage gap in the top half. While the college wage premium grew minimally since 1995 and especially since 2000, the 95/50 wage gap continued to grow strongly. The log 95/50 wage gap rose 0.76 points per year in 1979–2000 and rose even faster, by 1.00 log points per year, over 2000–2019 (see Appendix Figure A). In sharp contrast, the key education wage gap, the college–high school wage premium, grew far more slowly in the latter 2000–2019 period—hardly growing at all, just 0.13 log points per year, 87% slower than in the 1979–2000 period.

Appendix Figure A

As noted above, the growth of the wage gap in the top half, illustrated by the 95/50 or 90/50 gap, is a key wage pattern that needs to be explained, as it was the only source of growing wage inequality other than that of the top 1% in the last three decades. These data show that any explanation of wage inequality based on education wage gaps is implausible for the period since 2000 (and probably since the mid-1990s). That is, it is implausible that a sharply decelerating growth of the college wage premium can help explain an accelerated growth of the 95/50 wage gap since 2000.

The slowdown of college completion. The education wage-gap narrative sometimes focuses on the slower growth of college completion post-1979 as the cause of wage inequality. This makes sense within the conventional framework that ignores the role of other factors—globalization, weaker unions, lower minimum wages, and so on—besides supply and automation-driven relative demand. Nevertheless, the slowdown of college completion cannot explain wage inequality since the early to mid-1990s, the era of slight growth in the college wage premium. After all, slow college completion is said to increase wage inequality as the relative supply of graduates falls short of relative demand. The growth of the relative supply of college graduates, according to Autor, Goldin, and Katz (2020, Table 3), was very slow in the most recent two decades (1999–2017), yet the college wage premium barely grew.

The framework put forth by Katz and Murphy (1992) and by Goldin and Katz in The Race Between Education and Technology (2008) relies on competitive labor markets driven solely by relative supply of education and automation-driven relative demand for education. The notion that the relative demand for education (as a proxy for automation) can be deduced from education wage premiums and supply trends presumes that factors other than automation (unions, globalization, minimum wages, corporate structure changes, and others) have no impact. The evidence presented in this paper indicates otherwise. Simply put, the college–high school wage premium goes up and down for lots of reasons besides automation and supply factors, and we cannot readily deduce automation’s impact from data on wages and education supply.

There have been many critiques of the skills deficit/education wage-gap narrative in the past, and the analyses have stood the test of time; these include Mishel and Bernstein 1994; Mishel, Bernstein, and Schmitt 1997a, 1997b; Mishel and Bernstein 1998; Howell and Wieler 1998; Galbraith 1998; Howell 2001; Card and DiNardo 2002; Mishel, Shierholz, and Schmitt 2013; and Howell and Kalleberg 2019.

The job polarization automation narrative

A new automation-causes-wage-inequality narrative emerged around 2005 to replace or supplement the education wage-gap narrative and to overcome one of the latter’s key weaknesses—the inability to explain why the 50/10 wage gap grew in the 1980s but flattened or declined in the 1990s. The job polarization story claims that the nature of automation changed starting in the 1990s such that automation replaced middle-wage occupations/jobs more than jobs in low-wage and high-wage occupations. This is demonstrated by mapping the changes in occupational employment patterns by wage level. That is, this story relies heavily on the expansion of low-wage occupations characterized by routine manual tasks, the expansion of high-wage occupations requiring abstract, nonroutine tasks, and a corresponding shrinkage of occupations in the “middle,” which perform routine manual tasks.

Autor, Katz, and Kearney (2006) articulated this narrative:

[T]hese models also imply a puzzling deceleration in relative demand growth for college workers in the early 1990s, also visible in a recent “polarization” of skill demands in which employment has expanded in high-wage and low-wage work at the expense of middle-wage jobs. These patterns are potentially reconciled by a modified version of the skill-biased technical change hypothesis that emphasizes the role of information technology in complementing abstract (high-education) tasks and substituting for routine (middle-education) tasks.

This occupational employment polarization narrative was introduced into the policy world in a Center for American Progress/Hamilton Project paper by David Autor (2010) and articulated as the necessary replacement for the education narrative in Acemoglu and Autor (2012).

But the job or occupational polarization story fails to explain key trends and wage patterns:

Growth in top 1% wages. The job polarization narrative, as with the education wage-gap narrative, fails to address the superlative wage growth of the top 1% and top 0.1%, a major dynamic driving wage inequality.

Lack of evidence of job polarization since 1999 or in the 2000s. This was demonstrated in Mishel, Shierholz, and Schmitt (2013) and Beaudry, Green, and Sand (2013, 2014) and further confirmed in Hunt and Nunn (2019). The key chart in Autor (2010, Figure 1) showed there was no job polarization in the 1999–2007 period, but that finding was not mentioned in the text. Autor’s paper (2015, 149–50) for the Kansas City Federal Reserve Board’s annual Jackson Hole conference acknowledged the lack of polarization in the post-1999 period through 2012, the latest data available at that time:

Although the polarization hypothesis can explain some key features of the U.S. and cross-national data, reality invariably proves more complicated than the theory anticipates. The clearest evidence for this general dictum is the unexplained deceleration of employment growth in abstract task-intensive occupations after 2000, which is discussed by Beaudry, Green, and Sand (2013, 2014) and Mishel, Shierholz, and Schmitt (2013)…. The final empirical regularity highlighted by Chart 7 is that growth of high-skill, high-wage occupations (those associated with abstract work) decelerated markedly in the 2000s, with no relative growth in the top two deciles of the occupational skill distribution during 1999 through 2007, and only a modest recovery between 2007 and 2012. Stated plainly, the U-shaped growth of occupational employ­ment came increasingly to resemble a downward ramp in the 2000s.

A “downward ramp” and the absence of the “U-shaped growth of occupational employ­ment” are acknowledgments, though expressed in a not-very-straightforward manner, that job polarization was not present between 1999 and 2012.

Obviously, a narrative based on the changing composition of employment by occupation (expanding low-wage and high-wage occupations and shrinking middle-wage occupations) cannot be relevant to explaining post-1999 wage patterns if those occupational employment patterns have not been evident. In fact, the Autor (2014) data show that nearly all of the employment growth was in low-wage occupations, a pattern that does not readily explain why the wage gap between the top and the middle kept expanding and did so at an accelerated pace. For occupational employment patterns to explain top-half wage-gap growth would require finding a rapidly expanding need for high-wage workers able to carry out abstract, nonroutine tasks, a pattern not present since 1999.

Lack of a relationship between occupational employment patterns and wage inequality. Remarkably, the job polarization narrative relies on mapping occupational employment patterns to explain wage inequality but has never presented evidence that these occupational employment shifts affect wages. In fact, Mishel, Shierholz, and Schmitt (2013) show that changes in occupational employment shares (whether an occupation expands or contracts employment relative to other occupations) are not related to changes in relative wages by occupation (whether wages in that occupation rose or fell relative to wages in other occupations). That is, one would expect that occupations that expand (contract) would have rising (falling) wages relative to other occupations. Looking at the relation between changes in occupational employment shares and the corresponding relative wages of occupations, Mishel, Shierholz, and Schmitt (2013) found no relationship in each of the decades of the 1980s, 1990s, and 2000s. It is also worth noting that middle-wage occupations have shrunk and higher-wage occupations have expanded since the 1950s, but median wages and wage inequality have risen and fallen over this time with no apparent correspondence to job polarization trends.

If occupational employment patterns do not affect occupational relative wages, then they certainly bear no relationship to changes in wage inequality, since presumably the mechanism for automation to cause changes in wage gaps is for automation-induced changes in occupational employment patterns to alter the relative wages of occupations. The effort to track occupational employment patterns has no implications for understanding wage patterns.

Footprints of automation

The discussion so far has relied on economic analyses that derive the pace and skill bias of automation from patterns of occupational employment growth or from wage and education supply trends. It is worthwhile to examine other perhaps more direct footprints of automation to discern the pace of automation in recent years compared to earlier periods. These data are illustrated in Appendix Figure B, drawn from Mishel and Bivens (2017) and Mishel and Shierholz (2017).

Appendix Figure B

Automation is what occurs as new technologies are incorporated along with new capital equipment or software to replace human labor in the workplace. Labor productivity and capital investment are both measures of automation in that they necessarily accompany the substitution of capital for labor. Thus, if there were a recent surge of robots or automation, we would expect to see the footprints in trends in productivity, capital investment, and software investment. The trends shown in the figure suggest that automation has been far slower since 2002 than in the three earlier periods: the early postwar years from 1973 to 1973; from 1973 to 1995; and over the high-tech boom years of 1995–2002. There is certainly no evidence of automation having accelerated. These data affirm the findings above that automation, given its slow pace in recent years, is unlikely to have been a major factor driving wage stagnation or wage inequality in the last two decades.

Automation (along with shifts in consumer demand and trade) would be expected to be a major factor in why employment in some occupations expands and employment in other occupations declines. Therefore, we can also examine the pace of change in the occupational composition of employment to deduce trends in automation.

Using the data in Atkinson and Wu (2017), Mishel and Bivens (2017) computed a metric to examine the pace of occupational employment shifts in each decade. Specifically, Mishel and Bivens examined the shares of total employment for each of the 250 occupations in the data for the beginning and end years of each decade and computed the changes in these shares. The sum of the occupational share gains will automatically be equal to the occupational share losses, so the metric of change in each decade is half the sum of the absolute change in employment shares. This metric adjusts for differences in the rate of employment growth in each decade and the absolute employment size of individual occupations. This metric of shifts in occupational employment measures the shares of total employment exchanged between occupations that gain and occupations that lose employment shares each decade.

Mishel and Bivens found that occupational employment changes were “fairly uniform over the 1940–1980 period and far more rapid than for any period since 1980. The period since 2000 has seen the lowest rate of change—half the rate of change of the 1940–1980 period.” These findings indicate that the pace of occupational employment shifts was extremely slow in the 2000s, affirming the deceleration found in the slower growth in productivity, software, and capital investments identified in Appendix Figure B.

Appendix B: The intentionality of macroeconomic policies

There is a growing recognition that unemployment was kept excessively high for the purpose of inflation control over long periods after 1979. Could this have been simply a technocratic mistake, an instance of policymakers underestimating the sacrifice that would be required to keep inflation in check? We think this proposition lets policymakers off the hook too easily.

First, it was completely predictable who would bear the brunt of a contractionary macroeconomic shock, and Fed policymakers, charged with maintaining high employment as well as stable prices, were obligated to construct some portfolio of policies designed to cushion the shock.

Second, macroeconomic policymakers and particularly the Federal Reserve consistently overshot their own conservative estimates of the NAIRU—the nonaccelerating inflation rate of unemployment—during most of the 1979–1995 period. Rather than aiming for stable inflation after the 1970s episode of accelerating inflation, they sought to reduce inflationary expectations to a very small number, and they were willing to tolerate the extended periods of unemployment this required.

Finally, if going the severe contractionary route was a technocratic mistake, it was a foolish one. Keeping unemployment rates above the “natural rate” is an expensive way to reduce inflation, especially since evidence that inflation rates like those experienced in the United States in the 1970s are deeply damaging is very hard to find. In the U.S. postwar experience, there is no consistent relationship between inflation rates and aggregate growth. But large distributional shifts can occur with unanticipated bursts of inflation. Inflation does indeed reduce the real value of wealth stocks, but it also reduces the real value of liabilities. In essence, it causes a redistribution from net creditors to net debtors. So, for example, Americans who bought a home with a fixed-interest-rate mortgage in the late 1960s or early 1970s saw a windfall wealth gain as inflation eroded the real burden of their mortgage obligation. Inflation hawks tend to emphasize particularly sympathetic economic actors who might be hurt by this—retirees living on fixed incomes, for example. Of course, even by the 1970s most retirees’ incomes mainly comprised Social Security benefits, which were largely shielded from price increases.

Against these uncertain aggregate benefits, policymakers should weigh the extremely large and regressive costs of recessions engineered largely to break inflationary expectations. The recessions of the early 1980s and 1990s were both caused in large part by interest rate hikes undertaken by the Federal Reserve to reduce inflation. The cumulative output loss of the two early 1980s recessions approached 80% of one year’s gross domestic product (GDP) at the time, while the early 1990s recession exacted a cumulative cost of nearly one-third of one year’s GDP.

Were these costs necessary for reducing the 1970s inflation? While the 1970s inflation was the first in post-1900 U.S. history to not to be associated with a war effort, its cause was not mysterious: It was the combination of oil price shocks caused by political unrest in the Middle East and the global slowdown in productivity growth. The real price of oil tripled in 1973 (the Yom Kippur War), declined after 1975, and doubled again in 1979 (the Iranian Revolution). These exogenous oil shocks were amplified by wage-price spirals, as both firms and workers tried to raise the nominal prices under their control (product prices and wages, respectively) to avoid bearing the full brunt of adjusting to higher input costs, all without realizing that the economy’s underlying capacity to deliver income growth (productivity) had slowed markedly.

Implicit in this analysis is a view that inflation is at least in part an outcome not just of over-accommodative macroeconomic policy (the conservative view), but of distributional conflict between capital and labor. When bargaining power is more equal, exogenous price shocks take longer to propagate through the economy and cause higher and more persistent inflation. After an exogenous price shock, firms raise their price level to preserve profit margins, at the expense of real (inflation-adjusted) wages. Workers who have some degree of bargaining power can respond by demanding higher nominal wages to claw back the lost ground. Firms then pass on the higher wage costs into higher prices and so on. The longer this process goes on, the steeper and more persistent is the inflation. Conversely, if firms are able to pass on higher prices in response to the initial cost shock and workers lack the bargaining power to demand higher nominal wages in response, then the shock is muted and leads to lower and less persistent inflation.

What made the oil price shocks especially effective in generating wage-price spirals in the 1970s were the atypically strong perceptions held by American workers about their own bargaining power, as well as expectations of real wage growth fostered by decades of rapid and equal economic growth.

Coming into the 1970s, American workers had experienced wage growth on par with productivity growth for most of the past three decades, and this productivity growth averaged 2% per year. They had also come off a decade from 1959 to 1969 when unemployment averaged 4.8% and reached a low of 3.5% in 1969. Further, key labor standards in the U.S. labor market were strong in historical terms. Private-sector unionization rates were 24.2% in 1973, more than twice as high as they are today. The inflation-adjusted value of the minimum wage reached its highest point ever in 1968 after three decades of rising (roughly) with economywide productivity.

An objection to an analysis putting the 1970s inflation at the feet of wage-price spirals has traditionally been that it implicitly blames workers for inflation’s rise, and seems to acknowledge the need for reducing workers’ bargaining power as an anti-inflation strategy. This line of thinking is unjustified and unfair. The root causes of the inflationary episode of the 1970s were two oil price shocks, and a wage-price spiral following such an exogenous shock requires, by definition, both wages (driven by workers’ desire to protect wages’ purchasing power) and prices (driven by firms’ desire to protect their profit margins) to rise. Blaming this spiral on the workers’ side alone is unfair, but typical in our framing of labor-capital conflicts. We’re more likely to hear about “labor militancy” rather than “capital militancy” when the subject is wage-price spirals, but this is probably because it is taken as given that capital will be militant and usually effective in protecting its share of income. Times must be truly remarkable when the economic context allows labor to push back and protect its gains.

Galbraith (1997) makes the obvious inference from this episode:

It would therefore be reasonable to approach anti-inflation policy in general as a matter, first and foremost, of designing circuit breakers for shock episodes, so as to reduce the cost of adjusting to a new pattern of relative prices and therefore the need to do it through the brute-force method of mass unemployment. Some simple steps, like coordinating the timing of wage bargains and providing the president with limited discretion over cost-of-living adjustments in Social Security, federal pensions and other payment streams might help a great deal….

In short, the fact that the 1970s inflation was tamed by the severe contractionary approach does not mean that the approach was most efficient way to tame this inflation, or that the benefits outweighed the costs imposed on the broader economy.

Notes

1. The Republican Party platform reads: “Our economy has become unnecessarily weak with stagnant wages. People living paycheck to paycheck are struggling, sacrificing, and suffering.” The Democratic platform reads: “But too many Americans have been left out and left behind. They are working longer hours with less security. Wages have barely budged and the racial wealth gap remains wide, while the cost of everything from childcare to a college education has continued to rise.”

2. The 44.6% growth is the growth of wages on average over the 1979–2019 period and represents what each group would have experienced absent changes in the distribution of wages.

3. This acceleration is reflected in the growth of the log 95/50 wage gap, which grew 0.75 log points annually from 1979 to 1995 and by 1.0 log points from 2000 to 2019, using the same data as in the figures.

4. This college–high school wage premium is the premium estimated using log hourly wages, and the controls are for gender, race and ethnicity, education, age, and geographic division. The premium is the coefficient on “college,” having a four-year degree but no further education, as the omitted category is “high school.” The sample is wage and salary workers ages 16 and older in the CPS-ORG data; the data are available at https://www.epi.org/data/#?subject=wagegap-coll.

5. See Table A2 in Autor, Goldin, and Katz 2020. The relative supply of college graduates grew 1.96 log points annually from 1999 to 2017, down from 2.28 log points annually from 1979 to 1999. This deceleration of supply should have led to a faster growth of the college wage premium.

6. The most recent version of this chart can be found at https://www.epi.org/productivity-pay-gap/.

7. In addition to these two factors, Bivens and Mishel also identified differential trends in the price deflators used to measure productivity and real median hourly compensation. Since our focus is on the inequality-generating factors–inequality within compensation or a shift toward labor’s share of income­—we compute the divergence so as to exclude the impact of differing price deflators (using the CPI-U-Rs to deflate both productivity and median hourly compensation).

8. Restoring labor’s share to 82.4% means a 9.1% across-the-board increase (82.4/75.5 = 9.1%) in compensation); falling to 75.5% is an 8.4% cut ((75.5/82.4 – 1) = 8.4%).

9. This conclusion is based on regression-based estimates of the Black–white wage gap. Wages are adjusted into 2018 dollars using the CPI-U-RS. The regression-based gap is based on average wages and controls for gender, race and ethnicity, education, age, and geographic division. The log of the hourly wage is the dependent variable. See https://www.epi.org/data/#?subject=wagegap-bw.

10. See https://www.epi.org/data/#?subject=wage-education.

11. The range in each estimate brackets the regression results from using state-specific unemployment rates to predict wage growth, as Bivens and Zipperer (2018) did, and results from using national time-series data only. The lower state-specific results likely stem predominantly from smaller and noisier samples at the state level.

12. Estimates of the wage impact of unemployment on the median and 10th percentile wage are from Bivens and Zipperer 2018, Figure F. The impact of 1 percentage point higher unemployment lowers the median wage by 0.459 and 0.296 in the earlier and latter period and lowers the 10th percentile wage by 0.582 and 0.243 in the earlier and latter period.

13. See Bivens and Zipperer 2018 for a demonstration of how including the post-2008 period reduces the coefficient on unemployment in a wage Phillips curve, and Bivens 2019 for coefficient estimates for just the post-2007 period.

14. These data are the share with collective bargaining coverage for “1979,” calculated as an average of 1977–1980 shares from May CPS data.

15. This discussion draws heavily from Bivens et al. 2017.

16. Evidence for these effects can be found in Mishel et al. 2012: union impact and coverage by demographic groups (Table 4.33) and by education, occupation, and wage fifth (Table 4.37).

17. These estimates look at what wages would have been in 2013 had union density remained at its 1979 levels.

18. Fortin, Lemieux, and Lloyd (2021) find a 7.6 log point impact of deunionization on the median. This amount includes both direct and spillover impacts. Their estimate of the direct union impact on the 90/50 wage gap is 52.8% of the total union impact. Applying that share to 7.6 points yields a 4.0 log point estimate of a direct union effect on the median wage. Anna Stansbury provided a benchmark for comparisons to the Fortin, Lemieux, and Lloyd results based on her work with Summers (2020): “We estimate for the nonfinancial corporate sector a direct effect of union decline on labor rents for noncollege workers of 2.9 percent of compensation over 1984 to 2016.” The Fortin, Lemieux, and Lloyd estimates line up close to, even below, the Stansbury-Summers estimate if one adjusts the Stansbury-Summers results for the longer time period used by Fortin, Lemieux, and Lloyd, 1979–2017. There was a very steep decline in union membership from 1979 to 1984, comprising 40% of the total decline from 1979 to 2016. If one scales the Stansbury-Summers estimate to the total decline since 1979, their estimated impact would be 4.8% (2.9% × [1/60.4%]), an even larger impact than Fortin, Lemieux, and Lloyd.

19. Western and Rosenfeld find that deunionization’s impact (direct and spillover) on wage inequality explained 33.9% of male wage inequality and 20.4% of women’s wage inequality. The comparable estimate for Fortin, Lemieux, and Lloyd (2021) is deunionization explaining 28.8% and 6.7%, respectively, of men’s and women’s wage inequality.

20. Farber et al. (2021, 33) note: “We show that a combination of low-skill composition, compression, and a large union income premium made mid-century unions a powerful force for equalizing the income distribution.” Specifically (p. 24): “During our long sample period, the union premium has remained between ten and twenty log points, with the less-educated receiving an especially large premium. Moreover, the negative effect of unions on residual income variance is large and also relatively stable over time. By contrast, selection into unions is not constant across time. In the Great Compression period, when unions were at their peak and inequality at its nadir, disadvantaged households were much more likely to be union members than either before or since.”

21. This conclusion leaves open, however, the question of how useful or good the status quo rules of the game governing globalization are, even aside from any downward pressure they may put on American workers’ wages. For example, these rules’ effects on the economic development possibilities of poorer countries or the ability of all countries to tax mobile capital are incredibly important issues in their own right. Saying that the downward wage pressure of the globalization status quo could be overcome with an aggressive domestic policy response does not imply that this status quo should be preserved.

22. This estimate is based on the impact of raising the minimum to $15 in 2025 and including the impact on those who received minimum wage increases at the state or local level since 2017. This estimate understates the share of earners affected since it ignores those in states that had a higher minimum than the federal threshold minimum wage in 2017 but did not increase it further since then.

23. This calculation refers to net productivity growth (output per hour taking depreciation into account). Average wage data are drawn from NIPA data, deflated by the CPI-U-RS.

24. Increase from July 2019 to October 2025, as per analysis in Cooper 2019.

25. This estimate assumes 0.5% real wage growth in the median worker’s wage from 2019 to 2025. One obtains similar results if one examines the real value of the minimum wage relative to the average hourly earnings of production/nonsupervisory workers.

26. See https://www.dol.gov/agencies/whd/minimum-wage/history.

27. The analysis provides estimates of the impact of the higher threshold on weekly hours (Table 21) and weekly wages (Table 22). These data allow a computation of the before and after hourly wages that are the basis for these estimates.

28. Those affected on the post-1979 erosion of the salary threshold include three groups. The first are those directly affected by the raising of the salary threshold as proposed by the Department of Labor, the 4.2 million receiving a 1% hourly wage boost. The second group are the broader group, the 8.9 million affected by the 2016 rule change. There was probably a smaller than 1% wage impact for this group, since it is generally more educationally downscale than those directly affected (see Shierholz 2019 analysis of the education composition of those enjoying new protections versus “strengthened protections” from the 2016 rule change). The remaining group are those who earned above the 2016 rule change and the salary threshold in 1979.

29. See Table 1 in Gould 2018 for the decile cutoffs in 2017.

30. Judged by the share of the workers covered in 1979, 39.8%, compared to those who would have been covered by the 2016 rule in 2015, 32.7% (Kimball and Mishel 2016).

31. This section draws heavily on Shierholz 2021.

32. Calculated as 0.68 * 0.1495 = 0.102.

33. “I was also struck by commentary from leaders at digital platforms in Silicon Valley, as well as our own discussions with executives, venture capital companies, and workers. Most indicated that they viewed an independent contractor status as the default option for employment” (Weil 2017).

34. For instance, a rise of 3.1 percentage points of the entire private nonagriculture workforce yields a 0.5% or 0.9% wage reduction if misclassified workers are paid, respectively, 15% or 30% less than regular W-2 workers. Similarly, a rise of 4.6 percentage points among the bottom two-thirds of the private nonagriculture workforce yields a 0.7% or 1.4% wage reduction if misclassified workers are paid, respectively, 15% or 30% less than regular W-2 workers.

35. This discussion borrows heavily from Costa 2019.

36. For additional discussion and context on OECD’s findings, see Costa and Martin 2019.

37. Also see the literature review in Ortega and Hsin 2018 for evidence of wage disparities between unauthorized and authorized workers.

38. Starr, Prescott, and Bishara (2020, 15) state: “The ability to enforce noncompetes should encourage greater noncompete use, more investment, and higher wages, but employers use noncompetes virtually as often in states where they are clearly unenforceable.” Starr, Prescott, and Bishara (2019) find “that noncompetes are associated with reductions in employee mobility and changes in the direction of that mobility (i.e., toward noncompetitors) in both states that do and do not enforce noncompetes…. [W]e find that employees with noncompetes—even in states that do not enforce them—frequently point to their noncompete as an important reason for declining offers from competitors.”

39. BLS data on “median weekly earnings of full-time wage and salary workers by detailed occupation and sex” at https://www.bls.gov/cps/cpsaat39.pdf show weekly earnings for full-time workers in construction and installation, maintenance, and repair occupations at, respectively, 94% and 102% of U.S. weekly earnings. The noncompete ban estimates are in Figure 5 using fixed effects and controls. Mike Lipsitz kindly provided the exact estimates.

40. The incidence of noncompetes in construction occupations (12%) was a bit below the average (14%), while that for installation, maintenance, and repair occupations was above average (18%) (Figure 5, Starr, Prescott, and Bishara 2020).

41. As Starr (2019b) suggests, “it’s not clear if different establishments owned by separate franchises should be considered competing entities.”

42. Technology plays a role in that communications and other technologies better enable firms to monitor dispersed economic activity and monitor the fulfillment of standards. Key researchers in this field have noted the enabling role of technological changes. Weil (2014) wrote, “Information and communications technologies have enabled this hidden transformation of work.” Bernhardt et al. (2016) write: “New information and communications technologies (ICT) have facilitated outsourcing and the decentralization of producing goods and services because ICT lowers the costs of information processing and coordination of work across organizational boundaries, thereby reducing the cost advantages of internal production. ICT also enhances firms’ capabilities to monitor and enforce contracts with external suppliers, thereby reducing the relative advantages of hierarchy. ICT allows firms to achieve control over productive activities—the advantages of vertical integration—without assuming the risks of actual ownership or the inflexibility of bureaucracy.”

43. Self-employment or independent contracting has been stable for the last 25 years, contrary to the hype about how we are all becoming gig workers and freelancers. The Contingent Worker Survey (CWS) (BLS 2018), the gold standard of data tracking “alternative work arrangements,” found that in 2017 those who were independent contractors (and do not themselves have any employees) on their main job comprised about 7% of all employment, the same as in 1995 and 2005 (BLS 2018). Analysis of tax data through 2016 (Collins et al. 2019) showed that “consistent with the 2017 CWS results, we find no evidence that ‘traditional’ work arrangements are being supplanted by independent contract arrangements reported on 1099s.”

44. There was a modest growth in employment in “staffing firms” as the share of private payroll employment in “employment services” grew from 2.5% in 1995 to 2.9% in 2018 (see Bureau of Labor Statistics Current Employment Statistics (CES) Series CES0500000001 and CES6056130001). Staffing employment in 2018 was actually lower than what prevailed at the start of the last two business cycles in 2000 (3.5%) and 2007 (3.1%). However, the composition of staffing employment shifted as the presence increased greatly in manufacturing (Mishel 2018).

45. Franchising is a part of fissuring to the extent that the franchisee is not simply a retail outlet for the franchisor (“traditional franchising”) but actually “relies on the transfer of a complete business format and methods—including extensive business support (e.g., training of the franchisee) and ongoing monitoring from the franchisor,” called “business template franchising” (Kosová and Lafontaine 2012). Unfortunately, it is hard to track trends in franchising because there are no recent data beyond 2012 (yet), and the data for 2007 and 2012 are not necessarily comparable to what is available in the 1980s and 1990s. Business-format franchisees provided 5.5% and 5.3% of total private-sector employment, respectively, in 2007 and 2012 (this assumes that business-format franchising represents the same share of total franchising employment in 2012 as in 2007). We do not know how much business-format franchising has grown since 2012. We have some historical information on total franchising but not for business-format franchising. According to a discontinued Department of Commerce series of publications, Franchising and the Economy, the share of (all) franchising in private employment was 6.3% in 1978 and 7.9% in 1986, somewhat higher than the 6.8% and 6.5% employment shares in, respectively, 2007 and 2012. Given that traditional franchising has fallen since the late 1970s, we can assume that business-format franchising has increased since the late 1970s, though we do not know how much. (Lafontaine and Blair [2009] say that “the value of goods sold via outlets of business-format franchisors has increased from 2.3% to 3.5% of total GDP” between 1972 and 1986, but we could not locate in the Department of Commerce data they cite any reference to business-format franchising. If Lafontaine and Blair are correct, then business-format franchising in the 2007–2012 period was on the same scale as in the 1972–1986 period.) In sum, we know that the type of franchising associated with fissuring represented 5% or so of total private employment in the most recent data available (for 2012) and did not necessarily significantly grow in the prior decades. This type of fissured franchising may have grown since 2012, however.

46. Analysis of the Census Bureau’s Longitudinal Business Database.

47. Weil bases this estimate on an analysis undertaken for investors by A/B Bernstein.

48. Stansbury and Summers (2020, 27–28) argue: “In addition, while a fall in worker rent-sharing power should not have any implication for firms’ underlying markups (which are determined by their product market power), it does have implications for measured markups. This is because measures of aggregate markups used in recent literature depend on firms’ costs, including firms’ labor costs—even if the labor costs partly represent rents accruing to labor as well as the true marginal cost of production. This implies that markups, as they have been measured in recent papers, cannot be used to distinguish between a story of rising product market power and a story of falling worker power: a rise in measured markups could reflect a fall in worker rent-sharing power just as much as it could reflect a rise in true markups and firms’ monopoly power.”

49. Measurement of labor’s share described in Bivens 2019 and the data are available at the Nominal Wage Tracker: https://www.epi.org/nominal-wage-tracker/.

50. Personal communications with Wilmers. Data based on Figure 1 of Wilmers 2018.

51. Based on personal communications and Wilmers 2018 (p. 230): “[G]rowing buyer power from 1979 to 2014 accounts for around 10 percent of the [35 percentage point] decline in earnings growth relative to the 1955 to 1978 trend.”

52. This discussion borrows heavily from Mishel, Schmitt, and Shierholz 2014.

53. “The percentage of male workers in the upper middle of the distribution, with hourly wages between $7.50 and $12.50 in 1979 dollars, fell from 52 percent to 38 percent in deregulated industries, whereas it fell only from 33 percent to 26 percent in other industries” (Fortin and Lemieux 1997, 85).

54. The ratio of compensation to wages, reflecting the scale of nonwage benefits, rose from 1.220 in 1979 to just 1.229 in 2017. See Bivens and Mishel 2015 for details on the data construction.

55. Mishel and Bernstein (1994) referred to this as the need to show “acceleration of technology/automation.”

56. The term “college graduate” in this discussion is explicitly restricted to those with a four-year bachelor’s degree and excludes those with “some college” or an associate degree and those with an advanced degree beyond a bachelor’s. Some discussions lump the college and advanced degree returns or supply together. That can be misleading when the evidence is used to suggest we increase the number of college graduates if, in fact, the evidence may suggest we need more post-college graduates.

57. Some researchers have asserted, without any empirical backup, that within-group inequality reflects the returns to unobservable (not captured by any metric in our regular data) skills. That is, of course, the only way to preserve the skill-biased technological change story without having to look beyond pure supply-and-demand factors. It is not, however, persuasive without further evidence or even some conjecture about what patterns we would expect returns to unobserved skills to display.

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A small but dedicated group of economists, legal theorists, and political thinkers has promoted the argument that little if any labor market regulation is required to ensure the proper level of protection for occupational safety and health (OSH), because workers are fully compensated by higher wages for the risks they face on the job and that markets alone are sufficient to ensure this outcome. In this paper, we argue that such a sanguine perspective is at odds with the history of OSH regulation and the most plausible theories of how labor markets and employment relations actually function. In particular, the imbalance of power between employers and employees and lack of information alone prevent employees from obtaining safe working conditions in market transactions with employers. We also find that the empirical claims purportedly buttressing the free-market view do not stand up to scrutiny, and that the profound shortcomings of OSH performance in the United States, brought to vivid light by the current pandemic, are attributable to too little public intervention in labor markets, not too much.

In the English-speaking world, OSH regulation dates to the Middle Ages. Modern policy frameworks, such as the Occupational Safety and Health Act in the United States, are based on the presumption of employer responsibility, which in turn rests on the recognition that employers generally hold a preponderance of power vis-à-vis their workforce such that public intervention serves a countervailing purpose. Arrayed against this presumption, however, has been the classical liberal view that worker and employer self-interest, embodied in mutually agreed employment contracts, is a sufficient basis for setting wages and working conditions and ought not be overridden by public action—a position we dub the “freedom of contract” view. This position broadly corresponds to the Lochner-era stance of the U.S. Supreme Court and today characterizes a group of economists, led by W. Kip Viscusi, associated with the value-of-statistical-life (VSL) literature.

The theoretical basis for the VSL approach assumes a full-employment labor market in which no worker would willingly exchange their job for another they would be qualified to fill. This situation has little similarity to real world labor markets, which are typically in a state of excess supply (unemployment), where compensation for equally qualified workers varies substantially by industry and employer, and where outcomes are determined not only by initial contracts but also worker and employer performance over time. OSH is one dimension of employer performance.

The problem of ensuring safe and healthy work is not just theoretical. Although workplaces are much less dangerous now than they were 100 years ago, more than 5,000 people died from work-related injuries in the U.S. in 2018. The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) reports that about 3.5 million people sustained injuries at work in that year. However, studies have shown that the BLS substantially underestimates injury incidence, and that the actual number is most likely in the range of 5-10 million. The vast majority of occupational diseases, including cancer, lung diseases, and coronary heart disease, go unreported. A credible estimate, even before the Covid-19 pandemic, is that 26,000 to 72,000 people die annually from occupational diseases.

Many high-risk workers are also poorly paid. For example, the 1.5 million nursing assistants, whose injury rates are over twice the workforce average, have median annual pay that barely exceeds the poverty level for a family of four, and the 2.16 million janitors and cleaners have median annual pay below the poverty level. In addition, temporary and short-term employment is associated with elevated injury rates, even within the same occupation.

There is also growing evidence that workers of color, particularly Black workers, have elevated injury risk because they are overrepresented in relatively hazardous occupations. This is the case even for workers of the same age, education, and sex as their white counterparts. Structural racism is a likely cause of these disparities.

When workers are injured, they incur substantial financial and nonfinancial burdens. Injuries involving a week or more off work lead to average lost earnings of around 20% over at least 10 years following injury. Only between one-half and three-fourths of injured workers eligible for workers’ compensation cash benefits actually receive them. For those who do, less than a fifth of lost wages are replaced.

Many families do not have adequate liquid savings or access to credit. As a result, financial losses caused by occupational injuries and illnesses can lead to difficulty covering everyday expenses, including rent or mortgage payments, car payments, and even food. Latinx and Black workers are much less likely than white workers to have adequate savings to cover these expenses.

Injury impacts stretch beyond the financial. Injured workers experience limitations in household roles, including those as spouse and parent. They suffer post-injury depression and opioid use disorder. They also die at higher rates than their fellow employees from causes including suicide and drug overdose.

The United States stands poorly in international comparisons of work-related fatal injury rates. The U.S. rate is 10% higher than that of its closest rival, Japan, and six times the rate of Great Britain. This difference cannot be explained by differences in industry mix: The U.S. rate for construction is 20% higher, the manufacturing rate 50% higher, and the transportation and storage rate 100% higher than that of the E.U.

This is the real world context of statistical studies claiming to find wages compensating for voluntarily accepted OSH risk. Following Viscusi, such researchers employ regression models in which a worker’s wage, typically its natural logarithm, is a function of the worker’s demographic characteristics (age, education, experience, marital status, gender) and the risk of occupational fatality they face. Using census or similar surveys for nonrisk variables and average fatal accident rates by industry and occupation for risk, these researchers estimate the effect of the risk variable on wages, which they interpret as the money workers are willing to accept in return for a unit increase in risk. This exercise provides the basis for VSL calculations, and it is also used to argue that OSH regulation is unnecessary since workers are already compensated for differences in risk.

This methodology is highly unreliable, however, for a number of reasons:

• It rests on assumptions regarding risk perception and behavior at variance with most research.
• It assumes workers are accurately informed about the risks they face by employers who have an incentive to conceal them.
• It ignores extensive existing regulation of OSH risk and the effects this regulation has on choices made by workers and employers.
• The risk variable, on which the entire empirical strategy depends, is mismeasured: It applies large-group averages to the individual level, and it excludes fatal diseases, which are far more numerous than fatal accidents.

• It suffers from omitted variable bias; in particular, omission of employer- and industry-level variables likely results in very large overestimation of compensation for risk.
• It fails to adequately incorporate the different labor market experiences of men versus women, white workers versus workers of color, and other relevant distinctions.

Given these issues, it is striking that hazardous working conditions are the only job characteristic for which there is a literature claiming to find wage compensation.

While the findings of individual studies have little credibility, the pattern of results across different samples might convey useful information. If so, we note that greater compensation has been found for white, native-born, unionized, and higher-paid workers than for their Black, immigrant, nonunion, and lesser-paid counterparts—suggestive of the role of social and economic power differentials.

The shortcomings of the U.S. OSH system have been laid bare by the novel coronavirus pandemic. Workplaces in meatpacking and other industries have functioned as superspreading venues, and broader surveys reveal widespread worker concern over exposure. Key underlying factors include limited employer protection efforts, the failure of OSHA to assume regulatory responsibility, the inadequacy of occupational disease surveillance, the absence of a social safety net that would permit lower-paid workers to take time off from work if they test positive or have been exposed to identified cases, insufficient coverage by the workers’ compensation system, the lack of hazard pay for workers at greatest risk, and the unequal distribution of risk along lines of race and class. The policy measures needed to protect workers during the pandemic reflect a larger agenda that preceded this episode and will remain after it is over: Raising the bottom end of the labor market to acceptable levels of wages and productivity; revamping labor laws to encourage unionization; rebuilding the occupational and public health infrastructure; taking assertive action to combat discrimination on the basis of race, ethnicity, and immigrant status; and embarking on initiatives to enhance worker voice in the 21st-century economy.

II. Introduction

By early summer of 2020 wildcat strikes or other job actions were underway at over 900 workplaces across the United States, largely over issues of health and safety related to the novel coronavirus (Payday Report 2020). Workers were demanding timely information, protective equipment, and changes in work arrangements to reduce their risk of infection and resorting to collective action to bring the changes about. As the confrontational nature of these events makes clear, employers did not always go along.

How should we understand such conflicts over health and safety at work? What do they tell us more generally about fairness, efficiency, and the role of inequality and power in employment? This paper examines these questions by reviewing a longstanding debate about occupational safety and health (OSH): Is it an obligation that ought to be assumed by employers, or do competitive markets under a presumption of equal power between employers and employees ensure safe conditions and adequate compensation for any risks that would be too costly to eliminate? As we will see, in modern economics our answer to this question often comes down to whether or not we believe workers are fully compensated for the risks they encounter at work, compensation they might reasonably demand if they could negotiate with employers from a position of approximate equality.

In this paper we will argue:

• The “freedom of contract” view of occupational safety and health fails both theoretically and econometrically. It is based on an inherently implausible view of labor markets and the employment relationship, and it is not supported by the empirical evidence.
• The inadequacy of the free market view is not a secondary matter. Rather, the failure of unregulated markets to ensure adequately safe working conditions and health equity for the workforce has urgent health as well as economic consequences, including those now visible as a result of the ongoing pandemic.

We will begin by briefly reviewing the history of OSH regulation in the English-speaking world, highlighting the changing assumptions on which regulation has been based. This will lead to an examination of modern theoretical perspectives on the employment relationship and its health and safety aspects, and we will contrast the anti-regulatory view held by some economists with alternatives that recognize power imbalances between workers and employers. In the following section we will document the extent and distribution of occupational injury and disease, demonstrating that their impact reflects and exacerbates economic and social inequality. It will be clear from our review of the evidence that, even in a technologically advanced economy like that of the United States, the toll of workplace accidents, illnesses, and deaths remains unacceptably high. After this we will turn to the “value of statistical life” (VSL) literature, which supposedly documents substantial wage compensation for risk, and expose problems in theory, measurement, and methodology. Moreover, we will show that, even on its own terms, this literature presents evidence for the importance of centering workplace inequalities when assessing compensation for risk: More-vulnerable workers (i.e., low-wage, Black, and/or immigrant) not only face greater risk on the job but also receive less compensation for it. In the final section we will return to a discussion of health and safety at work in the age of Covid-19, demonstrating how our analysis is applicable to this extraordinary episode.

One clarification about terminology: In this paper we will use the term freedom of contract to refer to the labor market perspective underlying the presumption that OSH risks are fairly and efficiently negotiated between workers and employers on an equal footing. Strictly speaking, this usage is not quite precise, since freedom of contract is a concept drawn from legal theory and is intrinsically normative, not necessarily descriptive of any particular labor market setting. In practice, however, there is a close correspondence between the legal and economic perspectives. Advocates of freedom of contract generally make the following assumptions about how labor markets work: (1) labor markets are in a more or less continuous equilibrium in which labor supply equals labor demand, (2) all relevant aspects of employment are determined in the initial moment of contractual agreement, (3) there is no regulation of the legal rights and obligations of the employment relationship on either side, (4) social norms and hierarchies are either nonexistent or can be regarded as fixed and are therefore ignorable background influences on individual choice, and (5) in the absence of regulation (or possibly excessive market concentration) the concept of power is inapplicable. In addition, in the context of OSH it is further assumed that risk to life and health is an ordinary consumption good, evaluated on a single dimension (from less to more) and without regard to additional social or psychological considerations. There is no generally accepted term that represents this constellation of assumptions, but, since certain strands of legal and economic thinking align so closely, we have chosen to use the legal designation. Of course, freedom of contract as an idealization applies to the entire range of economic outcomes in which markets play or could play a role, not just the labor outcomes we consider here (Atiyah 1979).

III. Two views of the risk of injury and illness at work

Under English common law dating from the Middle Ages, masters were deemed to be responsible for ensuring that work was acceptably safe for their servants (Henshaw et al. 2007). The underlying philosophy was paternalism, based on the view that masters were more knowledgeable, commanded more resources, and assumed reciprocal obligations because they benefited from their servants’ devotion. Acceptability meant that risks should be no more than typical of such employments, so if disputes made their way to court the relevant evidence consisted of comparisons between the working conditions of this particular master and his peers. Indeed, paternalistic entailments limited the scope of contractual freedom over a wide swath of social and economic life (Atiyah 1979).

Gathering force in the 17th and 18th centuries, however, was a new doctrine, freedom of contract. Under this view, parties are assumed to act in their best interest in the marketplace or, if they don’t, they must be made to suffer the consequences so they will learn to do so in the future. Thus, neither party is to be regarded as having obligations toward the other except insofar as they have agreed to them, and both sides to a contract are free to agree to any terms they choose. The only role of the state is to enforce the terms of such contracts on parties that resist carrying them out. Applied to matters of health and safety at work, this view entailed rejection of the paternalistic view that masters (employers) had inherent obligations to protect servants (workers), relying instead on the judgment both should exercise in pursuing their separate interests. Thus was born the notion of occupational risk as the outcome of a mutual, and presumably optimal, employment agreement (Atiyah 1979).

It is important to recognize that these new terms do not describe an evolution in which one view of OSH was progressively supplanted by another. On the contrary, with changes in the economic role of business, repeated revolutions in technology, and the emerging centrality of the employment relationship in modern life, a version of the older employer responsibility approach to OSH took on new life and became, in one form or another, the dominant understanding by the end of the 19th century (Henshaw et al. 2007). Rather than resting on the paternalism of medieval caste hierarchies, however, the modern view had these elements:

• It recognized that technology had become far more complex and opaque, with serious new dangers best regulated at their source. This meant that businesses had to take worker health and safety into account when devising new methods and products.
• It increasingly viewed the workplace as a sort of society, with workers at least partly in the role of citizens. Thus, the exercise of care by the employer was demanded because it reflected the reciprocity and mutual concern on which industrial cooperation ought to be based.
• It acknowledged the disparity of power between business owners and workers, especially in times of excess labor supply. Indeed, the worst-off workers, those with the least education and fewest outside options aside from their current job, were visibly subjected to barbarous conditions in the absence of social protection (Mill 1871).

For these reasons, the employer responsibility view of OSH freed itself from the ancient noblesse oblige paternalism of the law of masters and servants.

Employer responsibility was codified in the British Factory Acts beginning in 1833, and it crossed the Atlantic after the American Civil War. Massachusetts became the first state to regulate working conditions in 1877, and in the decades that followed nearly every other state followed suit (MacLaury, undated). This is not to say that regulation was sufficient; horrendous conditions could be found in mining, railroads, and meatpacking, as well as manufacturing. The political debate, however, was not over whether some measure of regulation was necessary but where and how much.

Workers often took the initiative to demand responsibility from their employers when the government failed to take action. Along with wages, the call for greater safety on the job was a prime motivator for the unionization drives of the late 19th and early 20th centuries. Eventually labor movement pressure resulted in the Occupational Safety and Health Act of 1970, which created the Occupational Safety and Health Administration (OSHA) and initiated a nationally harmonized system of workplace standards, record-keeping, inspection, and enforcement. It would not be an exaggeration to say that the employer responsibility view of OSH is the law of the land.

A small but dedicated group of economists, legal theorists, and political thinkers, however, resisted this tide.1 They drew on the contract-centered ideal of classical liberalism to argue that government regulation of working conditions was unnecessary, since they were already regulated efficiently by competitive markets. Workers who felt that a particular employer was too inattentive to safety could look for other work more to their taste. Employers, feeling the pressure of worker preferences, would have to invest in better working conditions, offer extra wages or other compensation for the risks they asked workers to undergo, or both. Indeed, labor market agreements drawn up by self-interested individuals aware of their own circumstances and preferences were believed to offer the best form of regulation; government interference could never improve such outcomes and would most likely make them worse.

There is debate among legal scholars over the extent to which such classically liberal ideas were influential in judicial oversight of the emerging regulatory state. In most cases courts upheld the regulation of working conditions, but the most important exception, Lochner v. New York (1905), established a precedent that held for three decades. John Lochner was a baker who challenged New York state regulation of working hours in his industry; state courts upheld the rule, but the U.S. Supreme Court deemed it an infringement on the right of individuals to “purchase and sell labor” (Rosner and Markowitz 2020). Yet even in this ringing assertion of freedom of contract the court was at pains to argue that employer responsibility for safety was unaffected: “To the common understanding the trade of a baker has never been regarded as an unhealthy one” (Justice Peckham, cited in Bale 1988). Regardless, the reversal of the Lochner precedent by the New Deal era court has generally been seen as the end of strict freedom of contract as applied to OSH and related aspects of employment.

It is remarkable, then, that beginning in the 1970s a research project arose in economics to estimate the amount of extra pay received by workers in exchange for bearing greater occupational safety and health risks. The research was based on the assumption that such risks were voluntarily agreed upon by self-interested parties and reflected their corresponding preferences. In other words, these economists assumed a Lochner, freedom-of-contract world and erected an edifice of theory and statistical research on top of it. This approach has proved to be an influential strand of analysis and advocacy, and one of the main purposes of this paper is to scrutinize it in the larger context of what we know about labor, employment relations, and the role of unequal bargaining power.

Here we will briefly summarize the freedom-of-contract approach to OSH that has gained a foothold in economics in order to see how it fits into the long evolution of thinking on this question—or doesn’t. In a later section of the paper we will return to give it much more careful scrutiny.

As presented by its chief advocate, W. Kip Viscusi, over a series of many books and articles, the contract-centered view takes the following forms. To begin with, it is assumed that the national labor market comprises innumerable markets for specific types of labor, each properly modeled as a relationship between supply (workers with particular productivity-related attributes offering their labor) and demand (employers offering pay for particular jobs). Each market clears where supply equals demand, establishing a single level of compensation for all labor of that type.

If there were no compensation except for money wages, a single wage would be paid to each type of worker; economists refer to this as the “law of one price,” which is thought to hold in competitive markets. (There are reasons why such a law might be violated even under conditions of unrestricted competition, but we won’t consider them here.) But now let us also suppose workers care not only about the wages they are paid but also the working conditions they will experience. From the employer’s point of view (in this theory), improvements in these conditions, including OSH, are expensive. Since productivity is assumed to be equal across firms (the result of competition), and all excess or deficient rates of profit will be competed away, all employers appearing as purchasers of labor in a given labor market will pay the same wages-plus-working-conditions expense. In this sense the law of one price remains in effect.

On the worker’s side it is a bit more complicated. Workers care about safety, so any job that is more dangerous than the available alternatives—the ones offered to workers of the same productivity type—has to pay a higher wage, otherwise it would get no takers. Of course, workers differ individually in how they trade off the benefits of income against the costs of risk, so in subjective terms there isn’t a law of one price anymore; a given worker will likely find one job offer more appealing than another, since it better matches that worker’s own subjective tradeoff. Nevertheless, in the new equilibrium of job offers and acceptances, no workers in the equation would willingly exchange their employment for any other offered to workers of their productivity. Any truly better job, one that offered a preferred combination of wages and working conditions, perhaps better in both respects, would be available only to those with more marketable productivity attributes than theirs.

Thus, in the freedom-of-contract world every labor market, comprising workers of the same type, would display a range of wages and working conditions corresponding to different costs of making work safer (employers) and subjective benefits from safety (workers). Riskier jobs would pay more and would be preferred by more risk-tolerant workers. The extra amount of money employers in this hypothetical world must pay to attract a labor force if their jobs are more dangerous is called a compensating wage differential (CWD). It is important to note that the story underlying this term requires that the CWD be fully offsetting; if it isn’t, the job in question won’t be filled. We will see that this backstory plays a critical role in the interpretation given to statistical findings: Economists wedded to the freedom-of-contract view regard any evidence of wage compensation for risk as a measure of the full value placed on safer work that extra wages are needed to replace. Since we are not beholden to this view ourselves, however, we are able to imagine partial compensation for risk—a monetary increment that might be given to workers laboring under more dangerous conditions that nevertheless leaves them worse off than they would have been had those conditions been improved instead.

Returning to the freedom-of-contract story, it’s worth spending a moment to consider how far-reaching the consequences of this set of assumptions must be. First, the level of safety in every single job would be efficient. Employers would make all investments that result in safety improvements that workers value (and are willing to accept correspondingly lower wages for) above the cost of implementing them, and none whose cost exceeds workers’ valuations. Employers with high costs of making jobs safe would offer more dangerous jobs but pay higher wages; workers with a higher tolerance for risk would accept more dangerous work but would be compensated with the additional wages they require. No regulator would be able to make any alteration that would improve the level and allocation of safety at work. Second, all workers who offer labor of the same type would end up at jobs they value at least as highly as any other they might qualify for. Some would get more dangerous jobs and more pay, others less on both counts, but no one would prefer to switch. Regulation would not be needed to protect anyone from anything. Third, by reflecting workers’ subjective valuation of occupational risk, CWDs could be used to estimate a value of statistical life for society in general insofar as workers are representative of the whole population. If the equilibrium CWD is $1,000 for a 1-in-10,000 increase in the risk of death on the job, the VSL would be $1,000 times 10,000 or $10 million. This third property of CWDs has given economists like Viscusi prominence in the world of public policy analysis, and estimates of compensating differentials are factored into regulatory decisions ranging from air pollution to vehicle speed to climate change mitigation.

Despite the publicity given to this strand of modeling, specialists in labor market research have long known that the law of one price for employers and the no-switch condition for workers are routinely violated; workers of similar observable skills doing essentially the same work under comparable conditions are typically paid quite differently, and sometimes those with lower wages also face greater occupational risks. There are better and worse jobs, and much of the modeling and econometric work of the past several decades has been devoted to trying to understand the forces behind these outcomes and what they imply for public policy. The starting point was the work of Richard Lester in the 1940s, such as “Wage Diversity and Its Theoretical Implications” (1946). It was clear that the simple supply-and-demand story could not be an adequate account of how labor markets operate, since competition should enforce equal compensation for equally productive workers.2

In subsequent years many approaches have been put forward. Some depend on dropping the assumption of perfect competition by dividing either firms, workers, or both into more- versus less-favored segments (Dickens and Lang 1993). Since the 1980s, one wage dispersion of interest has been that of inter-industry (and now also intra-industry) wage differentials. Other economists have revolutionized market analysis by looking more carefully into “search theory,” i.e., how workers search for jobs and employers search for workers. Two progenitors of this approach, Christopher Pissarides and Dale Mortensen, were awarded a Nobel Memorial Prize in Economics in 2010 in recognition of the centrality of the approach to modern labor economics, particularly at the macro level.3 In search models, as we will see, it is expected that the law of one price will be violated, a point emphasized in Mortensen (2003). Yet another approach foregrounds bilateral bargaining between employer and worker, either individually or in the context of collective bargaining. This process is referred to as “rent-sharing,” and bargaining models are often grafted onto underlying mechanisms, such as barriers to competition, that give rise to rents themselves. Meanwhile, closer collaboration between economists and management scholars has generated a range of modeling strategies that incorporate more complex and realistic employer choice options. These include “efficiency wage” models (pay for performance and not just showing up) and incorporation of on-the-job training and other investments or practices that use human resources as a basis for competitive advantage.4 Finally, there has been extensive research into the role of racial, gender, and other forms of discrimination in generating unequal outcomes for workers of comparable productivity.5

Nevertheless, despite all these important theoretical insights, a word of caution is in order. For institutional and other reasons we will not consider here, economists working on a particular departure from the freedom-of-contract model typically treat it as the only such departure; its significance is thought to be the difference it alone would make. Thus, we see an array of labor market models in the literature that are at variance with the freedom-of-contract approach only in one respect even though, taken together, they would point to a radically different vision. This strategy is important in practice because it is common for economists to propose policy responses that address only the single “imperfection” they are studying, and these frequently fall short of the scope of commitment embodied in regulatory interventions like OSHA. Without going into detail, we would like to explicitly stipulate a core set of characteristics of the employment relationship that, in combination, remove it decisively from the freedom-of-contract world:

• All employment contracts are necessarily incomplete. Worker and employer performance cannot be fully specified in advance, and thus an ongoing relationship with procedures for designating required, permissible, and prohibited activities is inescapable.
• The rights, opportunities, and obligations pertaining to each worker individually depend on those for their co-workers, including those above and below them in the chain of hierarchy. Thus, separate individual agreements (contracts) extending to all terms of the employment relationship are not feasible.
• Because of incomplete contracting, what workers sell is their subordination to the employer. This subordination is bounded, of course, by their freedom to terminate, but it is usually so costly for workers to exercise this option that they often accept substantial depredations and still remain on the job. This is the core power imbalance between worker and employer.6
• In all societies, employment is a legal status with associated rights and responsibilities for both parties. The ability to benefit from the provisions of this status also differs among workers for both legal and socioeconomic reasons, constituting another dimension of power.
• Provision of safe working conditions is largely a matter of ongoing performance and not a once-and-for-all commitment made at the moment of contract. In practice it entails such activities as housekeeping and maintenance, work pacing and scheduling, honest and timely risk communication, and the consideration of health and safety factors in the introduction of new materials and technologies. The determination of safe working conditions is subject to voice as well as exit influences from the workforce (Hirschman 1970).7
• Thus, regulatory systems like OSHA, which contribute to the legal status of employment, are essential. They reduce the effect that differences in power would otherwise have on safety and health outcomes, strengthening the ability of workers to engage in individual (whistleblowing) and collective action, and creating legal and financial incentives for improved employer performance. The necessity of regulation can mostly clearly be seen in its breach, as we will document in our concluding section on the coronavirus pandemic. If an economic model has the property that OSH regulation is generally unnecessary or even harmful, this points to a defect with the model, not regulation.

These foundations of our alternative view of OSH and employment do not negate the role of markets but supplement it. Employer costs and worker preferences do matter in the ways specified in market analysis, but they comprise only part of the story. We prefer to consider the theoretical departures of search theory, behavioral economics, and other branches of modern economics as extensions of an institutionally complex view of the employment relationship, not a stripped-down freedom-of-contract benchmark.

IV. The real world of dangerous work in the United States

A. The overall risk to the working population

In this section, we will summarize information about the extent, severity, and impact of injuries and illnesses related to work. We will see that there are a considerable number of work-related injuries and illnesses in the U.S. and that their financial and health impacts are substantial. We will also see that the impacts of these injuries tend to be unequally distributed, concentrated among lower-wage workers, Black and Latinx workers, and temporary, contracted, and online platform workers. In the United States, we have good information about fatal injuries at work, but we know less about nonfatal injuries. Moreover, we have only very indirect ways of trying to capture the extent of work-related illnesses, which are, by far, the largest category of risk.

1. Fatal injuries

Before 1980, the only source of occupational fatality data in the U.S. was the annual Survey of Injuries and Illnesses (SOII) conducted by the Bureau of Labor Statistics (BLS). In principle, the SOII covers all employers except for agricultural employers with fewer than 10 employees and federal government employees (whose injuries are reported separately). Employers are the only source of information for the SOII, so it depends on their diligence and willingness to report. From 1980 through 1991, the National Institute for Occupational Safety and Health (NIOSH) implemented a new source of occupational fatality data, the National Traumatic Occupational Fatality database (NTOF). The NTOF used death certificates, rather than employer reports, as a source of occupational fatality data. Unlike the SOII, it included all employment, including employees of small employers and the self-employed. It found much higher fatality numbers than reported by the SOII, particularly in the high-risk agriculture and construction sectors (Stout-Weigand 1988; Leigh and Garcia 2000).

Since 1992, U.S. national data about work-related fatalities have been collected by the BLS and published as the Census of Fatal Occupational Injuries (CFOI). The CFOI includes fatal injuries of both employees and independent workers (the self-employed and online platform workers). It is generally acknowledged to be a virtually complete accounting of these deaths and includes worker demographic information, industry, and injury characteristics. Figure A shows that, from 1992 through 2009, the annual number of fatal on-the-job injuries was generally declining, from over 6,000 to a little over 4,500. However, after four years of little change, the number of fatalities rose in 2014-2018. Because the number of people working rose during that period, the fatality rate remained about the same, 35 fatalities per million full-time workers. In 2018, 5,250 workers died from injuries at work. Another way of looking at this is that an American worker died on the job every 100 minutes.

Figure A

2. Nonfatal injuries

Surprisingly, no source provides an accurate count of the number of nonfatal injuries in the U.S. The only national source of information for the number and rate of nonfatal occupational injuries is the BLS’s annual SOII, which reported that 3.5 million work-related injuries and illnesses occurred in the private sector and state and local government in 2018. This translates into 3.1 injuries per 100 full-time workers. However, as noted above, the SOII omits self-employed and online platform workers, somewhere between 8% and 10% of total employment, and it also omits federal employees and workers on small farms. Although it does not omit household employees, their work-related injuries may escape reporting. Even for covered workplaces, researchers, the Government Accountability Office (GAO 2009), and the BLS itself (Ruser 2008) have agreed that it misses many injuries. This under-recording is not random, but is affected by many factors, including industry, occupation, duration of time off work, type of injury, and the state where the injury occurred (Boden, Nestoriak, and Pierce 2010; Boden and Ozonoff 2008; Fan et al. 2006). Also, as noted above, the SOII data are submitted to BLS and OSHA by employers only, a practice that may limit completeness of reporting (Rappin, Wuellner, and Bonauto 2016).

Injuries are underreported by workers, employers, and medical providers. Reasons for worker underreporting include fear of current and future employer retribution, employer bonuses for zero reported injuries (so-called safety bingo), and lack of understanding about reporting (Azaroff, Levenstein, and Wegman 2002; Frederick and Lessin 2000). Employers may underreport because of the economic incentives to do so (e.g., they wish to reduce workers’ compensation costs); because middle-manager evaluations include only reported, as opposed to actual, injury rates; because some contract bidding takes into account reported injury rates; or because of poor reporting systems and lack of understanding (Rappin, Wuellner, and Bonauto 2016; GAO 2009). Medical providers, who are workers’ compensation gatekeepers in addition to treating injured workers, have indicated that they frequently perceive pressure from employers to downplay injuries and illnesses (GAO 2009). These factors may be particular problems for low-wage and contingent workers, immigrants, and minorities (Castillo 2018; Premji and Krause 2010).

Researchers looking at different states have estimated that, on average, the SOII misses anywhere between 30% and 70% of injuries involving time lost from work (Boden and Ozonoff 2008; Rosenman et al. 2006). If we assume that the SOII misses half of all injuries, then 2018 saw about 7 million work-related injuries, over 6 per 100 full-time workers each year. Employers reported that about one-third of these injuries involved more than a day off work.

3. Occupational disease

Chronic occupational disease deaths are not covered by the CFOI. The SOII covers occupational illnesses in principle, however in practice chronic occupational illnesses are virtually uncounted (Leigh et al. 2000). There are many reasons for this, perhaps the most important of which is that these illnesses often go unrecognized by both workers and their physicians. Some states have programs targeting specific occupational diseases, like lead poisoning, work-related asthma, and pesticide poisoning. The only exception to the considerable undercount of chronic occupational diseases may be for coal workers’ pneumoconiosis, a disease that NIOSH has focused on for decades.

Because no record-keeping adequately captures occupational diseases, estimates of mortality from these causes have relied on epidemiological studies of specific diseases to estimate the fraction attributable to work. These estimates are then combined with overall U.S. mortality from these diseases (Steenland et al. 2003). The authors of an important study in this area estimated that about 49,000 people die annually from occupational illnesses, with a wide range of uncertainty—from 26,000 to 72,000. Even the low estimate of occupational disease deaths is much greater than the number who die from occupational injuries: If we take 5,500 as the annual average of fatal injuries, then occupational illnesses are responsible for roughly five to 13 times as many deaths each year.

The main causes of death from occupational exposures are cancers, noncancer respiratory disease related to dust and chemical exposures, and coronary heart disease, largely related to job strain (high job demands combined with low worker control) (Steenland et al. 2003).

4. Overall risk

In conclusion, except for traumatic fatal injuries, occupational injuries are substantially underreported in the United States. This underreporting varies by many categories, including worker characteristics, occupation, industry, injury severity, and state. Both incidence of and mortality from chronic occupational disease are barely reported at all. Experts can only guess at these risks, so it would seem unlikely that workers would have a reasonable sense of the probability of dying from disease hazards at work.8 One consequence of this lack of information is that workers can’t base their wage demands on the true risk they face on the job, a shortcoming that calls into question estimates of the value of a statistical life predicated on the assumption they can. Our best estimates are that, each year:

• 5,500 people die from work-related injuries.
• Another 49,000 people die from work-related illnesses.
• 7 million people are injured at work every year, and over 2 million of these lose at least a day from work.
• Many people suffer discomfort and disability from work-related illnesses, but we don’t know how many. However, work-related chronic lung and heart diseases can have life-altering consequences that last for decades before they result in premature death.

B. The distribution of risk

Of course, not all jobs are equally risky. Table 1 shows nonfatal injury rates for some high-risk occupations compared with the average for all occupations, and Table 2 shows fatal injury rates. Many of these high-risk jobs have relatively low wages. More generally, groups that have less power, knowledge, or ability to affect workplace hazards and groups that are discriminated against are more likely to be at risk of injury in the workplace.

Table 1

Table 2

Temporary, contracted, and online platform employment. Temporary agency workers often have higher fatal and nonfatal injury rates than do workers in standard jobs (Foley 2017; Julià et al. 2016; Smith et al. 2010). Similarly, studies of subcontracted employment have shown higher risks than in standard work (Kochan et al. 1994). Low-wage workers also tend to have higher injury rates. One study showed workers in low-income families had higher risk of injury, even accounting for industry and occupation (Dembe, Erickson, and Delbos 2004), another that people earning less than $50,000 per year reported a greater risk of injury than those with higher earnings (Fan et al. 2006).

Temporary and short-term workers, frequently hired through temporary employment agencies, may be particularly vulnerable to workplace safety risks. As noted in an OSHA white paper:

New workers often lack adequate safety training and are likely to be unfamiliar with the specific hazards at their new workplace. As a result, new workers are several times more likely to be injured in the first months on the job than workers employed for longer periods. Consistent with these findings, OSHA has investigated numerous incidents in recent months in which temporary workers were killed on their first days on a job.

Temporary workers are also likely to be newly assigned to unfamiliar workplaces multiple times in any given year and may carry this increased risk as long as they are in the temporary workforce. For employers, there is less financial incentive to invest training resources on temporary employees because shorter tenure will yield a lower return on investment than similar investments for permanent employees.

OSHA has encountered many situations, including some in which temporary workers have been killed, in which employers have chosen to not provide required safety training to temporary workers. And the temporary workers themselves, recognizing the precarious nature of their employment, are less likely to complain to their employers, or to OSHA, about the existence of even serious hazards (OSHA 2015).

Workers in temporary employment relationships are often subject to the same occupational hazards faced by others in the same work environments in standard employment relationships. In addition, these workers are likely to have little control over their work schedules or pace, may be hired only during periods of high demand, and have few social supports in the workplace. They may also have limited training in job tasks, job risks, and prevention of injury or adverse health exposures. They may not have access to personal protective equipment and training in its use. And, in some cases, they may be assigned to the most dangerous jobs (Mehta and Theodore 2006).

ProPublica reporters compared injury rates for jobs held by temporary workers with jobs held by regular employees, accounting for whether the jobs they held were particularly hazardous. For jobs with similar injury risk they found that the odds of injury for temporary workers were almost four times as high as for regular employees (Pierce, Larson, and Grabell 2013).

Short-term and seasonal workers may be more subject to job strain and its adverse health consequences and less likely to benefit from the workplace conditions that may mitigate these effects (Cummings and Kreiss 2008). Job strain can result in both physical and psychological disruption; prolonged job strain leads to increased cardiovascular disease, musculoskeletal disorders, sleep disruption, and psychological problems. Exposure to workplace conditions like job insecurity, low job control, high job demands, and low social support at work may explain a substantial proportion of observed inequality in life span in different demographic groups in the U.S. (Goh, Pfeffer, and Zenios 2015). The growth in temporary, contracted, and online platform employment relationships that results in increased exposure of less-educated and ethnic minorities to harmful workplace practices is likely to result in poorer health.

Also, temporary, contracted, and online platform workers may have less access to health insurance and workers’ compensation benefits (Asfaw 2014; Mehta and Theodore 2006), causing greater financial strain and interfering with recovery from injury or illness. For a more detailed look at these issues, see The Fissured Workplace (Weil 2014) and The Changing Structure of Work: Implications for Workplace Health and Safety in the U.S. (Boden, Spieler, and Wagner 2016).

Workers of color. There is also evidence that workers of color, particularly Black workers, have elevated injury risk. Loomis and Richardson found that Black workers were 30-50% more likely to die from an occupational injury compared to similar white workers (Loomis and Richardson 1998). The disparity in fatal injury risk was primarily accounted for by differences in the underlying hazards of their occupations. Another study indicates that Black men have greater fatality risk than white men working in the same industry. Black agriculture workers’ fatal injury rate is 26.9 per 100,000 workers, compared to 21.2 for whites (CDC/NIOSH 2004). Within the same industry Black and white workers may have very different jobs.

Another study examined six occupations, employing 16% of private-sector workers in the U.S., at high risk of nonfatal work-related injury. The authors found that Latinx, Black non-Latinx, and American Indian/Alaska Native workers were substantially overrepresented in these occupations (Baron et al. 2013). A more recent study found that non-Latinx Black workers and foreign-born Latinx workers were more likely to work in riskier jobs than white workers, leading to higher rates of work-related disability (Seabury et al. 2017). These results held even after accounting for education, age, and sex. Other research has shown increased risk of fatality and injury among immigrant Latinx construction workers (Dong and Platner 2004) and Latinx hotel workers (Buchanan et al. 2010).

Although studies of occupational disease in this context are rare, there is evidence that Black workers have elevated occupational disease risk. For example, a 1971 study found that, among steel workers, coke oven workers had the highest lung cancer mortality (Lloyd 1971). Moreover, Black coke oven workers were largely working on the topside of the coke ovens—hot, dirty work that resulted in heavy exposure to carcinogenic emissions. A more recent study of lung cancer among chromium smelter workers also found Black workers at higher risk (Rosenman and Stanbury 1996).

Some studies did not find increased injury rates among nonwhite workers. One found substantial excess risk of occupational fatalities among Latinx and immigrant workers, but not among Black non-Latinx workers (Marsh et al. 2013). Studies using the National Longitudinal Survey of Youth 1979 did not find higher injury rates among nonwhite workers, but one found longer absences from work (Berdahl and McQuillan 2008; Strong and Zimmerman 2005). However, most of the evidence supports the view that white non-Latinx workers have the lowest risk.

Using another way of looking at relative power, Peter Smith and his colleagues have studied the relationship between injury and worker vulnerability (Smith et al. 2015). Their concept of vulnerability combines potential exposure to hazards with the ability to mitigate those hazards. Mitigation resources include workplace policies and procedures, workers’ awareness of their rights and responsibilities, and workers’ empowerment to protect themselves. Workers who reported being more empowered had much lower injury rates (Lay et al. 2017).

C. The burden of injuries at work

1. Lost earnings

Although there is a history going back to the early 20th century of studies on earnings lost because of injuries at work, researchers have applied modern statistical methods only over the last two decades. Beginning in 1999, a series of studies using workers’ compensation data from California, New Mexico, Oregon, Wisconsin, and Washington has consistently shown that injured workers who received workers’ compensation benefits for lost wages had substantial earnings losses and that these losses persisted for as long as the injured workers were followed. One study focusing on permanent partial disability (PPD) cases in five states estimated that affected workers had lost about 20% of their earnings over a five-year period (Reville et al. 2001). A 2014 study following New Mexico workers for 10 years after injury found average losses of about 20% over the full 10-year period (Seabury et al. 2014). Indeed, all studies have found losses that continue for as long as the study can follow injured workers, and from these studies we conclude that PPD injuries cause a lifetime of substantial lost earnings.

Some studies of lost earnings have also looked at temporary disability (TD) cases, where benefits were paid for time lost from work but not for permanent impairment or disability. The New Mexico study just cited (Seabury et al. 2017) found that in TD cases with one to eight weeks off work workers lost an average of about 10% of earnings averaged over the 10 years after injury. These losses looked like they would continue far into the future, but the workers were followed only for 10 years. Those losing 8 weeks or more lost almost as much on average as those with PPD injuries. A California study found that workers with injuries occurring from 2005 to 2017 who lost at least four days from work lost about 20% of earnings over the two post-injury years (Rennane, Broten, and Dworsky 2020).

A study examining differences in injured workers’ lost earnings by income found that workers in the highest wage quartile had the lowest percentage loss in earnings, while workers in the second quartile had the greatest percentage loss in earnings (Rennane, Broten, and Dworsky 2020). Differences in lost earnings among earnings or racial/ethnic groups have not been well studied.

Workers’ compensation programs only partially cover the earnings losses of injured workers who receive benefits. The extent of this coverage depends both on whether injured workers receive benefits and the proportion of lost wages covered when benefits are paid.

2. Proportion of injured workers receiving workers’ compensation benefits

Studies of the take-up of workers’ compensation benefits have uniformly shown that many injured workers never receive any benefits. Because state systems vary substantially, the proportion of injured workers receiving benefits can vary widely. A six-state study of injuries eligible for cash benefits (lost-time cases) found that workers’ compensation benefits were paid to about 90% of eligible injured workers in two states but to just 50-70% of cases in the other four (Boden and Ozonoff 2008). To be eligible for cash benefits that replace lost earnings, states require that the number of days lost from work exceed the waiting period, which varies between three and seven days. A similar study in Michigan found that 66% of eligible injuries received workers’ compensation benefits (Rosenman et al. 2006). A study of workers’ compensation take-up in 10 states found that, of work-related injuries involving medical treatment or at least one day lost from work, workers’ compensation benefits were received in 47-77% of cases (Bonauto et al. 2010). Presumably all the injuries in this study would have been eligible for workers’ compensation medical benefits, but not necessarily for cash benefits.

Aside from specialized federal compensation programs (the Black Lung Program, the Radiation Exposure Compensation Program, and the Energy Employees Occupational Illness Compensation Program), virtually no chronic occupational disease victims receive compensation. This means that, since occupational illnesses have a far greater incidence than injuries, the bulk of occupational illnesses and injuries go uncompensated.

3. Proportion of lost wages replaced among injured workers receiving workers’ compensation benefits

Several of the studies of lost earnings that used modern statistical methods also calculated the proportion of injury-related lost wages replaced by workers’ compensation cash benefits. The earliest of these studies—the five-state PPD study referenced above—found that workers’ compensation benefits replaced 38-60% of after-tax lost earnings for PPD cases in these states (Reville et al. 2001). (After-tax earnings are used because workers’ compensation benefits are not taxed, while wages are. We note, however, that lost fringe benefits are not considered in this calculation, meaning that the actual income-replacement rate is even lower than what these studies report.) A more recent study in New Mexico, using more complete data, estimated replacement of only 16% of after-tax earnings lost in the 10 years after injury (Seabury et al. 2014). This study also found that workers’ compensation benefits replaced less than 10% of after-tax losses for injuries classified as temporary disability cases. The reason for this somewhat surprising result is that even people receiving less than eight weeks of TD benefits, on average, have losses that continue far into the future.

Some of these lost earnings may be partially covered by sick pay, private disability insurance, public short-term disability insurance (in some states), unemployment insurance, Social Security Disability Insurance, Supplemental Security Insurance, etc., but the information about this is limited. One study estimated that workers’ compensation cases annually account for about $9 billion in Social Security Disability Insurance benefit payments and about the same amount in Medicare payments (O’Leary et al. 2012).

4. Proportion of medical costs replaced among injured workers receiving workers’ compensation benefits

In principle, workers’ compensation pays all injury-related medical costs for covered injuries. Of course, a substantial number of workers with occupational injuries and almost all workers with chronic occupational diseases do not receive workers’ compensation, so their medical costs are not covered. There is virtually no information about the cost of uncovered injury-related medical expenses, nor is there information about how much of those expenses are covered by general health insurance, Medicaid, Medicare, workers and their families, or other sources.

5. Work-related injuries and financial distress

Many working families live paycheck to paycheck and have little or no savings to fall back on. A 2018 survey asked people whether they could cover an unexpected expense of $400; only 61% said they could cover it with cash, savings, or a credit card paid off by the next statement. A 2017 survey asked people whether they could cover a $2,000 unexpected expense within a month. Over 40% said they could not, even including cash from credit card advances, payday loans, or checking account overdrafts; even greater proportions—54% of Latinxs and 64% of Blacks—gave this response (Stavins 2020). Not surprisingly, the proportion who could not cover the expense fell as incomes rose.

Reductions in income after injury can lead to problems in covering rent or mortgages or car loan payments, increased credit card debt, and general difficulties in making ends meet (Keogh et al. 2000; Morse et al. 1998). Even spending on food declines after injury (Galizzi and Zagorsky 2009). Groups with no or minimal savings are particularly hard hit by occupational injuries and illnesses, with Latinx and Black workers much more likely than white workers to fall into this category. Generally, low-income workers with relatively little savings are more likely to be injured than are other workers (Galizzi and Zagorsky 2009).

6. Other costs

Lost household production. People with work disabilities may not be able to engage fully in household tasks like caring for children, cleaning, or taking out the trash. Several interview studies have shown the considerable extent of these impacts on home life (Imershein, Hill, and Reynolds 1994; Keogh et al. 2000; Strunin and Boden 2004).

Depression and drug and alcohol use disorders. A substantial number of injured workers can’t do the same work or household tasks, lose their jobs, live with intermittent or constant pain, or can’t participate fully in many aspects of family life. There is substantial and growing evidence that these injury effects can lead to depression (Asfaw and Souza 2012; Dersh et al. 2007; Kim 2013) and drug use (Asfaw and Boden 2020). These health consequences have recently been coined “diseases of despair” and have been cited as important reasons for recent declines in U.S. life expectancy (Case and Deaton 2017).

Deaths indirectly caused by workplace injuries. Deaths from suicide and drug overdose, in particular, have been growing in recent years and have become major public health concerns. Moreover, work-related injuries have been shown to increase the risk of dying from both of these causes (Applebaum et al. 2019; Martin et al. 2020).

D. International comparisons

Information from two studies of fatal workplace injury rates in the U.S. and other high-income countries strongly suggests that U.S. rates are higher. The first of these studies compared fatal injury rates among countries around the world. For reasonable comparison, we chose to compare the U.S. with other countries whose 2018 gross domestic product per capita was at least $40,000 (in U.S. dollars). As is evident in Figure B, the U.S. had the highest work-related fatality rate of these countries (Kharel 2016).

Figure B

It is possible that differences in industry composition skewed this comparison. That is, if the U.S. workforce was more concentrated in hazardous industries, one might expect the overall work-related fatality rate to be higher. A second study by Bureau of Labor Statistics economists takes this possibility into account by comparing work-related fatality rates between the U.S. and the European Union by industry sector (Wiatrowski and Janocha 2014). Table 3 shows that U.S. rates are higher than E.U. rates in 11 of 13 industry sectors. Indeed, in three of the four most hazardous sectors U.S. rates are about twice those of the E.U. U.S. rates are lower only in the financial and insurance sectors and the professional, scientific, and technical sectors, the two with the lowest fatality rates. Not only is the overall U.S. fatality rate higher, but disparities between the safest and most hazardous industries are greater than in the E.U.

Table 3

Because nonfatal injury rates are underreported in the United States, and because we do not know the proportion of injuries reported in other countries, we don’t know how U.S. nonfatal injury rates compare with those of other countries.

V. The value-of-statistical-life literature: What it says, what it gets wrong

The title of Kip Viscusi’s second book, Risk by Choice: Regulating Health and Safety in the Workplace (1983), in which he developed the perspective that has governed the VSL literature ever since, states bluntly its freedom-of-contract assumptions. Without referencing the actual legal, medical, and social history of OSH, it posits an ideal model of how occupational risk would be transacted if the market for labor services were determined solely by self-interested agents whose only concern was to strike the best possible bargain. Employers are assumed to maximize profits, treating both wages and safety as costs of production with no corresponding benefits. Workers are assumed to maximize utility derived positively from both safety and wages. Competition assures that employers all earn the same profit, i.e., zero in economic terms (net of the cost of capital), and workers of a given type all receive the highest level of utility attainable given the jobs they and their peers are offered. The market for each type of labor clears, so no employer faces an unfilled job or worker a spell of unemployment. Employers and employees have equal power to contract or walk away from any bargain.

This equilibrium can be depicted in Figure C, where wages are measured on the y-axis and risk on the x-axis.

Figure C

Here w represents the wage and r the level of risk of death on the job. For a given worker utility function, the curve u = u⁰ traces combinations of wages and risk that leave combined utility unchanged at the market-clearing utility level u⁰. The curve incorporates increasing marginal disutility of risk (the curve becomes nearly vertical as a critical level of risk is approached). The other curve, π = π⁰, traces the corresponding combinations that leave employer profit π unchanged at the competitively determined level of zero. The employer faces increasing marginal costs of reducing risks (diminishing marginal return to safety investments), so the curve becomes steeper as one goes from right to left. Profits and utility are jointly maximized at the tangency indicated by dw/dr, the marginal tradeoff between wages and risk for this particular contracting pair. At market equilibrium for a worker with this productivity (which determines u⁰) and utility map and for an employer with this cost-of-safety schedule, an equilibrium wage of w* will be established along with an equilibrium risk r*. In a more complete representation of this model there would be many iso-utility curves reflecting different worker attitudes toward money income and risk and many iso-profit curves representing different employer cost-of-safety conditions. More safety conscious workers would sort to be matched with employers with less expensive safety options and vice versa. An upward-sloping contract locus would connect all these individual tangencies.

Here we can see all three properties of compensating wage differentials in a purely contract-centered world:

1. The level of risk is perfectly efficient, since the marginal cost of an additional increment of safety is exactly equal to the marginal benefit (in monetary equivalent) it would provide to workers. Safety is neither too low (where improvements inexpensive for the employer to provide would be highly valued by workers) nor too high (where the cost of providing some of the improvements exceeds workers’ valuation of them). Regulation cannot improve this outcome.
2. Workers in dangerous jobs would be no better off if they switched jobs with equally productive workers in safer ones. The dangerous jobs pay higher wages so that each worker receives that worker’s u⁰ in overall compensation. True, with their subjective differences, some workers will end up more satisfied with their work than others, but there is no a priori reason why such differences should have any systematic relationship, positive or negative, to safety.
3. The marginal tradeoff between wages and risk, dw/dr, can be employed to calculate the implicit value of life voluntarily chosen by workers at this point in the contract curve. Multiply this incremental equivalent by the number of such increments required to sum to a single statistical life (1 divided by the marginal risk change) and the result is the aggregate money that many such workers would collectively require to reduce expected occupational deaths by one. If workers are viewed as representative of the larger society, this VSL can be applied to any policy change that reduces expected mortality but imposes other costs, e.g., mitigating climate change, reducing toxic emissions from power plants, or, for that matter, regulating risk in the workplace.

Before moving forward, it is important to emphasize that this model begins with the core assumptions of a freedom-of-contract world. Workers care only about their individual well-being, a function of their income and the disutility they experience from occupational risk, and they perform this calculation rationally and consistently, unaffected by social or ethical considerations. Similarly, firms care only about profits, which depend on the wages they pay and the safety investments they make; neither worker commitment nor market reputation plays a role. The labor market is in continuous equilibrium, defined as a state in which supply equals demand and there is no opportunity for any party to improve its outcome by altering the terms it offers to either supply labor or employ it. All relevant outcomes of employment, including actual safety on the job, are determined at the moment employment offers are accepted. Employers and employees have equal bargaining power, a claim increasingly contested by empirical research. There is no regulation of the terms of employment, either by government or collective bargaining agreements; in fact, the legal status of “employment” itself is undefined because none of the questions employment law resolves are at issue. These aren’t claims supported by historical, institutional, or empirical research; they are assumptions made prior to any theoretical or statistical analysis.

On the basis of the preceding model, VSL researchers estimate a wage equation of the following form:

ln w_i = α + βX_i + γr_i + ε_i

where w_i is the wage of worker i, α an intercept, X_i a set of control variables for worker i, β a vector of coefficients on these variables, r_i the occupational risk faced by worker i, γ the coefficient on this risk, and ε_i the error term. By incorporating control variables, the intent is to isolate the effect that risk has on wages for equivalent jobs, with the coefficient γ representing the wage effect of a unit change in this risk, which, when multiplied by the level of risk r becomes the compensating wage differential; for instance, if γ = 0.02, average w = $50,000, and average r = 1/10,000 per year, estimated VSL (at these averages) would be [2% of $50,000] x 10,000 = $10,000,000. (These numbers are only for purposes of illustration.) Referring again to Figure C, it is assumed that each worker is of a given productivity type, where this type is a function of attributes like age, gender, experience, education, race, union membership, and marital status. (Note that gender, race, and union membership are routinely interpreted as signaling differences in “productivity.”) Each productivity type applies its utility maps to the same set of wage offers in the competitive market, so including these variables is expected to strip away this potential confounder.

A large number of studies have been conducted along these lines, and most of them find positive coefficients γ on risk, representing wage compensation for more dangerous working conditions. When these marginal tradeoffs are multiplied by the mean change in risk of death, a VSL of several million dollars is typically estimated. Government agencies in the United States and a few other countries have officially adopted these estimates for use in benefit-cost analyses of regulations and public programs, thereby influencing the ability to regulate pollution, workplace safety and health, vehicle speeds, and every other regulatory issue affecting life and health. The VSL also enters into calculations of the “social cost of carbon,” used to justify and calibrate measures to combat climate change (Melillo, Richmond, and Yohe 2014).

The procedure is endorsed by leading lights in the “law and economics” movement, such as Cass Sunstein (e.g., Sunstein 2014), for what they regard as its rational approach to valuing lives. VSL calculations have made their way into introductory economics textbooks as examples of the insight that comes from applying “the economic way of thinking” to problems usually considered fraught or vexing (Mankiw 2014). For many whose only analytical exposure to labor issues occurs in the undergraduate economics classroom or in the use of VSL studies, the freedom-of-contract perspective represents the “economic” approach to OSH.

It is important to recognize, however, that the VSL literature and its underlying analytics are strongly disputed within the economics profession, particularly by those with a deep background in the study of labor markets. For a striking example, consider Labor Economics by Pierre Cahuc, Stéphane Carcillo, and André Zylberberg (2014), which has established itself as the leading graduate textbook in its field. Much of Chapter 5 in the second edition is devoted to disputing the modeling and empirical approach of VSL proponents, which the authors find simplistic and misleading. In the pages that follow we will explain some of these criticisms and add several of our own.

At the theoretical level it should already be clear that the modeling framework used by VSL proponents assumes away nearly all the problems that have preoccupied labor economists in the decades since the pioneering work of Richard Lester and have recently reemerged as central to our understanding of labor market trends. In Figure C, the determination of the slope of the contract curve by the marginal rate of substitution between wages and safety for each corresponding worker embodies the law-of-one-price constraint, but modern labor economics begins by asking why this law doesn’t hold: There is an array of wages paid to workers with similar skills or occupations. The most widely subscribed approach in the discipline today is search theory, in part because it provides a plausible, readily modeled explanation for both wage dispersion and involuntary unemployment. A formal proof that fully compensating wage differentials are a special rather than general case in a search framework was provided by Lang and Majumdar (2004).9 As they demonstrate, a search theoretic version of Figure C would portray many iso-utility and -profit tangencies, and the locus of them could as well be downward as upward sloping—lower wages and greater risk for workers of equivalent potential productivity. With search frictions there is no guarantee that competition will prevent the emergence of good and bad jobs corresponding to safer and more dangerous ones.

Similarly, a formal proof by Dorman (1998) shows that wage differentials will not be fully compensating if worker effort depends on the pay and working conditions provided by the employer—the efficiency wage case. This effect can only be magnified when the theorist takes into account the many other linkages between compensation, worker commitment, investments in training and promotion, and the role of problem-solving for flexibility and innovation characteristic of strategic human resource management (Bartling, Fehr, and Schmidt 2012). Compared to the more realistic models on which modern labor market analysis is based, the unadorned supply-and-demand framework of the VSL researchers can only be regarded as naive. Indeed, what is remarkable about employment as viewed through the freedom-of-contract lens is that it is modeled as a one-off bargaining game played by workers and employers, rather than a repeated game in which performance and not just acceptance or rejection of an employment contract is part of the strategy set. Worker performance is about how much effort is supplied as well as engagement in problem-solving and the exercise of initiative, while firms perform on such dimensions as job security, working conditions (including health and safety), opportunities for training and promotion, and their demonstration of respect and appreciation in general. It is clear that in a more realistic model the level of worker protection will likely play an important signaling role.

A second set of criticisms targets the behavioral assumptions of the freedom-of-contract approach. A useful starting point is the way occupational risk is represented in the VSL literature. Recall the regression equation above, for which it was explained that r_i is “the occupational risk faced by worker i.” This risk is typically measured as the annual occupational mortality rate faced by workers in a given job type, ranging from zero, if the job has no such mortality at all, to some number of deaths per 100,000 workers or other denominator. Each increment to this measure—each additional death tabulated for this job type—is modeled as having exactly the same effect on workers’ subjective perception of how dangerous their work is. This notion that goods are valued on a continuous, absolute scale violates one of the best-supported theories at the intersection of economics and psychology: prospect theory (Kahneman and Tversky 1979). According to prospect theory, evaluations are comparative: People typically have reference levels (norms) for goods and respond differently depending on whether the amount offered is above or below this level.

In most applications the reference quantity is assumed to be the status quo, with the behavioral distinction pertaining to gains or losses relative to it, but the theory itself is general. In the context of OSH, prospect theory suggests that workers may distinguish between largely acceptable (at or below the norm) and unacceptable risk. If this is correct, the risk variable in VSL studies is misspecified, failing to register risk differentials that matter most while (perhaps) exaggerating others. For instance, a small difference in fatal risk between two jobs may have little effect on workers’ valuation of the jobs if both are seen as acceptably safe, but if the difference pushes one of them over the acceptability threshold the effect may be substantial. This threshold may apply to a particular source of risk, one workers may think should not be a source at all; in other words, the norm for some types of risk may be zero. That people put up with substantial risks in some aspects of their life and work while vehemently opposing them in others is not irrational if we recognize the ethical—normative—dimension of risk.

Closely related is the observation that the behavioral model implicit in the treatment of risk in the VSL literature assumes that workers care only about the amount of risk they are exposed to and not the process by which the risk level was determined. This assumption has been widely contradicted by studies that show that individuals perceive less risk or are less perturbed by the risk they perceive when they believe they have control over it. 10

That is, self-imposed risk is evaluated as more acceptable than externally imposed risk—important when, as we will soon see, vehicle accidents play a large role in traumatic occupational fatalities. In this respect risk is like many other goods, where procedural utility supplements and modifies outcome utility (Frey and Stutzer 2005; Bartling, Fehr, and Herz 2014). The sensitivity workers often express toward how they feel themselves treated by employers in safety and other aspects of work extends two arguments we have already seen. First, insofar as employment is better modeled as a repeated rather than a one-off game, signaling becomes a crucial aspect of bargaining and performance, and how well employers mitigate safety and health risks can well serve as a signal of their overall intentions. Second, to the extent that a certain degree of risk can be viewed as intrinsic to the type of employment at issue, risk levels above it are likely to be regarded as discretionary—as imposed by actions or inactions deliberately chosen by the employer. Thus, the reference point at the heart of prospect theory can logically be the level of risk above which employers can be assigned responsibility, along the lines of the earlier discussion of the evolution of OSH law.

Finally, behavioral research has identified many cognitive processes that mediate between objective risks and subjective risk perception. In the field of OSH the most important is probably the avoidance of cognitive dissonance, among the most firmly established results in all of social psychology. The core idea is that if new information casts doubt on beliefs individuals rely on to make meaning of their world or undergird their sense of self-worth, consideration of it is painful. To avoid this pain individuals will often refuse to receive or accept such information. The common name for this behavior is denial, and responding to dangerous working conditions with denial is widespread enough to be regarded as normal. “You have to get it out of your mind” is a refrain often heard on the part of workers at risk, but the consequence is diminished risk perception and less disutility from dangerous working conditions than the standard regression model is predicated on (Akerlof and Dickens 1982; Nelkin and Brown 1984). 11

Aside from perception and interpretation issues, however, there is another obvious reason why subjective and objective risk may differ: Employers have an incentive to obscure the risks to which their workers are exposed. Indeed, the symbiotic interaction between the complex etiology of industrial diseases, employer disinformation, and worker denial may well place a substantial portion of true risk beyond the purview of labor markets. The problem is further exacerbated by the ability of employer-financed institutions to fund studies with the purpose of obscuring the hazards workers face from chemical exposures, repetitive trauma, and other risks identified by independent health professionals (Michaels 2008; Michaels 2020). Note that the complications associated with perverse incentives for risk disclosure rest on top of the irreducible complexities of expectation and trust that arise from safety being the result of performance over time and not an upfront, tangible commitment, as discussed earlier in this chapter.

Aside from simplistic economics and inappropriate behavioral assumptions, the freedom-of-contract approach to OSH encounters another problem: It is factually incorrect. It is based on the presumption that the relevant terms of the employment relationship are freely negotiated between workers and employers, but as we’ve seen, they aren’t. It is not true to say that workers “accept” the working conditions they encounter at their place of employment, not legally at least. As discussed earlier, occupational safety and health has been regulated in one form or another since the Middle Ages in the English-speaking world. The current legal framework is established by the Occupational Safety and Health Act, which proclaims at the outset that employers bear responsibility for ensuring that the workplace is free of hazards. Just how this legal framework affects worker perception and decision-making is a complex question, but the categorical answer that it doesn’t—the premise on which the freedom-of-contract approach rests—is surely false. To put it differently, it is not, nor should it be, unreasonable for workers to expect their employers to live up to the language of the law and address workplace hazards as they become evident.

Up to this point we have considered the theoretical underpinnings of the CWD model; now we turn to its statistical implementation. Consider once more the regression equation above: What are the pitfalls?

Perhaps the most obvious difficulty is that, when we apply such a model to a sample of thousands of workers, while we know with some confidence how much they earn, how old they are, how much education they’ve had, and so forth, we don’t have very accurate measures of the degree of risk they face at work. In U.S. studies the now-standard approach, epitomized by the many studies conducted by Viscusi and his coauthors, is to apply the following formula to each individual i:

where j is the occupation for i and k is the industry. This is an average mortality over that industry-occupation pair, and it is applied to each worker who shares those same occupational and industry codes. To give a feeling for the scale of this procedure, the regression reported in Viscusi’s 2013 paper, referenced below, assigns fatal injury risk to over 126,000 workers across 50 industries and 10 occupations, giving an average of just over 250 workers sharing the same injury rate. An obvious concern is that this generates a poor measure of individual risk, since some will face less than this average and others more. Indeed, if one accepts the notion that there are better and worse jobs even within the same intersection of industry and occupation, it is plausible that a negative relationship between risk and wages is being obscured at the individual level. (In this scenario, individuals with higher incomes given their industry and occupation would also enjoy safer jobs.) Such a presumption is supported by research that shows that a substantial portion of overall wage inequality is accounted for by variation across individual employers (Lane, Salmon, and Spletzer 2007; Appelbaum 2017; Card et al. 2018). Similarly, as we saw in the previous section, Black workers have been found to be concentrated in more dangerous jobs than their white counterparts even within the same industry; it would be optimistic to believe that such discrimination would be fully captured by adding occupational to industrial sorting. It is common for economists to brush aside these concerns under the presumption that any negative association between wages and safety found at the level of occupations and industries should also apply within these cells at the employer and individual levels, but this is simply an instance of the “ecological fallacy” (Piantadosi, Byar, and Green 1988).12 Aside from the potential for bias, even measurement error orthogonal to the variables of interest due to assigning an average risk measurement to individuals reduces the likelihood that a given estimated effect of risk on wages reflects a “true” process; if there is conscious or unconscious methodological selection on statistical significance, such as choosing control variables or sample exclusions that generate a low p statistic for the risk coefficient, the effect size—in this case the estimate of CWDs—will be biased upward (Loken and Gelman 2017).

A second problem with the risk variable employed by Viscusi et al. is even more dramatic. Recall from the previous section that, while accurate data exist for fatal occupational injuries, we have only the most limited data on fatal occupational diseases—and to the extent we can compare their magnitudes, the second is from five to 13 times the first. Worse, we know nothing about the distribution of these nontraumatic fatalities across industries and occupations, the basis VSL researchers use to assign occupational risk measures to individuals. Consider the two polar cases, and for simplicity let the number of disease fatalities be 10 times fatal injuries. Assume first there is a perfect negative correlation between fatal risks from injury and disease. In that case, the industry-occupation cells deemed most safe by Viscusi would actually be the most dangerous, and the wage-risk relationship would be nearly the opposite of what he claims to have found. At the other extreme, the distribution of these two risks across industries and occupations is perfectly coincident, which would preserve the CWD effect, but the measured wage increment would correspond to a risk differential that is approximately 10 times as great. This calculation means the VSL would be just a 10th of its current estimation. Of course, neither of these polar cases is likely, but the actual relationship between the distribution of the measured risk of a fatal injury and the unmeasured risk of a fatal disease is simply unknown—a revealing indicator of how little actual concern a true measure of risk at work arouses in this group of researchers ostensibly studying it.

In this connection it should also be noted that the subset of occupational fatalities captured by the CFOI only loosely corresponds to the commonplace notion of “dangerous working conditions.” Approximately 40% of all fatal injuries each year are the result of motor vehicle accidents, including both those in which the worker was behind the wheel, where driving was a component of work responsibilities, and many others where the worker was on the receiving end. Such injuries might be disproportionately born by better-paid workers whose work is less restricted to a single location, but if so should this be viewed as wage compensation for risk? Somewhat less than another 10th of all CFOI-recorded deaths were caused by homicides, some of which might well be the result of foreseeable risk (night shift at a convenience store), but others would be essentially random events (U.S. DOL-BLS 2020b). 13 One of the disadvantages of measuring risk with only traumatic fatalities and not the far more numerous toll of fatal illnesses is that the latter may more closely reflect what is commonly understood to be “hazardous” work.

Yet another problem is the likelihood of missing variables in the regression model. Nearly all the literature that addresses this issue considers only missing variables that might capture differences in worker productivity. Recall that the underlying model behind the VSL studies implies that wage compensation for risk should arise only within labor markets specific to a particular worker type. If the variables included in the vector of X_i fail to fully distinguish between these different types of workers—which inevitably they must—the model will be comparing wages and safety levels for at least some workers across different labor markets. Since we expect workers in a higher-productivity labor market to have both higher wages and better working conditions on average, this statistical shortcoming will introduce a downward bias to measured wage compensation within each market. Not surprisingly, the general view among economists is that the VSL literature struggles to capture labor-market-relevant worker differences and probably underestimates true CWDs.14

There is less recognition, however, of the reciprocal problem: The econometric model is likely to be missing variables that would capture relevant differences on the employer side of the market, meaning differences between factors that affect worker compensation at the industry and occupation level as well as those stemming from different types of firms. In particular, some industries, occupations, or firms will offer higher wages because of features like greater product market power, higher capital-labor ratios (which reduce the labor share of production cost), and a greater concentration of workers with above-average clout, like union members or simply white males. If some industry-occupation cells have both more fatal injuries and other attributes that lead to higher wages, estimates of CWDs would be biased upwards, and incorporating a fuller set of such variables would cause the estimates to fall. Indeed, that is exactly what Dorman and Hagstrom (1988) found in a study published in the mid-1990s based on data from about a decade earlier: Inclusion of variables found to have explanatory power in the interindustry wage differential literature, which looks at differences in wages at the industry level, reduced measured compensation to the point where the only discernible wage compensation for risk was acquired by members of labor unions, and even their CWDs were lower than the average differentials found by Viscusi and his coauthors using the same data. 15 It is interesting to note that, in the more than two decades since the importance of incorporating industry-level variables was first documented, no further study by economists specializing in VSL estimation has used them.16

The final issue that arises with the empirical specification employed by Viscusi and others is that it assumes by construction that all variables have the same wage effects for all workers; that is, workers are permitted to differ according to their age, race, gender, education, experience, and average measured risk, but the coefficients on these characteristics—the effects they are estimated to have on wage outcomes—are the same for all. For example, the effect that education is assumed to have on how much a worker earns is forced to be equal for male and female workers, white and Black, and young and old, and the same, of course, goes for exposure to risk. In this way, discrimination and other forms of unequal power or treatment in the labor market are simply assumed away. At the very least, conscientious modeling would permit personal and industry-level factors to have different effects based on race, gender, experience, education, union status, and similar power-related distinctions, and ideally a multilevel modeling approach would be employed to capture the systematic aspects of these forms of social and labor market diversity.

Considering all of these issues together, we have little reason to put much faith in the numbers that purport to represent a statistical value of life based on wage compensation for risk. This impression is only reinforced by the recognition that risk of fatal injury is just one of many aspects of work that affects the well-being of workers and, according to the simplest version of supply-and-demand theory, ought to generate compensating wage differentials; others include the stability of employment, workplace autonomy, the degree of general work comfort or discomfort, opportunities for training and advancement, provision of sick leave, employer-provided child care, flexibility in scheduling, and commuting distance. For several decades economists have searched for these wage differentials with little success, as indicated by the very title of one study, “The Pervasive Absence of Compensating Differentials” (Bonhomme and Jolivet 2009). A recent paper, for instance, asserts, “While the theory on the relationship between job characteristics and wages is clear…the empirical literature documenting the existence and magnitude of such tradeoffs has lagged behind, often finding the opposite relationship that theory would predict” (Maestas et al. 2018) 17. And indeed, their carefully conducted investigation into the value workers place on nine job attributes finds that, rather than offsetting wage inequality, as it would if less-desirable work paid more, bringing them into a combined wages-and-amenities measure of compensation actually increases it. Thus, the VSL literature, with all its red flags, stands out as the only corner of the compensating differential literature in which researchers claim to have regularly found that, all else equal, disagreeable work pays more.

But for now let us put all these doubts temporarily to the side and examine the results the VSL researchers claim to have uncovered. Why do this? Even if the absolute levels of compensation estimated by Viscusi et al. are unreliable, it is possible the patterns in their results may hold some meaning. This would be the case if the various confounding factors we reviewed apply with more or less equal force to each subsample of the workforce; greater or lesser wage compensation for risk across them might be discernible in the findings despite the misestimation they all share. Of course, it is also possible that the confounding factors don’t apply equally, so the patterns we will describe have to be taken with an extra dollop of caution.

What we will find, if these studies are to be believed, is that the relative position of different categories of workers in the social hierarchy are reflected not only in absolute wage and risk differentials, as we saw in the previous section, but also in the extent to which higher risk is compensated by higher wages. It turns out that the pattern of estimated compensating differentials corresponds to what would be expected if workers with less bargaining power are not fully compensated, or at least receive less compensation for comparable risks. Perhaps the place to start is with a rather basic study published by Kip Viscusi in 2013 to demonstrate the usefulness of the BLS’s Census of Fatal Occupational Injuries (Viscusi 2013). Using aggregate worker hours as the denominator of the fatality variable and regressing on the log of wages, and using the results for the average wage in his sample, he estimated a VSL of $9.9 million. This is a rather typical result in his oft-repeated wage-risk regressions, uncomplicated by the various adjustments and disaggregations he has sometimes made to his procedure, so it can serve as a baseline. Note that Viscusi interprets this sum as fully compensating the worker who receives it—an inference based on the theoretical model we have already considered, but, as we have seen, unwarranted if the model is adjusted for greater realism. What interests us in this context, however, is the effect of altering the regression model to accommodate a range of risk coefficients across the workforce or applying the same model to different subsamples of workers. To repeat, while we have ample reason to be skeptical of any particular result using this modeling approach, there may still be interest in the pattern of relative results that emerges from it.

Here we review studies of compensating differentials that have disaggregated the workforce into subsamples by wage levels, race, immigrant status, and unionization:

Position in the wage hierarchy. The econometric technique used to estimate wage compensation for risk already incorporates the worker’s wage level, since the dependent variable is the log of wages; this means the coefficient on the risk of fatal injury corresponds to a percentage increase or decrease in what the worker is paid. The VSL calculation converts this to a monetary amount by applying the percentage change to a particular wage within the distribution, such as the median or mean. But there is no rule that says there can be only one such VSL; on the contrary, the percent increment (or decrement) can be taken at multiple points along the wage spectrum. Doing so will produce a range of estimated values, but the elasticity of the VSL with respect to wages will remain constant, since the same percent change is used in each case.

In order to compute VSLs for different wage groups in a way that allows this elasticity to vary, Kniesner and his coauthors conducted a wage-risk regression using panel data; the data incorporated changes in wages and attributed risk levels for the same workers over time as they moved between jobs. (Since few workers change jobs in this fashion over a short multiyear period, their sample was only a bit over 2,000 unique individuals, rather than 126,000 as before.) Thus, since the methodology assumes worker utility is unchanged across moves—there are no good or bad jobs for workers of a given “sort”—there is a sort of compensating wage differential for each of these individuals. Establishing any sort of gradient over the entire sample, however, requires making some simplifying adjustments that modify the independence of these wage-risk relationships. There is no single best way to do this, and Kniesner, Viscusi, and Ziliak (2010) provide results for a range of such “tunings.” Taking one such choice, where the tuning parameter is set at 1, the coefficient on the risk variable, which measures the percentage effect of a change in fatal risk on worker pay, is almost 50% higher for those in the top fourth of the wage distribution compared to those in the bottom fourth. Thus, not only are lower-wage workers estimated to get a smaller pay boost from having to cope with work hazards, they also get a much smaller percentage increase, despite facing far greater risk, as the previous section documented.18 (Kniesner, Viscusi, and Ziliak).

This result is interpreted by the authors in psychological terms: Occupational safety is described by Kniesner et al. as a “normal good” whose value to the worker increases with income. It could just as well be understood in terms of the foundational observation of Lester and those who followed him that there are better and worse jobs for workers with the same skills and personal attributes. A bad job is one with relatively lower pay and higher risk, all else being equal. As long as job segments overlap in the labor market, it follows that at any level of the wage hierarchy higher pay means a higher likelihood of having a good job. One of the characteristics of a good job is that it compensates workers for bearing extra risk. It’s not necessarily that higher-paid workers care more about safety; they are treated as if they do compared to those earning less, a consequence of their greater market power and in contrast to the relative disempowerment experienced by lower-wage workers in bad jobs.

Race. A 2003 study by Viscusi focused specifically on differences between white and Black workers in the degree of risk they face at work and the amount of wage compensation they are estimated to receive for it. He used CFOI data for fatal injuries and SOII data for nonfatal, assigning to both white and Black workers the average risk for the industry in which they were employed.19 (Risk categories were based only on industries, not occupations, since many industry-occupation cells would be too small if disaggregated by race.) Not surprisingly, he found that Blacks are relatively more concentrated in the most dangerous industries and receive lower pay overall. In addition, however, he estimated substantially lower compensating differentials for Blacks: Their coefficient on fatal risk, which measures the percentage effect on their earnings from a unit change in the average risk of their industry, was not quite 60% that of whites, while the coefficient on nonfatal risk was just under two-thirds. Note that these smaller percentage effects apply to the lower wages Black workers already face.

If valid, these results are important for many reasons. They indicate that racial inequality in pay is not offset but exacerbated by un- or insufficiently compensated risk of injury and death. They offer further support for our view that the extent of OSH risks and possible compensation for them are strongly influenced by the relative power a particular group of workers can draw in bargaining and at the workplace. Finally, they undermine the case for the freedom-of-contract view as it might apply to any set of workers. According to these regression results, Black workers receive less compensation than whites for the risks to which they are exposed. If we agree it makes little sense to argue that Blacks are somehow less aware of or concerned by these risks, this reduced compensation shouldn’t be interpreted as evidence for a lower Black VSL. In that case, however, why should the larger coefficients on risk for white workers be viewed as the basis for their VSL? Indeed, faced with these racial disparities, one is forced to either accept both the VSL (freedom-of-contract) interpretation of them and a racially pejorative view of relative attitudes toward risk or, conversely, reject both of them, as we do.20

Immigrant status. This was explored in a 2010 paper by Joni Hersch and Kip Viscusi, and then in a followup 2020 study by Viscusi and Nick Marquiss.21 Since the second paper largely follows the methodology of the first and updates it, we will focus on the most recent version. The main innovation in both papers was to add to the standard wage-risk regression additional terms that interact the fatality risk variable with binary variables indicating whether the worker in question is an immigrant either in general or from Mexico in particular.22 (Hersch and Viscusi also interact with indicators for other regions.) This means that native workers have a coefficient on their estimated fatal risk, while immigrants have that same coefficient plus the coefficient on their interaction term. In their published specification, for example, the baseline coefficient on risk was 0.0029 for 2007, while the coefficient on the interaction between risk and being an immigrant from Mexico was -0.0075, so the overall coefficient for native workers remained at 0.0029 but was -0.0046 for Mexican immigrants and 0.0013 for non-Mexican immigrants. In Table 4 we give a selection from their results.23

Table 4

What is striking in this exercise is that the combined coefficient was strongly negative for immigrants in three of the four cases (two types of immigrants, for 2007 and 2015 each) and was essentially zero for the other case. In addition, when Hersch and Viscusi in the earlier paper included a variable for English fluency, they found that non-English-speaking immigrants from Mexico received less—which is to say more negative—wage compensation for risk than those with English language skills.24 A negative compensating differential, if you accept the interpretation Viscusi and his coathors give to coefficients on risk, would somehow imply that immigrants have a positive appetite for risk of death, a bizarre claim not supported by any independent assessments, such as survey questionnaires. Such results, however, are broadly consistent with the perspective proposed in this paper that those with less workplace power have difficulty obtaining compensation for risks. Of course, care should be taken in drawing any conclusions. It is noteworthy that the risk variable in both studies assigned fatal risk on the basis of industry only, again because of the difficulty in populating a large number of industry-by-occupation cells. Moreover, all the other caveats we examined regarding this stream of research apply to these papers as well.

Unionization. The relationship between unionization and wage compensation for risk is complex. From a bargaining power perspective, the effect ought to be clear: In general, being a member of a union or covered under a collective bargaining agreement should give workers a greater ability to demand extra pay if there are extra risks of injury or illness. On the other hand, unions often resist resolving OSH issues through hazard pay, demanding instead employer adherence to more stringent safety standards or the establishment of a joint health and safety committee; that is, unions attempt to lower the risks. Moreover, the likelihood of a union being established is itself related to the presence of OSH hazards, either in the past or currently. And unions vary greatly among themselves, of course, in the amount of attention they give to OSH risks and the leverage they provide workers for addressing them.

That said, one might suppose that, compared to the situation workers find themselves in when unions are absent, collective bargaining ought to increase the pressure on employers to compensate workers for risk exposure. This was the general pattern found in the most influential meta-analysis of VSL studies, which Viscusi and Aldy published in 2003:

Regardless of estimation strategy, most assessments of the U.S. labor market found higher risk premiums for union workers than for non-union workers….Of the ten U.S. labor market value of life studies we reviewed that evaluated the role of unions in risk premiums, nine found union workers enjoyed greater compensating differentials for bearing risk than nonunion workers. In contrast to [our] accepted theory, several of these papers found that non-union workers had insignificant or statistically significant negative compensating differentials for risk. (Viscusi and Aldy 2003, 44, with our clarification)

It is important to note, however, that this summary is now nearly two decades old, and no published studies have looked at the union effect on compensating differentials in the United States since then.

Overall, the pattern of empirical results in the VSL literature, taken at face value (as if they were correctly estimated), is consistent with the view that wage compensation for hazardous work is not an automatic feature of unregulated labor markets, as proposed by freedom-of-contract theory, but a benefit to be achieved according to the influence or power workers can bring to bear on employers; a higher status in the labor market and more power on the job mean more likelihood of receiving this compensation. It would be too much to regard these statistical results as convincing evidence, however, since the methodological assumptions underlying them are so problematic, and this uncertainty may extend to the pattern as well as the overall direction of results. To take just one example, the exclusion of fatal occupational diseases from risk measures may mean that, on average, industries and occupations deemed safer by VSL researchers might actually be more dangerous. Similarly, the omitted explanatory variables, like measures of capital intensity and market concentration, that characterize this literature might, if included, change the picture of which groups in society are most likely to receive compensation for risk. The most we can say is that the evidence, such as it is, does not contradict the view that the degree to which risk is rewarded with greater pay, as well as every other outcome of the employment relationship, is the product of economic institutions, public policy, and the relative power each side brings to the table.

When we pull back and consider VSL methodology as a whole, what stands out is its focus on presumed commonalities that cut across different strata of the labor force. In the environmental, health, and other policy arenas that employ monetary measures of the value of life-saving, the demand is for a single value for all lives, or at most a small set of values for the specific populations that might be affected by a policy choice.25 Not surprisingly then, the statistical procedure we have surveyed attempts to pick out percent changes in wages corresponding to changes in fatal occupational risk averaged over broad swaths of the workforce. Workers differ in the risk they face, but the coefficient γ on the risk variable r applies to all of them. At the end of our survey we looked at a handful of studies that disaggregated by wage levels, race, and immigrant status and found these groups receive less compensation for the risks they face, which is especially problematic since these groups face the most risks. We also found indications that workers with a union are able to increase the compensation paid for risks. Still, even these estimates average effects over very large portions of the population. One is reminded of the story about two statisticians who went deer hunting. One took aim but fired two feet to the left. The other then fired two feet to the right. “Congratulations,” they said to each other, “we got it!”

From a realistic labor market perspective it makes no more sense to ask what is “the” compensating differential for risk than to ask what is “the” level of pay or number of hours in the work week; compensation for risk is just one more dimension along which labor market experience varies. It is surely the case that some workers are amply rewarded for taking on additional risk, others rewarded somewhat but not fully, and still others not at all or even penalized, in the sense that they are stuck in bad jobs that are worse in both respects. Thus, the presumption that estimated compensating wage differentials always represent full compensation for risk is unsupportable. What ought to interest us is the variation of compensating differentials: who tends to get how much compensation and why. Answering that question would call for entirely different study designs, drawing on both the analysis of large data sets and case studies of specific work contexts to capture, among other factors of interest, differences in labor market and workplace power. In this context it is worth noting that case study research is nearly absent from the VSL literature.

VI. Occupational safety and health in the era of the coronavirus: Challenges and policy

Years can go by with little public notice given to issues in occupational safety and health, at least in higher-income countries. But the advent of the Covid-19 pandemic has moved OSH to front pages and Twitter feeds, since the risk of infection has made work suddenly more dangerous, and in some communities workplaces are the most important sites of transmission. In this as in other aspects of our society, the virus has brought once-hidden flaws out into full view.

Before we can discuss the role of the workplace in the pandemic, however, it will be useful to sum up the main conclusions from the preceding analysis.

• Despite the Occupational Safety and Health Act and the other programs created over the past century, poor working conditions remain a concern. Workers exposed to excessive risk of accidents and illnesses face not only a health but also an economic problem, due to uncompensated medical costs and the loss of current and future income. The network of state-level workers’ compensation programs provides benefits to too few of these workers and provides too little income support.
• OSH reporting systems are incomplete and inaccurate. While the Bureau of Labor Statistics now provides a comprehensive census of fatal occupational injuries, nonfatal injuries are often missed and most occupational diseases pass completely beneath the radar. This is a problem at the national level, since it limits the guidance we need for policy and implementation; it is also a problem at the enterprise level, where workers remain uninformed about the true risks they are exposed to.
• While there is sometimes economic and ethical justification for hazard pay, such payments are rarely offered explicitly, and there is little reason to believe they are commonly implicit in wage offers either, despite the claims of some researchers. This is not to say no workers ever receive compensating wage differentials for risk, but evidence for the view that such differentials are widespread does not survive scrutiny. Moreover, there is no reason to assume that when extra wages are offered the differential fully compensates workers for the risks they bear. For these reasons, it is likely that the existence and extent of hazard pay in any form, explicit or implicit, reflect the relative power workers are able to draw on to advance their interests.
• The view of the labor market associated with the freedom-of-contract perspective, which holds that OSH risks are efficiently negotiated between workers and employers, is at odds with nearly everything we know about how labor markets really work. It cannot accommodate the reality of good and bad jobs, workplace authority based on the threat of dismissal, discrimination, and the pervasive role of public regulation in defining what employment entails and what obligations it imposes. It also fails to acknowledge the social and psychological dimensions of work, which are particularly important in understanding how people perceive and respond to risk.

The current pandemic has thrown all of these observations into vivid relief. In the remaining portion of this paper we will show how abiding economic, social, and public health aspects of OSH have been magnified under the impact of the coronavirus. We will conclude by briefly sketching some of the measures that would mitigate the impacts on workers, their families, and their communities. The place to begin is with the recognition that the pandemic is, to a significant extent, a crisis in occupational safety and health. Transmission occurs mainly in social settings when uninfected people come into proximity with others who are shedding the virus; this can occur at home, in school, and while shopping, traveling, and recreating. But another prime venue is the workplace. Those at greatest risk are often either classified as “essential” workers or unable for economic reasons to avoid going to work no matter how great the risk.26

Particular work environments have been singled out as coronavirus hotspots. Health care facilities, of course, belong in this category, although extra effort has gone into measures like frequent testing, isolation, and provision of personal protective equipment. At the opposite extreme, meatpacking plants are by nature conducive to spreading, with their crowded production lines and cool temperatures, but many companies have failed to address the risk (Narea 2020; Schlosser 2020; Swanson, Yaffe-Bellany, and Corkery 2020; Thompson 2020). 27 Instead they have often used their political clout to prevent public health officials and journalists from learning the full extent of the problem (Corkery 2020; Foley 2020; Grabell, Perlman, and Yeung 2020; NC Watchdog Reporting Network 2020). A recent report from the Centers for Disease Control and Prevention (CDC) tallies over 16,000 confirmed cases and 86 deaths nationwide in meat and poultry facilities, but a brief concluding statement on “limitations” makes it clear their partial, self-reported numbers are likely to be a substantial underestimate (CDC 2020).28

Food production facilities in general have been recognized as spreading venues. Workers in these jobs are more likely to be immigrants, Latinxs, or both, and half again as likely to earn less than twice the official poverty cutoff—$12,760 for an individual and $26,200 for a family of four—making them more likely to keep coming to work even if they are infected (Artiga and Rae 2020). Of course, low-income, minority, and immigrant workers are also likely to come home to more crowded living conditions while also having fewer options to avoid contact in shopping and other off-work activities. The result is that each infection acquired at work means more transmission in the community. For instance, when it is reported that confirmed cases in Nebraska’s meatpacking plants constitute a fifth of the state’s total (Goodwin 2020), it should be taken as a lower bound for the contribution of this one sector to the state’s caseload. While the actual contribution is unknown, with plausible estimates of R0 (the transmission rate) for these workers, and recognizing some infections were transmitted to rather than from the workplace, it could be as large as half.

When we add the many other sectors potentially conducive to spreading—retail, in-person care, transportation, etc.—it becomes clear how large a role the workplace plays in the pandemic. Among the inadequacies exposed are:

• Insufficient employer protection. There is substantial evidence of worker discontent with the measures employers have, or have not, taken to reduce the risk of infection. To take one example, over 17,800 complaints have been filed by workers to the Los Angeles County Department of Public Health alone (Roosevelt, Martin, and Avery 2020). The Payday Report website documents over 900 wildcat job actions nationwide over pandemic-related issues (Payday Report 2020). Polls show a minority of workers working outside the home are dissatisfied with precautions taken by their employers (17% in the Washington Post-Ipsos Coronavirus Employment Survey, 8% in an Economic Policy Institute poll), but the samples are drawn from all occupations and industries and may significantly understate the level of concern in the most affected workplaces (Dorman and Mishel 2020; Washington Post-Ipsos 2020). It is also possible that, while many workers fear being exposed to the virus at work, they don’t hold their employers responsible for this risk.
• Regulatory failure. The primary regulatory agencies for OSH in the United States, the U.S. Occupational Safety and Health Administration and the state OSHAs that take on responsibility for regulation in the 25 states that have assumed this role, have largely been silent bystanders. As of July 21, 2020, OSHA had received over 7,000 Covid-19 complaints but issued citations to only two workplaces. In both cases at least six workers had been hospitalized before the citations were issued (OSHA 2020; Department of Labor 2020). Incredibly, a recent ruling from OSHA effectively absolves employers of responsibility for reporting any occupational exposures from Covid resulting in hospitalization—this despite the general obligation on employers to log and report occupational events resulting in hospitalization. In its September 30, 2020, guidance, OSHA interpreted the statute as requiring notification only if the hospitalization occurs within 24 hours of the worker’s initial exposure to the virus, virtually an impossibility in light of the delayed onset of Covid symptoms (Edwards 2020; Moyer 2020; Jamieson 2020). Above all, OSHA has not translated CDC guidelines into enforceable mandates for employers in line with its core responsibilities (Covert 2020; Michaels and Wagner 2020).
• Surveillance failure. As noted just above, employer resistance and weak public health authority, compounded by drastic shortfalls in testing capacity, have rendered workplace infection numbers unreliable. Although the workplace is a prime venue for coronavirus transmission, our knowledge of where the risks are concentrated is inadequate.
• Economic coercion. Low-income workers are afraid to stay home from work, even if they or another household member is infected; many are also afraid to criticize employers for policies that penalize workers for putting health and family obligations first. In one poll conducted by the Roosevelt Institute, over 40% of all workers who said they would be unable to pay all their bills if they took time off from work either largely or strongly agreed they would continue going to work if they came down with a fever (Hertel-Fernandez et al. 2020). In the same poll, only a third were sure they would receive paid sick leave if they stayed home due to the virus; this drops to about a quarter for the bottom half of the wage distribution. To some extent, the intimidation of low-wage workers was reduced by the additional unemployment insurance payments voted by Congress, but this program is set to lapse, and in any case laid-off or dismissed workers would also lose health insurance coverage and any other nonwage benefits from work, with no guarantee that another job would be available when unemployment insurance benefits expire.
• Noncoverage by workers’ compensation (WC). Although the WC system is state-based and varies according to jurisdiction, as we have seen there is little coverage of occupational disease anywhere. Few workers or their survivors have received benefits for contracting Covid-19 during the pandemic, and where they have the payouts have been inadequate (Bailey and Jewett 2020). Of the five states that have taken action to make their WC programs substantially more responsive to the ongoing pandemic, three have done so by executive order and two by legislative enactment; of these, two are for all workers and three for essential workers only (Cunningham 2020; National Council on Compensation Insurance 2020).29
• Limited financial compensation for risk. At the outset of the pandemic there was much publicity about wage boosts given the “heroes” working in essential positions. Indeed, some workers received hazard pay, as evidenced by the Economic Policy Institute survey that found 30% of all workers working outside their homes receiving a wage increase. This is corroborated by the previously cited Roosevelt Institute study in which less than half of all workers received a pay boost, with the average increase coming to just over a dollar per hour (Hertel-Fernandez et al. 2020). But a team of researchers using a real-time human resources management database also found that a 10th of all workers had their wages cut between the beginning of the pandemic and the end of May (Cajner et al. 2020). Later, from the vantage point of eight months into the publicly visible phase of the pandemic, a team of researchers at the Brookings Institution found that hazard pay in the retail sector was short-lived and dwarfed by increased profits. Examining data for the 13 biggest retailers whose markets grew during the pandemic and for which financial information has been reported, they found, while a few instituted permanent wage increases, none sustained hazard pay throughout the period, and (after dropping one outlier) the average date for eliminating this premium was the end of May. For the six of these firms reporting wage data, outlays for hazard pay were just 38% of the increase in profits during the pandemic (Kinder, Stateler, and Du 2020).
• Unequal burdens. Every study of the pandemic to date that has looked at the issue has found higher infection rates among Blacks, Latinxs, Native Americans, and immigrants. These disparities can be found in polls, studies, and reportage of workplace exposures specifically, some of which have already been referenced above. To take one example, the Roosevelt Institute poll found that, while 23% of white workers reported they were “extremely concerned about being infected at work,” the numbers for Latinx and Black workers were 33% and 42%, respectively (Hertel-Fernandez et al. 2020). Of course, this is not about the relative attraction of the virus to people of these different backgrounds; it reflects the greater concentration of minority groups in riskier jobs with less employer protection, subject to heightened economic coercion from low income and fewer benefits.

These are readily observable aspects of the pandemic as an occupational health crisis. Our findings in this paper, however, direct us to several underlying factors that help explain why these harsh outcomes have occurred.

• The extent of the low-wage economy. Decades of increasing wage dispersion have left the U.S. with a substantial portion of the labor force whose pay is at or approaching the poverty level even during times of economic expansion. Such workers are subject to economic coercion in all significant life decisions, including what jobs to accept and when to put family or similar obligations temporarily above work attendance.
• Limited employer and government benefits. Paid sick and family leave are privileges for the upper strata of the labor force, not rights all workers can rely on. Health insurance is also largely employment-based, with only partial supplementation through the Affordable Care Act. The state unemployment insurance systems are designed primarily to make it difficult to claim and to not reach as many of the jobless as possible, and they generally replace less than half the worker’s prior earnings.
• Deunionization. Unions help inform workers about the risks they face and use the lever of collective action to improve conditions at work. At the same time, they diminish economic coercion by giving workers procedural rights on the job, yet the share of the private-sector labor force covered under a collective bargaining contract has fallen to just 7%.
• Lax regulation. The federal agencies responsible for regulating working conditions, the Occupational Safety and Health Administration and the Department of Labor’s Wage and Hour Division, have been weakened by prolonged underfunding and little policy impetus from political leadership. OSHA in particular was completely unprepared to meet the challenge of the pandemic.
• Marginalization of minority, immigrant, and low-income communities. Social hierarchies corresponding to what this paper has called power differentials largely structure the country’s economy and politics. Workers concentrated in the worst jobs also tend to live in crowded residences, sequestered in neighborhoods with little political influence. Policies like sheltering in place and commercial reopening are chosen with little input from or attention to the needs of these communities.

With these considerations in mind, we can suggest several lines of reform that not only address the current pandemic but have the potential to set in motion a more fundamental reshaping of public health and labor market outcomes for the post-pandemic world.

• Workplace measures for impeding the spread of the novel coronavirus should be mandated by an emergency temporary OSHA standard. No new statutory language is needed. Indeed, the 25 states with OSHA state plans can take this step on their own, since the law requires them to meet federal standards but leaves them free to exceed them. Adequate guidance has already been issued by the CDC; there is no reason for either OSHA or the states to delay action.

Legislative action at the federal or state level could mandate the establishment of joint worker–management health and safety committees with jurisdiction over protection measures against the virus. These could take advantage of workers’ on-the-ground knowledge in translating OSHA standards into detailed workplace actions while promoting an atmosphere of public health collaboration (Lichtenstein 2020).

• There should be a default presumption of work-relatedness for coronavirus infection for workers’ compensation eligibility, applicable to all workplaces and not only those categorized as essential. This would conform to the practice in Germany (among other countries), where, early in the pandemic, the Labor Ministry identified Covid-19 as a potential occupational disease and stipulated that employer responsibility could be voided only by strict adherence to specified distancing and personal protective measures (Bundesministerium für Arbeit und Soziales 2020). Federal and state OSHAs, coordinating with public health authorities, should establish mandatory record-keeping for all employee infections, to be transmitted to the relevant agencies and open to public inspection. There should be no more uncertainty about workplace hotspots, either for the workers directly at risk or members of the public concerned about community health conditions.
• Adequate paid sick leave for any employee who is infected by the coronavirus and family leave for those with pandemic-related obligations in their household should be universal and mandatory. During the transition to such a system the federal government can assume part of the financing burden.
• While avoidable infection risks should be minimized through the enforcement of science-based standards, there will still be occupations more exposed to the pandemic, like health care, in-person education and other services, and some retail employment. Workers facing these residual risks should be identified and awarded extra compensation—hazard pay—as a matter of fairness. These extra wage payments should supplement and not replace existing wages. As with paid leave benefits, hazard pay can be partially financed by the government to facilitate implementation.

In addition to the immediate actions suggested above, we need a fundamental redirection of labor and public health policies so future challenges don’t find us as unprepared as the current pandemic has. These include:

• shrinking and eventually eliminating the low-wage sector through more comprehensive and higher-targeted minimum wage requirements along with training and other productivity-enhancing measures;
• revamping labor laws to encourage unionization under centralized systems of bargaining;
• rebuilding the occupational and public health infrastructure with more funding and a broader scope for standard-setting and regulation;
• taking assertive action to combat discrimination on the basis of race, ethnicity, and immigrant status, the most salient forms of bias in occupational health outcomes; and
• embarking on initiatives to enhance worker voice in the 21st-century economy, such as extending rights to workers in online platform or otherwise “fissured” occupations and promoting new institutions for worker participation at the worksite and top management levels.

It is beyond the scope of this paper to do more than enumerate the items on this agenda, but they are logical consequences of the perspective on labor markets we have developed in the preceding pages.

About the authors

Peter Dorman is an emeritus professor of political economy at Evergreen State College in Olympia, Wash. The author of Markets and Mortality: Economics, Dangerous Work and the Value of Human Life and a forthcoming book on the economics of climate change, he has worked extensively for the International Labor Organization on occupational safety and health, child labor, and HIV/AIDS, and has written numerous articles and book chapters on topics in economics and political economy. He holds a PhD in economics from the University of Massachusetts, Amherst.

Les Boden is a professor of public health at Boston University School of Public Health. Much of his research has focused on the economic and human consequences of occupational injuries and illnesses. He has also written on workers’ compensation, occupational safety and health regulation, gender and racial disparities, and the legal and public health use of scientific information. He has a Ph.D. in economics from MIT.

Acknowledgments

The authors are grateful for the extensive assistance they received from Lawrence Mishel and Melat Kassa of EPI, our copy editor Patrick Watson, and our reviewers Andy Garin, Kevin Lang, and J. Paul Leigh. Any remaining shortcomings are ours and not theirs.

Endnotes

1. This group includes W. Kip Viscusi, who will be discussed shortly, and his various coauthors, as well as legal theorists like Cass Sunstein, who has written extensively on the use of compensating wage differentials for the purpose of valuing statistical lives (VSL). An overview of Sunstein’s views, which address complexities in the application of VSL findings but largely accept the labor market analyses on which they are based, can be found in Sunstein (2014). The group also includes policy analysts like John Graham, who served as the director of the Office of Information and Regulatory Affairs of the Office of Management and Budget—the so-called regulatory czar—under the George W. Bush administration. This position was occupied by Sunstein after the election of Barack Obama.

2. Lester pointed out that the existence of involuntary unemployment is another anomaly supply-and-demand theory cannot account for. Although it remains germane, we will not pursue that critique here.

3. A third economist, Peter Diamond, shared the reward for his work on search in nonlabor contexts.

4. For a relatively recent example, see Bartling, Fehr, and Schmidt 2012.

5. The literature on discrimination in labor markets is far too large to be distilled even into a few reviews. For two influential examples, see Lang and Lehmann 2012 and Bertrand 2011.

6. It might be tempting to reclaim subordination for markets—treating it as a disutility of employment for which a compensating differential would need to be paid—along the lines of the VSL literature and as Nozick (1974) attempted to do with alienation. This fails, however, because the alternative to greater subordination is more delegation of authority to the workforce, and economic theory is clear that, to work, such a strategy requires greater pay, not less. The role of wages in self-regulation and intrinsic motivation is modeled under different conditions by efficiency wage and gift exchange theory (Akerlof 1984).

7. The relationship between safety performance and the degree of worker subordination is not uniform. Greater worker autonomy, for example in controlling the pace of work, is often conducive to safety. On the other hand, greater managerial supervision of work behavior, such as requiring personal protective equipment, can also be risk-reducing if it is motivated by safety concerns.

8. Clearly, if workers cannot determine the probability of having an occupational illness, this probability cannot be reflected in their wage demands. As a result, estimates of the value of a statistical life based on their wages will not be meaningful.

9. The main point of their paper is to demonstrate that safety regulation can improve efficiency if workers differ in their risk preferences, due to externalities resulting from statistical discrimination by employers during search. This does not bear on the argument developed here.

10. See for instance the essays collected in Slovic 2000.

11. Dorman 1996 provides a simple model in which the salience of cognitive dissonance avoidance in worker risk perception depends inversely on the degree of agency experienced at work.

12. Their important conclusion: “inferences should be confined to the level of observation” (p. 902).

13. The CFOI website shows the distribution of vehicular and homicide deaths across occupations but doesn’t provide denominator data.

14. Because the limited suite of observations on age, education, experience, and marital status is not sufficient to capture many employer-relevant differences in qualification and skill, VSL studies routinely exclude white-collar or managerial occupations from their sample. Of course, these filters bias their findings toward a more positive coefficient on risk, since the excluded occupations generally feature both higher wages and lower fatal accident rates. Such sample pruning is problematic, however, since individuals often move between blue- and white-collar jobs, and the potential for promotion to lower-level management is also an important incentive for line workers.

15. This result somehow did not make its way into the widely cited meta-analysis by Viscusi and Aldy (2003), although they did incorporate the larger positive coefficient on risk found by Dorman and Hagstrom, when, for the purpose of comparison, industry-level control variables were excluded.

16. There is some confusion on this score, because VSL studies commonly employ industry and occupational dummies, and advocates like Viscusi claim this procedure picks up non-OSH factors associated with where and how workers are employed. Such a claim is false, however, since the statistical effects of including variables like average capital-labor ratios and percent female are entirely different than those of binary categorical indicators—as they also are for average risk measures, which don’t duplicate the information conveyed by dummies.

17. By “theory,” the authors mean the simple supply-and-demand framework reflecting a freedom-of-contract view of the labor market.

18. A similar result was found in Evans and Schaur 2010: The bottom quarter of the income distribution, aggregated across age differences, received minimal if any wage compensation for risk, while compensation was substantial for the upper quarter. Their purely cross-sectional wage and risk data were less suitable for quantile regression, however, with no opportunity for identifying the worker’s occupation, compared to Kniesner,Viscusi, and Ziliak 2010.

19. Viscusi does not explain his decision to not take advantage of the breakdowns by race in these data sources. It is possible the data were not reported by race crossed with industry, and he didn’t have access to the detailed records to construct these crosses himself. Incidentally, calculations based on SOII should be taken with an extra grain of salt since, as we saw in the previous section, it is an incomplete and biased accounting of traumatic injuries.

20. In his 2003 paper, Viscusi too rejects the VSL interpretation of racial disparities in estimated risk compensation, arguing they are due to employer discrimination. It is not possible, however, to simultaneously acknowledge that white and Black workers typically are employed side-by-side in the same jobs, reject racial differences in risk preferences, and yet maintain the interpretation of risk coefficients as revealing both worker preferences and employer costs in the face of these disparate results. While we have criticized the standard VSL model, which makes no provision for different coefficients for demographic or identity groups, it is derived from a logically consistent model of a labor market in equilibrium (Rosen 1974). No such model can generate a VSL depiction of racially disparate risk coefficients without unacceptable assumptions about race and risk preference or getting mired in conundrums resulting from employers engaging in discrimination in hiring and pay while also being held to an iso-profit frontier in safety provision.

21. Viscusi and Marquiss (2020) examine other issues in addition to the wage-risk regressions discussed here, but we will not take them up.

22. They also allow the intercept of the estimated wage equation to shift by including a term with just the immigration dummy, uninteracted.

23. Adjustment for clustering was not reported in their results, and this may be consequential, since adjusting for clustering—mandatory because the risk variable is assigned the same value for all workers in each industry—rendered most of the corresponding coefficients “insignificant” in Hersch and Viscui 2010.

24. It is not clear why Viscusi and Marquiss (2020) did not report a comparable regression specification, since their recommendations all center on communication issues due to different native languages.

25. In some contexts, the demand is for the value of life-years saved rather than lives as such.

26. For just one of many examples, see Hubler et al. 2020.

27. Note that the increased risk of transmission in these facilities is associated with cool temperatures produced by air conditioning and doesn’t imply that risk of aerosol transmission is associated with lower temperatures per se.

28. See the disclaimer on p. 5 of the report.

29. We exclude reforms that identify Covid-19 only as a potential occupational disease without altering the burden of proof for establishing work-relatedness; address only health care workers, first responders, and public employees; or have provisions that have already expired.

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I am testifying in support of SB 15, which would gradually raise the Delaware minimum wage from the current $9.25 per hour to $15 per hour by 2025. In my testimony I will discuss why $15 in 2025 is an appropriate level for Delaware’s minimum wage and the impact it will have on the state’s low-wage workforce. I will briefly summarize what economic research tells us about how higher minimum wages affect workers, employers, and the broader economy. Finally, I will discuss why now is a good time to raise the state’s minimum wage, particularly as an end to the COVID-19 pandemic may be on the horizon.

Background and appropriateness of a Delaware minimum wage of $15 in 2025

Figure A shows the nominal and real (inflation-adjusted) values of the prevailing minimum wage in Delaware since the late 1930s. From the late 1940s until the late 1960s, the federal minimum wage—which covered workers in Delaware—was raised regularly, at a pace that roughly matched growth in average U.S. labor productivity. The federal minimum wage reached an inflation-adjusted peak value in 1968 of $10.66 per hour in 2021 dollars.1 In the decades that followed, Congress made infrequent and inadequate adjustments to the federal minimum wage that never undid the erosion in value that occurred due to inflation in the 1970s and 1980s.

Figure A

Beginning in 1999, Delaware lawmakers did step in to raise wages for the state’s lowest-paid workers, raising the state’s minimum wage modestly above the federal minimum for about a decade. The state reverted to the federal minimum from 2009 to 2014. Beginning in 2015, Delaware’s minimum wage was again raised above the federal minimum in stages until it reached the $9.25 value it has had since 2020. While this is certainly an improvement over federal policy, the state’s current minimum wage is still 13.2% lower than the minimum wage that applied in the late 1960s.

Allowing workers today to be paid less than their counterparts a generation ago makes no sense for the well-being of Delaware’s workforce or the state economy, and there is no economic justification for it. Over the past 50 years, the country has experienced enormous growth, and the economy’s capacity to deliver higher wages—through improvements in productivity—has more than doubled, growing by 109% since 1968. The top line in Figure A shows that, had the minimum wage kept pace with productivity growth since 1968, it would have reached $22.29 per hour by 2021, and would likely be nearly $24 by 2025.

Raising the Delaware minimum wage to $15 by 2025, as proposed in SB 15, would help correct policymakers’ failure to raise minimum wages more appropriately over the past five decades. Figure A shows that a minimum wage of $15 in 2025 would be the equivalent of $13.72 in today’s dollars, based on the Congressional Budget Office’s projections for inflation.2 This would finally grant Delaware’s low-wage workers a share of the country’s productivity gains over the past generation, with a wage 28% higher (adjusted for inflation) than the 1968 minimum wage. Again, it is important to recognize that since 1968, the economy’s capacity to deliver higher wages and living standards will have grown by 122% by 2025. Thus, raising the minimum wage 28% above the previous high point is meaningful, but it is still less than one-quarter of the economy’s productivity improvements of the past 50 years.

Table 1

Effects on the Delaware workforce

In 2025, with the final increase to $15, SB 15 would raise the wages of an estimated 122,000 Delaware workers, or roughly 28% of the state’s wage-earning workforce. As shown in Table 1, this includes 92,000 workers who would be directly affected—meaning that they would otherwise be paid less than $15 in 2025—as well as 30,000 indirectly affected workers who would otherwise be earning just above $15. They are likely to receive a pay boost as employers raise wages to recruit and retain them under the new higher wage standard.

Table 2

SB 15 would provide a substantial earnings boost to Delaware’s lowest-paid workers. As shown in Table 2, EPI’s model estimates that affected workers would receive a total of $314 million in additional wages through 2025. The average affected worker who works year round would see their real (inflation-adjusted) annual earnings rise by $2,800—a nearly 13% real pay increase. Among the directly affected workforce—i.e., those who would otherwise be paid less than $15—the policy change would lift pay by an average of 18% or about $3,600 in annual earnings for year-round workers. For someone making only $20,000 a year, that is a substantial increase in their spending power.

Table 3

Raising the Delaware minimum wage to $15 would also help combat gender and racial inequities, with disproportionate impacts on women and workers of color. As shown in Table 3, of the 122,000 workers likely to get a raise, 71,100 (58%) are women. Nearly one in three women workers (32%) in Delaware would get a raise from SB 15. Similarly, 51% of the affected workforce are people of color. In fact, nearly 40% of Black workers in Delaware would get a raise and almost half (47%) of Hispanic workers would get a raise.

Notably, a $15 minimum wage would primarily benefit adults in the prime career-building years, many of whom are supporting families. There is sometimes a perception that the workers who would benefit from a higher minimum wage are mostly teenagers in their first jobs. This is not true. In fact, the data show that most of the workers who would benefit from a $15 minimum wage are older and full-time workers. Table 3 shows that only 14% of affected workers in Delaware are teenagers while 63% are 25 years old or older. The average age of affected workers is 35 years old. Fifty percent of affected workers work 35 hours per week or more, and more than a quarter have children. In fact, raising the state minimum wage to $15 would provide a raise to 40% of all working single parents in Delaware.

Table 3 also shows that most workers who would receive a raise come from families with limited means. Nearly half (49%) of affected workers are in families with total annual incomes less than $50,000. For these families, every additional dollar they receive has a meaningful impact on their ability to make ends meet.

Using the federal government’s poverty guidelines, the data show that over 52,000 workers who would benefit from SB15 are either in poverty or close to it. In fact, raising the state minimum wage to $15 by 2025 would provide a raise to 82% of all working people in Delaware currently in poverty.

What the research shows about effects on employment

Whenever any minimum wage increase is proposed, concerns are always raised about the impact such a policy change might have on employment.3 By raising the cost of labor, do minimum wage increases cause businesses to employ significantly fewer workers, threatening the incomes of the low-wage workforce the measures are intended to help? This is one of the most heavily studied topics in economics, and the resounding conclusion of empirical research over the past several decades is a clear “no.” In a comprehensive review of nearly all published minimum wage research over the past 30 years, University of Massachusetts Amherst Professor Arindrajit Dube concludes that “the overall body of evidence suggests a rather muted effect of minimum wages to date on employment.”4 The median effect across studies in Dube’s review was that for every 10% increase in wages of low-wage workers, employment declined by 0.4%—essentially zero.

Importantly, even research on the highest minimum wages enacted at state or local levels has shown that there does not appear to be any sizable effect on jobs. In a paper published in the Quarterly Journal of Economics, Doruk Cengiz and co-authors examined the effects of 138 state minimum wage changes that occurred in the United States between 1979 and 2014.5 They found that even with minimum wages rising as high as 55% of the median wage—roughly the same as is being proposed for Delaware—there was no evidence of any reduction in the total number of jobs for low-wage workers. Harvard and U.C. Berkeley researchers Ellora Derenoncourt and Claire Montialoux demonstrated that highest national minimum wage we’ve had—in 1968, the equivalent of $10.66 per hour in 2021 dollars—also raised wages and significantly reduced Black–white earnings inequality without employment losses.6 Using data from low-wage counties, where minimum wage increases have raised labor costs much more than in high-wage labor markets, U.C. Berkeley researchers Anna Godøy and Michael Reich found that the policies significantly reduced poverty and had essentially no employment impact.7 And in a paper just recently published in the Journal of Economic Perspectives, Arindrajit Dube and Attila Lindner found that 21 city-level minimum wage increases raised wages in those cities with little effect on the number of low-wage jobs.8

Effects on businesses and the broader economy

There are several reasons why higher minimum wages have never meaningfully manifested the negative job impacts predicted by textbook models. Research has shown that when minimum wages are raised, businesses are typically able to adjust through variety of channels.9 These include:

• reductions in turnover and increased job tenure, which can reduce business costs of recruitment, hiring, and training;
• increases in productivity, as a result of increased work effort by employees, raised expectations by managers, or new efficiencies identified by businesses;
• wage compression—i.e., raises for higher-paid workers may be delayed or reduced;
• increased consumer demand, generated by the increased spending power of low-wage workers across the affected region; and
• modest price increases, on the scale of 0.4–1.1% per 10% increase in the minimum wage.10 These increases can be more easily absorbed as a result of concurrent boost in pay to a large portion of the region’s workforce, combined with the fact that all area businesses will be facing similar increases in labor costs—i.e., no single business will be at a competitive disadvantage if they all must raise prices.

Research by my colleague Elise Gould has shown that in recent years, as numerous states have enacted higher minimum wages, there has been a clear pattern of low-wage workers in those states seeing faster wage growth than their counterparts in states that did not raise their minimum wages.11 Figure B shows that in the states that raised their minimum wage between 2013 and 2018, wages among low-wage workers grew 5 percentage points faster than in states that did not change their minimum wage. Among low-wage women workers, these effects were even more pronounced: Wage growth was twice as strong for women at the bottom of the wage scale in states that raised their minimum wages versus in states that did not.

”Figure

Too often discussions on the minimum wage focus narrowly on these questions of potential employment effects, but this is a deeply flawed way of evaluating the merits of the policy. Research has shown that—regardless of any employment effects—higher minimum wages have led to clear, sizable welfare improvements for workers, their families, and their communities that far outweigh any potential costs of the policy. For example, in an article published in the American Economic Journal: Applied Economics, Arindrajit Dube demonstrates that the income-boosting effects of higher minimum wages significantly reduces the number of families below the poverty line.12 Similarly, Kevin Rinz and John Voorheis—researchers at the U.S. Census Bureau—have shown that not only do higher minimum wages lead to increases in income for low-income families, but that those income gains actually accelerate in the years after the minimum wage is raised.13 Higher minimum wages have been shown to reduce rates of smoking and are associated with a slate of other improved measures of public health.14 Researchers at Rutgers University and Clemson University also find that higher minimum wages reduce recidivism and may reduce property crimes.15 This policy has been shown to achieve broad public good that should not be overlooked or obscured by claims by opponents that raising the minimum wage would lead to economic devastation that has never manifest with any previous minimum wage increase.

Why now is a good time to enact this policy change

The COVID-19 pandemic has been devasting for workers, families, and businesses throughout the country, and recovering from the pandemic’s harm—both economic and otherwise—will take time. Fortunately, raising the minimum wage is a good way to heal some of the economic harm and expedite the recovery.

The immediate benefits of a minimum wage increase are in the earnings boost for the lowest-paid workers—increases in spending power that also deliver broader benefits to the economy. Extra dollars in the pockets of working families throughout the state would help by boosting aggregate demand. Economists generally recognize that low-wage workers are more likely than any other income group to spend any extra earnings immediately on previously unaffordable basic needs or services. Indeed, researchers at the Federal Reserve Bank of Boston find that minimum wage increases are associated with higher consumer spending, particularly in places with higher concentrations of low-wage workers.16

With vaccinations accelerating and a possible end to the pandemic in sight, it is an ideal time to inject more money into the pockets of workers and families who will go out and quickly spend those dollars. The best way for businesses throughout Delaware and the rest of the country to recover from the pandemic is by bolstering strong consumer demand.

A higher minimum wage would also more appropriately compensate many of the workers who have shouldered tremendous risk throughout the pandemic. EPI’s research on the effects of a federal $15 minimum wage by 2025 shows that the majority of workers who would benefit are essential or front-line workers.17 Because the composition of workers who would benefit in Delaware is similar to the national estimates, it’s safe to assume that essential and front-line workers likely constitute the majority of those who would benefit in Delaware. During the COVID-19 pandemic, these workers have kept the economy running at great risk to their health and their families, and very few of them have received hazard pay to compensate for their now-more-dangerous work. Raising their pay through a minimum wage hike is a good way to recognize the critical roles they have in the economic health of every community.

Conclusion

Given improvements in productivity, low-wage workers in Delaware and throughout the United States could be earning significantly higher wages today had lawmakers made different choices over the past 50 years. As such, the question for policymakers today should not be whether we can have significantly higher minimum wages, but rather, in what time frame we can achieve such levels.

Raising the Delaware minimum wage to $15 an hour by 2025 would finally raise the state’s wage floor to a purchasing power above the previous high point set in the late 1960s. It would raise pay for over 122,000 workers in the state, with particular benefit for women and workers of color. It would also more appropriately reward the essential and front-line workers who have kept the economy going during the pandemic, and would bolster consumer spending as the state and country recover.

Research has shown that past minimum wage increases have achieved their intended effects, raising pay for low-wage workers with little to no negative impact on employment. Moreover, research that has looked beyond the narrow question of employment impacts has found clear, meaningful benefits from higher minimum wages to low-wage workers, their families, and their broader communities.

I strongly encourage the committee and the full Delaware legislature to pass SB 15 and help strengthen the future for Delaware’s lowest-paid workers, their families, and their communities.

Notes

1. Inflation adjustment uses the Consumer Price Index for all Urban Consumers, Research Series (CPI-U-RS). See Bureau of Labor Statistics, “CPI Research Series Using Current Methods,” updated March 2021.

2. Projected inflation is from the CPI-U series published by the Congressional Budget Office. See Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031, “10-Year Economic Projections” (downloadable Excel file supplement), February 2021.

3. See National Employment Law Project, Consider the Source: 100 Years of Broken-Record Opposition to the Minimum Wage, March 2013.

4. Arindrajit Dube, Impacts of Minimum Wages: Review of the International Evidence, report prepared for Her Majesty’s Treasury (UK), November 2019.

5. Doruk Cengiz et al., “The Effect of Minimum Wages on Low-Wage Jobs,” The Quarterly Journal of Economics 134, no. 3 (2019).

6. Ellora Derenoncourt and Claire Montialoux, “Minimum Wages and Racial Inequality,” Quarterly Journal of Economics 136, no. 1 (February 2021).

7. Anna Godøy and Michael Reich, “Are Minimum Wage Effects Greater in Low-Wage Areas?” Industrial Relations, January 2021.

8. Arindrajit Dube and Attila Lindner, “City Limits: What Do Local-Area Minimum Wages Do?,” Journal of Economic Perspectives 35, no. 1 (2021).

9. For greater detail, see John Schmitt, Why Does the Minimum Wage Have No Discernible Effect on Employment?, Center for Economic and Policy Research Briefing Paper, February 2013.

10. See Sylvia Allegretto and Michael Reich, “Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-Based Restaurant Menus,” ILR Review 71, no. 1 (January 2018): 35–63.

11. Elise Gould, State of Working America 2018: Wage Inequality Marches On—and Is Even Threatening Data Reliability, Economic Policy Institute, February 2019.

12. Arindrajit Dube, “Minimum Wages and the Distribution of Family Incomes,” American Economic Journal: Applied Economics 11, no. 4 (2019): 268–304.

13. Kevin Rinz and John Voorheis, “The Distributional Effects of Minimum Wages: Evidence from Linked Survey and Administrative Data,” Working Paper 2018-02, Center for Administrative Records Research and Applications, U.S. Census Bureau, March 2018.

14. J. Paul Leigh, Wesley Leigh, and Juan Du, “Minimum Wages and Public Health: A Literature Review,” February 27, 2018.

15. Amanda Agan and Michael Makowsky, “The Minimum Wage, EITC, and Criminal Recidivism,” September 25, 2018.

16. Daniel Cooper, María José Luengo-Prado, and Jonathan A. Parker, “The Local Aggregate Effects of Minimum Wage Increases,” Journal of Money, Credit, and Banking 52 (December 2019): 5–35.

17. David Cooper, Zane Mokhiber, and Ben Zipperer, Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers, Economic Policy Institute, March 2021.

Key findings

Preemption is more prevalent in the South and is embedded in a racist history.

• “Preemption” in this context refers to a situation in which state lawmakers block a local ordinance from taking effect—or dismantle an existing ordinance.
• Southern states are more likely than states in other regions to use preemption to stop local governments from setting strong labor standards that would support people struggling to make ends meet, such as raising the minimum wage and guaranteeing paid sick leave.
• The use of preemption in the South is deeply intertwined with a long history of events and actions that have reinforced anti-Black racism and white supremacy.
• Preemption laws in the South are passed by majority-white legislatures and tend to create barriers to economic security in cities whose residents are majority people of color.
• The ordinances being preempted would disproportionately benefit Black workers and other workers of color, as well as women and low-income workers.

Preemption limits cities’ ability to protect their residents from the pandemic.

• Misuse of preemption has prevented localities in some Southern states from responding to the pandemic with local policies promoting public health, such as mask mandates and stay-at-home orders.
• In addition, misuse of preemption in the past prevented these same localities from enacting policies that would have made them better equipped to deal with the pandemic now.

Case studies. In this report, we use case studies to (1) document the practice, and establish a pattern of, misusing state preemption and (2) explore the adverse implications of this state interference on workers.

Introduction

Compelled by state and federal inaction, local governments throughout the country are tackling some of the most pressing issues of our time—from public health and safety, to climate change, to protecting workers’ rights and promoting broad-based economic security. And now, local governments in many states are leading the fight for stronger public health protections against COVID-19—through mask mandates, stay-at-home orders, and paid leave provisions, among other actions.

However, in every state in the South, conservative state lawmakers have long used preemption—state laws that block, override, or limit local ordinances—to stifle local government action, often under pressure from corporate interests and right-wing groups like the American Legislative Exchange Council (Cornejo, Chen, and Patel 2018). Through preemption, state lawmakers have obstructed local communities—often majority-Black-and-Brown communities—from responding to the expressed needs and values of their residents through policies strengthening workers’ rights. Even in the context of COVID-19, state governors have taken action to preempt local measures, like masking orders, that would do more to keep vulnerable people safe.

In this report, we first look at the historical context behind preemption in the South. We track current-day preemption of workers’ rights back to state-sanctioned policies and practices rooted in racism and designed to uphold white supremacy—practices begun in the post-Reconstruction era that disproportionately disadvantage not only Black and Brown workers but also women and low-income workers.

After establishing these historical foundations, we turn to specific case studies that illustrate the wide range of worker’s rights issues on which state policymakers are interfering with local democracy and—taken in the aggregate—have preempted progress throughout the South. To the extent that the data allow, we show the specific impacts state interference has on people of color as well as women and low-income workers. For each case study, we detail the demographics of the city or county compared with those of the state, illustrating how, across the former states of the Confederacy, the voices of people of color are being suppressed by disproportionately white state legislatures (see appendix tables).

In most of the case studies, state policymakers directly preempted a specific local ordinance that was passed or that was under consideration, stripping localities of the power to adopt the ordinance in question. In some cases, state policymakers acted proactively, passing laws to prevent local policymakers from enacting or considering certain types of ordinances. Again, we make the case that this disparate effort across states and issue silos are all connected, driven by the same goal of limiting the economic, political, and social power of people of color, women, and low-income workers.

Finally, we discuss how the current COVID-19 pandemic is disproportionately harming the same communities that have been preempted from taking local action, limiting their ability to effectively combat the public health crisis.

Preemption and the legacy of racism in Southern states

State governments interfere with local authority far more in the South than in any other region

Although state interference with local decision-making occurs in every region of the country, it is much more prevalent across the South. As seen in the interactive map (Figure A), local communities in Southern states have been prevented from enacting policies on a multitude of work-related issues. Southern communities have also been blocked from implementing various other social and economic policies that are increasingly common in other parts of the country, such as laws protecting LGBTQ communities from discrimination, immigrant rights measures, environmental protections, and ordinances to authorize removing Confederate monuments (PWF 2020; Schragger and Retzloff 2019).

^{FIGURE A}

This has also held true during the pandemic. There has been friction between local and state governments across the South, including in Florida, Georgia, Mississippi, South Carolina, Tennessee, Texas, and West Virginia, as these states have blocked cities and counties from imposing stricter local public health measures. For example, in Georgia, Gov. Brian Kemp sued Atlanta Mayor Keisha Lance Bottoms for imposing mandatory mask ordinances and other measures to protect public health in her majority-Black city (Haddow et al. 2020). While he has since dropped the lawsuit, he is still insisting, by way of executive order, that localities can only require masks on public property, not at private businesses (LSSC 2020c). In another illustrative example, policymakers in the two most populous Southern states, Florida and Texas, pushed schools to reopen in person, challenging the authority of local school districts to make their own slower, online reopening plans (LSSC 2020c).

State interference in local democracy is rooted in Confederate history and white supremacy in the South

State interference in local democracy is embedded in a long history of events and actions that have sought to promote the interests of historically privileged property owners and perpetuate the South’s racist past. Across the region, the configuration of government, policies, and practices are rooted in earlier efforts to limit the rights and freedoms of Black people and entrench white supremacy during the dismantling of Reconstruction-era economic and political gains and the concurrent rise of Jim Crow–era state-sanctioned discrimination (Farbman 2017).

Beginning in 1867, a series of radical Reconstruction Acts were enacted and paved the way for the rise of Black elected officials in state and local government as well as in the U.S. Congress (Sigward 2015). The military was given authority over the state judiciary and politics, and states were required to rewrite their constitutions for approval by Congress, including provisions for voting rights for all men, regardless of race. The Freedman’s Bureau was also authorized to register newly eligible voters across the former states of the Confederacy. Additionally, all men, regardless of race, but excluding former leaders of the Confederacy, could participate in constitutional conventions to form new state governments. The former Confederate states were also required to ratify the 14th amendment, which defines citizenship rights and grants citizens equal protection under the law, in order to regain representation in Congress (Sigward 2015).

Legislative seats that were once held by white slaveholders just a decade earlier were held instead by the country’s first Black members of the United States Congress (Harper and Brady 2019). About 2,000 Black public officials were elected to state legislatures and to local offices—to roles such as sheriffs, school board officials, and justices of the peace (Foner 2019). Many of these leaders were viewed as representatives not only for their states or districts, but also for Black constituencies in the region and around the country, advocating for policies to support enfranchisement and equal rights, criminalize lynching, and suppress the Ku Klux Klan (Harper and Brady 2019). But even as they were rising to positions of power and influence, supporters of the former states of the Confederacy and white supremacists were already seeking to stem their power: Elections were often marked by violence against both voters and candidates. Black elected officials often had to fight to secure their seats after winning elections because their opponents contested the results. Once in office, their colleagues actively sought to undermine their influence in the legislature.

In 1866, violence led by white conservatives in the South culminated in particularly horrific massacres of Black people in Memphis, Tennessee, and New Orleans, Louisiana. It was also in 1866 that the Ku Klux Klan first formed in Tennessee. Between 1869 and 1877, electoral backlash marked by Ku Klux Klan voter intimidation allowed white conservatives to replace Black public officials in Tennessee, Georgia, North Carolina, Virginia, and Mississippi (Foner 2019).

In 1877, the year commonly marking the end of Reconstruction, President Rutherford B. Hayes withdrew federal troops providing protection for Black communities in the South. White Southern state lawmakers continued to disenfranchise Black voters and dismantle the reforms that had been instituted after the Civil War. In this way, they were able to essentially restore the racial hierarchy of the pre–Civil War political order (Sigward 2015).

A legacy of racist symbols in the South reinforces the supremacy of whiteness and depresses economic and political outcomes today

A large spike in the number of Confederate symbols, including monuments and place names, occurred following the end of Reconstruction, during the rise of Jim Crow and segregation in the early 20th century. A second wave of new Confederate symbols was prompted by opponents to the civil rights and desegregation movements of the 1950s and 1960s, as part of a concerted effort to reinforce a white supremacist worldview (Schragger and Retzloff 2019; SPLC 2019).

Confederate symbols are closely tied to violent oppression of Black people in both the past and the present. Lynchings were used to intimidate Black voters and suppress the political power of Black communities in the South; areas that had more lynchings historically have more streets named after Confederate generals today (Williams 2019). These areas also tend to have lower Black voter registration rates and more officer-involved killings (Williams 2020; Williams and Romer 2020).

Pride in this violent history, enshrined in symbols, asserts the political and economic supremacy of whiteness. Significantly, areas with large numbers of Confederate-named streets are also more problematic economically for Black people: These areas experience worse Black–white inequality in labor market outcomes including unemployment, employment in jobs paying low wages, and overall wage disparities (Williams 2019).

States have used preemption to restrict local governments’ authority to remove Confederate monuments

As calls to remove Confederate symbols have grown, so has the reactionary movement to protect these symbols. For those seeking to do the latter, their task is as simple as calling on historical preemption laws still on the books—laws passed over the years by legislators who have unabashedly sought to protect the legacy of the Confederacy.

While Virginia recently (in April 2020) gave localities back the authority to remove Confederate monuments, seven states—Alabama, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, and Tennessee—still have some form of “statue statute” interfering with local governments’ ability to take down Confederate monuments, as of August 2020 (Schragger and Retzloff 2019; Thrasher 2020). In some cases, these statutes include punitive measures against localities that attempt to remove Confederate symbols, including fines in Alabama and withholding of state grants in Tennessee. Tellingly, many of the same states that preempt local control over monuments also prohibit local action on raising the minimum wage and passing paid sick time—including Alabama, Georgia, Mississippi, North Carolina, South Carolina, and Tennessee (EPI 2018).

As shown in Table 1, these statue-protection statutes have not completely halted efforts, either by local governments or activists, to remove these racist symbols. In the seven states with laws preempting local authority over monuments, 47 Confederate symbols have been removed—17 were removed in 2020 alone (as of August). While these actions represent meaningful progress, there are still nearly 1,000 Confederate symbols in these seven states alone. Of these states, North Carolina has removed the most symbols—18. However, this accounts for just 10.2% of the 176 Confederate symbols erected in North Carolina.

Table 1

At the same time, protesters across the country have successfully pushed state policymakers to call for the removal of statues. This was the case in North Carolina, where the governor ordered the removal of Confederate monuments from the grounds of the state Capitol building (Moshtaghian and Cullinane 2020). Local policymakers can also take strong public stands, as the mayor of Birmingham did recently by ordering the removal of a Confederate statue in defiance of the preemptive Alabama Monuments Preservation Act (Burch 2020).

Preemption interacts with other policies in the South to undermine public services and worker power

The abuse of preemption is just one tool that state policymakers in the South use to suppress the political power of Black communities, reinforce white supremacy, and undermine progressive policies that would benefit not only Black workers but also other workers of color, women, and low-income . When local governments have sought to improve public services or to strengthen worker bargaining power, state policymakers in the South have interfered at every opportunity. This section provides background on two overarching goals of these policymakers, which are common themes throughout the case studies explored in this paper: (1) keeping taxes low and regressive, and (2) undermining the power of workers to maintain the present political, racial, and economic power structure.

Tax policy and public investment

Tax and spending policy in the South emphasizes a minimalist form of government focused on privileging property holders. In their comprehensive report, Advancing Racial Equity with State Tax Policy, examining the interplay of state tax policy and racial equity, Leachman et al. (2018) describe how many of the state and local tax laws that preserve structural inequality by constraining public revenues had their origins in the post-Reconstruction and Jim Crow eras.

Fearful that their large Black populations might wield political power to restructure taxes, some Southern states enacted supermajority requirements for revenue changes, starting with Mississippi in 1890. This made it next to impossible for Black voters and their allies to meaningfully raise property taxes and secure public investments in education, health care, and other public goods.

The South was also home to the first modern sales tax, adopted by Mississippi in 1932 (Leachman et al. 2018). Sales taxes are particularly regressive—costing low-income families a larger share of their income compared with higher-income families—and therefore disproportionately harm Black families, who have lower household incomes on average.

The connection between these early laws and the current state of public revenues and spending in the South is self-evident. Texas and Florida, the two most populous states in the South, have the second and third most unequal tax systems in the country, meaning they take a greater share of income from low- and middle-income families than they do from wealthy families. Two other Southern states, Tennessee and Oklahoma, are also among the 10 least equal states in terms of taxation (ITEP 2018).

Their tax structures are not just unequal, but they are also inadequate. Southern states rank particularly low in state tax collections per capita and in other revenue sources, including fees and user charges (such as tolls for roads and bridges) (TPC 2020a). As a result, the unweighted average of per-capita direct state and local general expenditures in the South in 2017 was lower than in the rest of the country (TPC 2020b). Southern states, by and large, spend less on both education and health care than other states (NSB 2020; Urban Institute 2020). At the same time, the nine states with the highest incarceration rates are in the South, meaning these states are pouring excessive resources into an oppressive criminal justice system while neglecting public services that are badly needed (The Sentencing Project 2020).

With so few resources generated for and invested in public services, it is perhaps not surprising that the South has the highest poverty rates, the worst infant mortality rates, and the lowest educational attainment of any region in the United States (CDC 2018; U.S. Census Bureau ACS 2019a, 2019b).

This insistence on undercutting public investment at every turn persists even when the cost to taxpayers would be minimal, as illustrated by Medicaid expansion in the states under the Affordable Care Act (ACA), for which the federal government foots the majority of the cost. Eight states in the South have not yet expanded Medicaid and, as of 2018, 92% of uninsured adults who would have health insurance if their state chose to expand Medicaid were residing in the South (Garfield, Orgera, and Damico 2020).

The rise of so-called right-to-work laws

Southern state lawmakers also sought to limit Black workers’ power in the workplace through the passage of so-called right-to-work (RTW) laws. These laws undermine workers’ collective bargaining power by allowing workers at unionized firms to benefit from a collective bargaining agreement without paying their fair share toward the union’s costs of negotiating and administering the agreement. RTW laws undermine the financial strength of unions, thereby limiting their ability to win better benefits, wages, and working conditions for their members. RTW laws have been shown to lower workers’ wages and benefits in the states where they have been enacted (Gould and Kimball 2015).

Efforts to enact RTW laws began in the South, with the first RTW laws adopted in Arkansas and Florida in 1944. The initial efforts to push RTW laws are credited primarily to Texas businessman and lobbyist Vance Muse and the Christian American Association (CAA). Using arguments equating union growth with race-mixing and communism—and with financial backing from wealthy Southern planters, oil companies, and allied industrialists—Muse and the CAA succeeded in passing a variety of anti-union laws, including RTW laws, in the South in the 1940s (Kromm 2012; Pierce 2017). RTW laws were designed to help entrench existing political power structures by undermining workers’ collective voice and ensuring that workers remained divided along racial lines (Pierce 2017).

When the Congress of Industrial Organizations (CIO), one of the country’s largest national labor organizations, began its “Operation Dixie,” hoping to organize workers in the South, Southern Democrats in Congress joined with northern Republicans in voting for the 1947 Taft-Hartley legislation that undermined union organizing, in part by explicitly authorizing state RTW statutes (Kahlenberg and Marvit 2012). Following the passage of Taft-Hartley, a wave of Southern states enacted RTW laws (NCSL 2020b).

The impacts of the South’s anti-union efforts are stark. As of today, every state in the South is an RTW state, and all three states that ban collective bargaining by public employees are in the South: North Carolina, South Carolina, and Virginia (Barber 2020). The six states with the lowest rate of workers represented by unions are all Southern states: South Carolina, North Carolina, Georgia, Texas, Virginia, and Tennessee. Of the 10 states with the lowest rate of union representation, eight are Southern states (BLS 2020a).

Case studies of state interference with local business and labor standards ordinances

Minimum wage: Birmingham, Alabama

In 2016, the Birmingham City Council passed an ordinance raising the city’s minimum wage to $10.10 per hour. The Alabama state legislature blocked the ordinance, bringing the city’s minimum wage back down to $7.25 per hour.

Alabama is one of five states—all in the South—that would not have a minimum wage at all if it were not for the federal minimum wage of $7.25 an hour (EPI 2020). Last raised in 2009, the federal minimum wage is worth significantly less today than in previous decades. At its high point in the late 1960s, the federal minimum wage was equal to roughly $10.35 in today’s dollars—about 43% higher than it is today. Since then, Congress has enacted infrequent and inadequate adjustments to the federal wage floor, such that a working parent of one child working full time and being paid the federal minimum wage today has earnings below the federal poverty line (Cooper, Gould, and Zipperer 2019).

In 2016, faced with this decline in the real value of the minimum wage, local lawmakers in Birmingham, Alabama, passed an ordinance that established a city minimum wage of $10.10 an hour. In doing so, Birmingham joined roughly two dozen cities and counties throughout the U.S. that had similarly established local minimum wages.

Alabama is a Dillon’s Rule state, in which local authority is strictly limited to only those powers granted by the state—therefore, the fate of Birmingham’s minimum wage ordinance was already uncertain. But the state legislature was not taking any chances that the local minimum wage law would be allowed to stand. Within just two days of the ordinance’s passage, the Alabama state legislature blocked Birmingham and other localities in the state from establishing their own minimum wages (Roth 2016).

Alabama is one of 25 states to bar local governments from setting minimum wages that are different from the state minimum wage (EPI 2018; NELP 2019). In theory, preemption could be used in such a case to ensure consistently high standards across a state—that is, to prevent local governments from setting a local minimum wage that is lower than the state minimum wage. That is not the case here. In fact, in 18 of these states, including Alabama and nine other Southern states, the state minimum wage is equal to the federal minimum wage of $7.25 an hour—so it’s not possible to go lower (EPI 2020).

In an effort to reinstate the higher local minimum wage, Birmingham fast-food workers, Black state lawmakers, and civil rights groups filed suit against the state’s attorney general. They argued that the attorney general had a duty to inform lawmakers that the law negating Birmingham’s minimum wage was unconstitutional because it “perpetuates Alabama’s de jure policy of white supremacy, in particular its suppression of local black majorities through imposition of white control by state government” (Koplowitz 2019). Although the lawsuit was dismissed on procedural grounds, the data, discussed below, show that the plaintiffs’ arguments have merit.

The decision by the Alabama state legislature to block the Birmingham minimum wage is a clear example of a majority-white legislature using its power to block communities of color from adopting laws benefiting their communities. According to data from the 2018 American Community Survey, almost 69.2% of Birmingham’s residents are Black while just 22.1% are white. When Birmingham’s population is compared with Alabama’s state legislature, the racial disparity is stark: 75.0% of state legislators in Alabama are white and only 22.1% are Black (see Appendix Table 1).

In blocking Birmingham’s minimum wage ordinance from taking effect, the state legislature prevented local leaders from taking action to address the needs of the city. In 2018, Birmingham’s poverty rate among working-age people was 23.7%—dramatically higher than the statewide working-age poverty rate of 14.5%. Yet local leaders were blocked from enacting a policy that effectively reduces poverty.

As shown in Figure B and Table 2, stopping Birmingham’s minimum wage from taking effect denied pay raises to an estimated 65,000 low-wage workers, 19.1% of the local workforce. Note that the minimum wage impact data in the figure and table reflect estimates for Birmingham’s Jefferson County, which includes Birmingham and surrounding areas.

Figure B

Table 2

The Birmingham minimum wage case also reveals how the decision by a white, male-dominated state legislature to strip local governments of their ability to respond to the needs of their constituents disproportionately harms women and communities of color. Table 2 shows that a higher Birmingham minimum wage would have disproportionately helped Black workers: 26.2% of Black workers in Birmingham’s Jefferson County would have received a raise, compared with just 14.2% of white workers. While Black workers make up just 31.5% of the Jefferson County workforce, they would have made up 43.1% of all workers receiving higher pay due to the higher minimum wage. It is also worth noting that the majority of low-wage workers who would have benefited from the higher minimum wage are women. As shown in Table 2, 53.8% of the workers who would have received a raise because of the higher local minimum wage are women.

Occupational tax: Montgomery, Alabama

In February 2020, the Montgomery City Council passed an occupational tax to provide additional funding for public services. The Alabama state legislature passed a bill to nullify the ordinance.

In February 2020, the Montgomery, Alabama, City Council passed a measure establishing an occupational tax (a payroll tax levied on employees who work in the city) of 1%. The tax was intended to provide additional funding for public services, and it supported the hiring of additional public employees (WSFA Staff and Bowerman 2020). In anticipation of the tax passing, and in defiance of a letter signed by the mayors of the 10 largest cities in Alabama, the state legislature moved to strip cities of the ability to levy occupational taxes (AP 2020). The new law, passed in March, does not impact the occupational taxes that were already in place in more than 20 Alabama cities prior to February 2020, but it nullified the Montgomery measure. Going forward, cities must now obtain permission from the state legislature before they can raise their occupational taxes above the levels they were at as of February 1, 2020 (Cason 2020).

Here again, a majority-white state legislature overrode the will of local lawmakers representing a majority-Black city. As previously noted, the Alabama legislature is 75% white. Nearly two-thirds (60.8%) of Montgomery residents are Black, compared with one-quarter (26.7%) statewide (see Appendix Table 1). Four of Montgomery’s nine city council members are Black (MacNeil 2019). While the council is still whiter than Montgomery’s majority-Black population, it is still much more representative than Alabama’s state legislature.

The need for additional revenues such as those that would have been provided by the Montgomery occupational tax is clear. Alabama, like most states, has a regressive state tax system that needs progressive overhaul (Gundlach 2020). In fact, its system is even more regressive than most states in that its residents must pay the full sales tax on groceries (Figueroa and Legendre 2020). Under Alabama’s regressive system, residents in the lowest income group pay the largest share (9.9%) of their income in total taxes, while Alabamans with the top 1% of families pay 5.0% of their income in taxes (ITEP 2018).

The additional revenue from the Montgomery payroll tax was intended to go toward bolstering public safety, education, infrastructure, and other public programs, including salaries for additional public employees (WSFA Staff and Bowerman 2020). In Alabama, as in communities across the country, women and Black workers are disproportionately employed in state and local government (Cooper and Wolfe 2020). As shown in Figure C, women account for nearly three in five state and local government employees in Alabama, whereas they make up less than half of the private-sector workforce. Black workers are also somewhat overrepresented (26.9% of the state and local government workforce compared with 25.8% of the private-sector workforce) as are women of color (19.7% compared with 17.1%; see Table 3). The Montgomery occupational tax aimed to bolster progressive revenue streams at the local level to strengthen local programs and services—goals that should be encouraged, not blocked.

Figure C

Table 3

Targeted and local hire laws: Nashville, Tennessee

In 2015, Nashville voters passed a ballot initiative requiring that a share of work hours on municipal construction projects go to local and low-income workers. The Tennessee state legislature passed a bill overriding the ballot initiative.

Targeted and local hiring policies support job opportunities by requiring that a minimum percentage of work hours created by a development project be set aside for job seekers from low-income communities within the city or county, especially low-income communities of color. These policies provide good jobs to local residents in communities that often experience barriers to employment (Cornejo, Chen, and Patel 2018).

In 2015, Nashville1 voters approved, by a 58% to 42% margin, a local ballot initiative backed by local community and labor organizations. The proposed ordinance required that for municipally funded construction projects that cost $100,000 or more, 40% of construction work hours must go to Nashville residents, with 25% of those work hours (or 10% of the overall work hours) going to low-income Nashville residents. Just weeks after the city passed the ordinance, the state legislature introduced and passed a bill to override it. With the governor’s signature, it became the first state prohibition on municipal-level local hire laws in the country (Woodman 2016).

Tennessee is no stranger to preemption. The state limits municipalities from implementing minimum wage, paid leave, and anti-discrimination laws, to name a few (DuPuis et al. 2018). And it took no time for state legislators to step in to override the will of Nashville voters. As state senator Jack Johnson, the bill’s sponsor, put it: “Another issue that has been brought in opposition to my bill, which would nullify the charter amendment, is that we are overturning the will of the voters of Nashville. In fact we are” (Ebert 2016).

The state legislative override of the Nashville local hire initiative is another example of state legislators thwarting the will of local communities of color. In Nashville, 44.1% of residents are people of color, while 82.6% of state legislators in Tennessee are white and 84.6% are men. Just 12.9% of Tennessee state legislators are Black and 0.8% are Latinx (see Appendix Table 2).

Guaranteeing that 40% of construction work hours on municipally funded projects go to Nashville residents would substantially increase the chances of Black, Latinx, and immigrant workers being hired for this work. As shown in Figure D and Table 4, about one in seven construction workers living in Nashville are Black (14.5%), while workers in the larger Nashville metropolitan area that extends beyond Davidson County (Nashville-Davidson-Murfreesboro-Franklin, Tennessee) are half as likely to be Black. The trend is even more pronounced for Latinx workers, who make up nearly half (46.2%) of construction workers in Nashville, compared with a quarter (25.1%) in the greater metro area and fewer than one in five (18.2%) in Tennessee.

Figure D

Table 4

Immigrant workers also would have benefited from the local hiring initiative, if the will of Nashville voters had not been overturned. Just about half (49.5%) of all construction workers in Nashville were born outside the U.S. and 45.0% are not U.S. citizens. Immigrant construction workers are far more concentrated in Nashville than in the Nashville metropolitan area (23.0%) or Tennessee overall (16.1%).

To sum up: In addition to disregarding the will of Nashville voters, Tennessee legislators directly blocked a policy that would stand to benefit Black, Latinx, and immigrant workers. Without targeted local hiring policies, workers from these communities are more likely to be denied job opportunities due to systemic racial discrimination in hiring practices (Quillian et al. 2017). The failure of state legislators to support this policy also deprives communities of transparency regarding hiring in the construction industry for publicly funded projects in their communities.

Around the country, local and state governments have made effective use of targeted and local hiring measures on major economic development and construction projects to deliver good jobs to local communities. By voting for a measure that would ensure more construction job opportunities go to Nashville residents, voters chose to provide opportunities to Black, Latinx, and immigrant workers in their community. Voters sent a clear message that when their tax dollars are spent on development, those dollars should be bolstering the economic security of Nashville residents. As many Southern states see an increase in the number of development projects and other public infrastructure investments in their communities, targeted and local hiring measures will serve as a critical component for ensuring racial and economic equity and inclusion in the South.

Paid sick leave: Dallas, Texas

A paid leave ordinance was set to go into effect in Dallas, Texas, on April 1, 2020. On March 31, a Texas federal court judge blocked the ordinance after state legislators’ attempts to block it failed.

When workers do not have access to paid sick leave, they are forced to choose between their economic security and the health of themselves and their families. The workers who are the most economically precarious, who stand to lose the most by missing a day of earnings, are also the least likely to have access to paid leave. Paid sick leave is particularly important for women in the workforce, who are more likely than men to have caregiving responsibilities. Having access to paid sick days allows parents to stay home from work when their child is sick and increases their ability to stay in the labor force (Milli and Williams-Barron 2018). Despite these benefits, no states in the South require all employers to provide paid sick leave (ABB 2019).

For many service workers—for example, restaurant workers—going to work while ill could also pose an increased contagion risk to the greater community (NPWF 2020; Ibarra 2018). The coronavirus pandemic has made many realize the public health implications of going to work while sick—a realization that should underscore the importance of paid leave, even during “normal” times.

Over the past two years, the cities of Austin, San Antonio, and Dallas, Texas, have all passed laws requiring that businesses provide their employees with paid sick leave (Dailey and Douglas 2020). State legislators in 2019 attempted, but failed, to pass legislation to block these local paid sick leave laws. Undeterred, right-wing lawmakers in Texas and their business allies turned to the Texas court system to try to block the local paid sick leave ordinances, succeeding in receiving injunctions for the Austin and San Antonio ordinances in 2018 and 2019, respectively (Samuels 2019; Dailey and Douglas 2020). On March 31, 2020, in the face of a global pandemic, a federal judge blocked Dallas from enforcing its paid sick leave law, which was set to go into effect the next day (Dailey and Douglas 2020). All three ordinances are still on hold pending court action.

As shown in Table 5, two in five (41%) of workers in Dallas, a total of 301,838, do not have access to paid sick leave (Milli and Williams-Barron 2018). Access rates for Black workers in Dallas fall below access rates for white workers, with 37% of Black workers lacking paid sick leave compared with 31% of white workers (see Figure E). The majority (55%) of Latinx workers in Dallas do not have access to paid leave. The vast majority (71%) of the workers who would benefit from a paid leave ordinance are people of color.

Figure E

Table 5

The Dallas paid leave ordinance would particularly benefit lower-income workers, who are much less likely to have access to paid sick leave. Fewer than one in three full-time (35 hours or more), full-year workers in Dallas whose income is less than $15,000 per year have paid leave, compared with the vast majority (85%) of workers who earn $65,000 or more (Milli and Williams-Barron 2018).

By blocking these paid leave measures through the courts, right-wing legislators and the business community have shown their disregard for the health of the 4.3 million Texas workers who do not have access to paid leave. Paid leave represents an investment in public health (Lewis 2019), because it prevents workers who are sick from exposing their co-workers and the public to illness. Yet as the Texas experience shows, even in the face of a global public health crisis, the fight to deny workers paid leave continues.

In fact, the pandemic has created additional opportunities for the misuse of preemption to prevent policies that would promote public health. Southern states—including Florida, Georgia, Mississippi, South Carolina, Tennessee, Texas, and West Virginia—have prevented localities from enacting local public health measures that are stricter than statewide stay-at-home orders.

Case studies involving proactive preemption, in which localities are blocked before they can even consider policies that could benefit their residents

As we have shown, state lawmakers in the South often override local initiatives benefiting local residents. In other cases, local communities lose their ability to make positive change before they have even contemplated action on the issue. This section details some of these cases. We describe actions taken by state policymakers to block local democracy, and we show how local communities could have benefited from the potential measures in question, based on the positive impacts such measures have had where they have been enacted. At bottom, it is clear that local communities have been deprived of the opportunity to benefit their residents because of the chilling effects of state interference.

Fair scheduling: Atlanta, Georgia

In 2017, the Georgia state legislature passed a law prohibiting local governments from implementing fair scheduling regulations, even though no cities in Georgia had such a law. Fair scheduling could benefit 28,991 workers in Atlanta and 750,926 workers statewide who work in retail and food service.

The Georgia legislature has frequently acted to prevent local governments from protecting and empowering workers, including prohibiting local paid leave and minimum wage ordinances (EPI 2018). As discussed earlier in this paper, paid sick leave and minimum wage ordinances are particularly critical for raising the living standards of Black and Brown workers and women.

In 2017, Georgia joined the list of states that have passed laws prohibiting localities from implementing fair scheduling regulations (EPI 2018; Donohue 2017). By prohibiting its cities and counties from requiring that employers give additional notice or pay to employees when their schedules are changed, Georgia is once again preventing communities from adopting labor standards that would disproportionately benefit women and workers of color.

Many workers, especially hourly and low-wage workers, are subject to unpredictable schedules (Vogtman and Tucker 2017). Under the guise of flexibility, employers leverage technology to make last-minute and inconsistent scheduling decisions. The result is that workers are required to give up their own freedom and flexibility (CPD 2018). These unfair scheduling practices can take many forms, which can be used in combination, compounding their negative effects. Some employers use “just-in-time” scheduling, often with the aid of scheduling software, to make last-minute staffing decisions in response to anticipated changes in demand. Another tactic is on-call scheduling: Workers are asked to stay available, generally without compensation, but are not told whether they are required to come in until just hours before the shift. Workers may also be asked to work unreasonable shifts, for example, a “clopening”—a late closing shift followed by an early opening shift (Vogtman and Tucker 2017; Schneider and Harknett 2019). Each of these practices is quite widespread within the retail and food service industries (Schneider and Harknett 2019). While unfair scheduling is certainly not limited to retail and food service, most fair workweek laws do focus on protecting workers in those industries (Wolfe, Jones, and Cooper 2018).

These unpredictable scheduling practices wreak havoc on workers’ lives. Workers must plan their time, spending, and savings around these inconsistent (and often insufficient) hours. Unpredictable scheduling can negatively impact workers’ access to child care and health care, since day care centers often require consistent drop-off schedules and doctor visits require advance appointments. Enrolling in additional training and education can be next to impossible when you are required to “stay available” for shifts (Vogtman and Tucker 2017). Even when compared with peers with similar wages, retail and food service workers with less predictable schedules were more likely to experience material hardship, such as going hungry or being unable to pay bills (Schneider and Harknett 2019).

Furthermore, unfair scheduling practices can make it difficult to schedule job interviews or shifts at other jobs, preventing workers who are part time but would like to work more hours from getting full-time work or another part-time job (Golden 2015). Part-time work and lower hours are more prevalent in wholesale and retail trade, as well as in leisure and hospitality (which includes restaurants), than in the overall workforce. At the same time, part-time workers in these industries are also more likely to want full-time work than their peers in the overall workforce (BLS 2020c).

Since Black, Latinx, and Asian workers, and women of any race, are all disproportionately likely to be employed in restaurants or bars, they would also stand to gain the most protection from scheduling fairness legislation. Nationwide, Latinx workers make up 26.8% of all workers in the food service and bar industry, and Black workers account for 13.2% (compared with 17.6% and 12.3% of the overall workforce, respectively). Asian workers are also disproportionately likely to work in food service or bars, making up 7.5% of that industry compared with 6.5% of the overall workforce. Women account for a majority (52.1%) of this industry despite making up just 47% of the overall workforce (BLS 2020b).

Retail and food service workers of color, and particularly women of color, are more likely to experience unstable schedules than their white peers, an inequity that persists even when controlling for other demographic characteristics and education (Schneider and Harknett 2019).

Because of the clear importance of predictable scheduling to workers, a number of cities and one state have adopted scheduling fairness laws. As of 2018, 1.8 million workers in New York City, San Jose, Seattle, San Francisco, Emeryville (California), and the state of Oregon were protected by fair workweek laws that focused largely on retail and fast-food workers (Wolfe, Jones, and Cooper 2018). In the last year, fair workweek protections have also taken effect in Chicago and Philadelphia, with Chicago’s ordinance covering workers in health care facilities, building services, and hotels in addition to restaurant and retail workers (HR Dive 2019).

In Table 6, we show the number and demographics of nonmanagerial workers in retail and food service. By proactively preempting fair scheduling laws, the Georgia state legislature has denied local governments the opportunity to protect the 750,926 Georgians who work in retail and food service, not to mention workers in other industries who would stand to benefit from broader fair workweek protections.

Table 6

In particular, if Atlanta were to enact fair workweek legislation, 28,991 workers in retail and food service would stand to benefit. The majority, or 14,627, of those workers are Black. Women also stand to benefit from a fair workweek law focused on these industries, since they make up over half of this workforce both in Atlanta and statewide.

This state interference not only has an outsize impact on Black and women workers, but it also negates the voices of Black voters in Atlanta. Nearly half (48.0%) of the voting-age citizen population in Atlanta is Black, compared with less than one-third (32.0%) statewide (see Appendix Table 4). The state legislature, which is 69.5% white, is not representative of Black workers and the population whose authority they are preempting.

Platform ‘gig’ economy: Kentucky

In 2018, the Kentucky state legislature passed an expansive law classifying workers on “marketplace platforms” as independent contractors, which excludes them from key labor standards.

With the growth of the digital platform (“gig”) economy, much attention has focused on the issue of whether individuals performing services through an online platform such as Uber, Lyft, Handy, or TaskRabbit should be considered employees or whether they are independent contractors. The distinction makes a significant difference to workers. Independent contractors, who are viewed by the law as being in business for themselves, are not covered by unemployment insurance, workers’ compensation, minimum wage laws, overtime protections, paid leave laws, anti-discrimination laws, or most health and safety laws, and they do not have the right to form unions and engage in collective bargaining (Carré 2015). Employers do not pay payroll taxes, workers’ compensation, or unemployment insurance premiums on independent contractors. The distinction between employees and independent contractors is one of real substance, for workers, employers, and government programs.

Misclassification occurs when businesses deem workers “independent contractors” when those workers should be considered employees. By misclassifying workers, businesses avoid paying payroll and workers’ compensation taxes—saving themselves up to 30% while costing states and localities millions of dollars in lost revenue (NELP 2017).

Misclassification affects workers across industries, including construction, restaurants, janitorial services, and trucking. Lately, much attention has been paid to the misclassification of gig economy platform workers. Platform companies such as Uber and Lyft have maintained that their drivers are independent contractors who simply use Uber or Lyft’s technology to connect with their own customers. However, platform companies in fact play a large (often unilateral) role in setting pay and determining work hours and conditions. Many platform workers, including ride-share, delivery, and domestic workers, face hazardous workplace conditions and low pay. This makes it particularly egregious to exempt them from minimum wage and workers’ compensation protections (Smith 2018).

To protect workers from misclassification, state policymakers can set standards for who can be considered an independent contractor under state law. California adopted such a measure in September 2019, establishing a statewide “ABC” test for determining whether a worker is an employee or an independent contractor. When this California law was passed, however, gig economy companies such as Uber, Instacart, and DoorDash made their opposition clear by pledging to spend $110 million on a ballot initiative that would exempt them from the law (McNicholas and Poydock 2019). Uber and Lyft have refused to comply with the law and have been sued by the California attorney general and several city attorneys for noncompliance. A San Francisco Superior Court judge ruled against the companies and said they must treat their drivers as employees, although they are allowed to maintain the status quo for now while awaiting a decision by the court of appeals (Bond 2020).

In 2018, Kentucky took an entirely different approach, passing an expansive law prohibiting local governments from treating workers on “marketplace platforms” as employees by deeming them “marketplace contractors,” not employees. Any worker who uses a digital network or application to connect with those who are seeking their services—in other words, any gig economy platform worker—is deemed a marketplace contractor under Kentucky law. Nearly identical bills were introduced in nine other states during the 2018 legislative session (Smith 2018). In most of these cases, the legislation was drafted by Handy, an online building services platform (Kessler 2018). Passage of the marketplace contractor legislation is yet another example of businesses lobbying for lax state-level regulation to preempt city laws that would protect workers (James 2018).

The impact of the law on digital platform workers in Kentucky is extensive. The number of digital platform workers has grown significantly in recent years: Between 2012 and 2016 alone, the share of Kentuckians who were doing online platform gig work grew from just 0.01% to nearly half a percent (Collins et al. 2019). In 2016, there were more than 10,000 online platform economy workers in Kentucky—all of whom could potentially be misclassified with the aid of the 2018 law (Collins et al. 2019).

We estimate that as of 2016, there were between 3,822 and 7,527 workers in Louisville who earned money using an online labor platform. These estimates, based on Collins et al. (2019), use the shares of online platform workers in nearby cities.2 Our low estimate is based on Memphis, where 1.0% of workers reported earnings from online labor platforms, and the high estimate is based on 2.0% of workers in Columbus. Even this high estimate is likely an undercount, since we use the number of income tax returns filed by Louisville residents (373,690) to estimate its full workforce whereas Collins et al. had access to detailed administrative IRS data including the number of non-filers.

The 2018 law disproportionately impacts workers of color. Black and Latinx adults are more likely to earn money through online platform work than their white peers, so they are more likely to be deprived of important workplace protections because of their misclassification as “marketplace contractors” under the Kentucky law. In 2016, Black adults were nearly three times as likely to have worked using online labor platforms as white adults, and Latinx adults were more than twice as likely to have worked using online labor platforms as their white peers. People of color who have worked using online job platforms are also more likely than white gig workers to see that source of income as essential or important, rather than “nice to have” (Smith 2016).

Gig economy companies conspired with state lawmakers in Kentucky to protect their own interests and to overrule the authority of communities. In Louisville, this represents a silencing of a population that has a higher share of Black people (11.0%) than the state overall (7.8%) and that is not well-represented by the state legislature, which is 92.0% white (see Appendix Table 5).

‘Ban-the-box’: Mississippi

“Ban-the-box” policies reduce barriers to employment for the formerly incarcerated. But, since 2014, Mississippi has prohibited localities from adopting laws “that in any way interfere with an employer’s ability to become fully informed of the background of an employee or potential employee.”

As many as four in 10 people in the United States possess a criminal record, which creates barriers to housing, education, voting rights, and employment (Eberstadt 2019). Regarding employment, “ban-the-box” policies reduce barriers for formerly incarcerated people and people with arrest and conviction histories by delaying employer inquiries about an applicant’s criminal record until later stages in the hiring process. These policies prohibit employers from requiring applicants to disclose their criminal history on an initial application so that the initial employment consideration is made on job-related factors.

According to 2012 guidance issued by the Equal Employment Opportunity Commission, ban-the-box policies reduce employment discrimination based on race and national origin, particularly since Black and Latinx people are arrested, convicted, and incarcerated at higher rates than white people due to structural racism in policing, sentencing, and incarceration (EEOC 2012). Rather than automatically disqualifying candidates based on the stigma of a criminal record, ban-the-box policies allow employers to first evaluate applicants based on their skills and qualifications. At later stages of the hiring process, an employer may then inquire about and assess a relevant criminal record that could impact an applicant in a specific occupation or work setting.

Prompted by a nationwide movement led by a grassroots organization, All of Us or None, based in Oakland, California, ban-the-box laws have been increasingly adopted across the country (Evans 2016). In 2016, the Obama administration directed federal agencies to “ban the box” for federal government jobs (White House 2016). As of July 2019, 35 states and over 150 cities and counties have adopted ban-the-box policies. Currently three-fourths of people living in the U.S. live in an area that has banned the box. This includes several Southern states, including Georgia, Kentucky, Louisiana, Oklahoma, Tennessee, and Virginia, as well as many cities and counties with similar or more expansive policies, including Austin, Dallas County, San Antonio, Birmingham, Jacksonville, Miami-Dade County, Orlando, St. Petersburg, Tampa, Charlotte, Durham County, and Winston-Salem (Avery 2019).

A recent study found that, for people with conviction histories, ban-the-box policies increase the likelihood of obtaining a public-sector job by about 30% on average (Craigie 2017). Furthermore, the study did not find evidence that these policies resulted in discrimination against the very population they are intended to benefit, as some scholars have argued they would. Other studies of cities and counties that have implemented ban-the-box policies—including Durham, the District of Columbia, and Atlanta—have found similar positive employment impacts for people with arrest and conviction histories (Atkinson and Lockwood 2018; Juffras et al. 2016; Emsellem and Avery 2016). Studies show that employment is the single most important factor in reducing the likelihood of returning to jail or prison (Berg and Huebner 2011). Employment after incarceration provides critically important income to allow formerly incarcerated people to support themselves and their families.

In Mississippi, there is growing support for a statewide ban-the-box policy—while recently introduced legislation ultimately failed to pass both chambers, it did receive bipartisan support.3 However, since 2014, Mississippi has prohibited localities from adopting laws “that in any way interfere with an employer’s ability to become fully informed of the background of an employee or potential employee.”4 This law interferes with the ability of cities to pass local ordinances to ban the box for public-sector applicants and contractors, as well as for private-sector job applicants, as many neighboring states and cities have done.

The inability of localities to enact ban-the-box policies especially harms employment prospects for Black and Latinx people, who are more likely than white people to be incarcerated in Mississippi (and in other states) due to over-policing and structural racism (Hinton, Henderson, and Reed 2018). Mississippi has an incarceration rate of 1,039 per 100,000 people, meaning it imprisons a higher percentage of its people any other state in the country excepting Oklahoma and Louisiana (Wagner and Sawyer 2018). This includes those in prisons, jails, immigrant detention centers, and juvenile justice facilities. People from Black and Latinx communities are overrepresented among Mississippi’s incarcerated population (at 57% and 12%, respectively), while white people are underrepresented (30%), compared with their overall representation in the state (37%, 3%, and 58%) (PPI 2020).

National research on pre-incarceration income and unemployment finds that three years before incarceration, just 49% of working-age people were employed, and on average they were paid less than $15,000 a year (Looney and Turner 2018). This means that, for many, the economic insecurity following incarceration compounds the challenges they were already facing. Incarceration also further highlights income disparities for Black and Latinx formerly incarcerated people, who experience lower incomes when compared with white formerly incarcerated people (Western and Pettit 2010). Among people on probation, two-thirds are paid less than $20,000 per year (Finkel 2019). Banning the box supports employment opportunities for the formerly incarcerated and for others with arrest and conviction histories, many of whom were already struggling to make ends meet.

Public-sector employment, the sector in which ban-the-box policies are often first applied, has historically been at the forefront of anti-discriminatory employment, initially through measures that regulated the federal government. Eventually, anti-discrimination regulations were extended to state and local governments, making them generally more equitable and inclusive workplaces for women and Black workers (Cooper, Gable, and Austin 2012). As shown in Figure F and Table 7, Mississippi is no exception. Women account for more than three in five state and local government workers in Mississippi (61.6%), a much greater share than in the private sector. Black workers are also disproportionately represented in Mississippi state and local government, accounting for two in five workers in that sector (40.6%) compared with just over one in three (35.7%) in the private sector.

Figure F

Table 7

Banning the box for government employees in Mississippi would once again put the public sector on the front lines of anti-discrimination. While more equitable hiring policies should certainly be extended into the private sector as well, focusing first on passing ordinances in the public sphere can allow localities to pave the way for even more transformative change. If Mississippi localities incorporate these values into their government hiring practices, it could result in larger shares of Black, Latinx and other residents impacted by incarceration in the Mississippi public-sector workforce.

Prevailing wage: New Orleans, Louisiana

Since 2011, Louisiana has prohibited cities and counties from enacting prevailing wage ordinances. Prevailing wage laws ensure that contractors on public construction projects do not drive down local wage standards by underpaying their workers. We estimate that implementation of a prevailing wage law in New Orleans could increase the typical construction worker’s annual earnings by roughly $5,000.

Since 2011, Louisiana has prohibited cities and counties from enacting prevailing wage ordinances. Such laws govern the construction contracts that cities or counties enter into with private contractors for city or state construction projects, requiring that the contractors pay their workers at least the prevailing wage in the city or county for the type of work being contracted. The policies’ definitions of “prevailing wage” vary from location to location, although they generally reflect a commonly held or dominant wage.

Prevailing wage laws are common throughout much of the United States. Contracting by the federal government has been subject to prevailing wage regulation since 1931, with the passage of the Davis-Bacon Act (Mahalia 2008). As of January 2020, 26 states and the District of Columbia have some form of prevailing wage law (DOL 2020). Louisiana is one of the 24 states without such a law.

The rationale for prevailing wage laws is straightforward: Communities do not want public contracts to drive down local wage standards. Because contractors typically must bid to work on public projects, without a prevailing wage requirement, firms may cut wages in order to win contracts. This obviously harms employees of the individual construction firm and, more importantly, it also pushes down wages throughout the industry as rival firms respond with similar cuts when making their bids. Prevailing wage laws preserve wage levels for construction workers and ensure that contractors compete for government projects based on efficiency, management skill, material costs, and the productivity of a firm’s employees.

Despite the clear benefits of prevailing wage laws, in June 2011, then-Governor Bobby Jindal signed a bill passed by the Republican majority in the Louisiana legislature prohibiting any public entity in the state from establishing standards—such as requiring certain wage rates—on any public contracts (NCSL 2020a). Louisiana is one of the nine states that Diller (2012) classifies as “home rule, but skeptical of local authority.”5 Notwithstanding Louisiana’s home rule tradition, the state legislature stripped local communities’ ability to establish wage standards on publicly funded projects. This is not the only time that the legislature has gone against the home rule tradition. In fact, in 1997 Louisiana became the first state to pass a law preempting local minimum wage ordinances. Community, faith, and labor groups in Louisiana have joined together to advocate for the repeal of the 1997 minimum wage preemption law, as well as paid sick leave preemption, in the “Unleash Local” campaign (Barber 2019).

Research shows that construction workers in jurisdictions with prevailing wage laws earn substantially more than their counterparts in places without such laws. Eisenbrey and Kroeger (2017) find that construction workers in states with prevailing wage laws are typically paid 13% to 22% more per hour than construction workers in states without prevailing wage laws.6 This wage premium benefits not only construction workers on public projects in a state, but also construction workers across the state. It is thus not surprising that the median wage of construction workers in Louisiana is lower than the median for construction workers nationwide. The national median was $22.80 per hour in May 2019, 7.2% higher than Louisiana’s median of $21.27.7

If cities in Louisiana were permitted to adopt prevailing wage standards, these laws would raise the pay of thousands of local construction workers, including workers of color. Consider, as an example, wages for construction workers in New Orleans. As shown in Table 8, the median hourly wage of construction workers in the New Orleans Metropolitan Statistical Area (MSA) in 2019 was $20.46 per hour—3.8% less than the statewide median and 10.3% less than the national median. A New Orleans prevailing wage law would have the potential to lift pay for over 35,000 construction workers in the area. If wages rose by the 13% difference identified by Eisenbrey and Kroeger (2017) (the lower end of their range), that would translate into a wage increase of $2.66 per hour, or—applied to the median annual wages reported by construction workers in the New Orleans MSA—a roughly $5,000 increase in annual earnings.

Table 8

Table 8 also shows the differences between the racial and ethnic composition of the construction workforce in New Orleans and that of the statewide construction workforce, as well as the differences in wage levels by race and ethnicity. The construction workforce in the New Orleans area is majority people of color—only 41.1% of area construction workers are white. Statewide, 64.7% of construction workers are white. Both statewide and in New Orleans, white construction workers are typically paid more than Black and Latinx construction workers, although median wages for Black construction workers are slightly higher in the New Orleans MSA than they are for the state.

Louisiana’s legislature is 76.4% white (see Appendix Table 7). The state population overall is 58.4% white. By restricting the ability of localities to set prevailing wage standards, the majority-white state legislature is denying the local government of New Orleans—a city that is 69.6% people of color—from establishing a policy that would raise wages for all local construction workers, the majority of whom (58.9%) are workers of color. For a Black construction worker in New Orleans, a pay raise equivalent to the 13% prevailing wage premium identified by Eisenbrey and Kroeger (2017) would mean a $5,000 increase in annual wages. For Latinx construction workers, it would be a $3,300 raise.

By banning cities and counties from enacting any prevailing wage ordinances, the Louisiana state legislature is suppressing pay for construction workers throughout the state. State lawmakers are tying the hands of local leaders, preventing them from enacting policies that would strengthen pay for workers of all races and ethnicities. And with white construction workers being paid considerably more than Black and Latinx construction workers—even in cities where white construction workers are in the minority—the inability to set local standards only further exacerbates racial inequities.

Case studies: Preemption fights on the horizon

Since 2010, state interference in local governance has continued to expand rapidly across the country, particularly in the South (von Wilpert 2017). In what was clearly a coordinated strategy to push corporate-friendly legislation in as many state houses as possible, historically high numbers of preemption bills were filed in many states in 2019 (Haddow, Gad, and Fleury 2019). And while not all of the bills that were introduced became law, there is every reason to believe that the bills will be introduced again in future sessions.

The following case studies describe instances in which anti-regulatory groups and right-wing lawmakers have tried to block local actions that protect workers but have not yet succeeded in doing so.

Wage theft protections: Miami-Dade County, Florida

In 2010, Miami-Dade County became the first county in the country to enact a wage theft ordinance. Within two years, the county had recovered more than $500,000 in stolen wages for nearly 400 workers. However, in 2019, Florida state lawmakers attempted to pass a bill negating Miami-Dade’s wage theft ordinance and preventing other counties in Florida from following Miami-Dade’s lead.

Wage theft occurs when an employer fails to pay a worker the full compensation to which the worker is legally entitled. As Cooper and Kroeger (2017) explain, wage theft can take many forms, from the explicit—such as refusing to pay promised wages, paying less than legally mandated minimums, or failing to pay overtime premiums—to less visible exploitation, such as requiring staff to work off the clock, making illegal deductions from paychecks, or intentionally misclassifying employees as independent contractors to avoid paying minimum wages, payroll taxes, or other required benefits.

In 2010, Miami-Dade made history by becoming the first county in the country to enact a county wage theft ordinance. Florida is a “permissive home rule” state, rather than a Dillon’s Rule state, meaning that there is a settled understanding that local governments have broad authority to enact policies on any issue where there is no state or federal prohibition. Miami-Dade’s ordinance created a mechanism within the county’s Small Business Development Agency for workers to file wage theft claims that the agency would then investigate, attempt to reconcile, and refer to a hearing examiner when needed. Within the first two years after the ordinance passed, the Miami-Dade Small Business Development Agency’s wage theft enforcement actions had already recovered more than $500,000 for nearly 400 workers in the county (Hernandez 2012).

In creating a local system for wage theft victims to seek restitution, county commissioners were responding to a widespread and deeply harmful problem that the state had failed to remedy. McNicholas, Mokhiber, and Chaikof (2017) estimate that low-wage workers across the country lose more than $50 billion to wage theft annually. Cooper and Kroeger (2017) describe how minimum wage violations alone cost workers an estimated $15 billion each year, including over $1.1 billion in Florida. In fact, Cooper and Kroeger find that Florida has the highest rate of minimum wage violations among the 10 most populous states in the country, with nearly a quarter (24.9%) of low-wage workers reporting being paid less than the state minimum wage.

This exceptionally high rate of minimum wage violations is likely caused, in part, by the fact that employers in Florida have little reason to think they will be caught if they engage in wage theft. Galvin (2016) explains that Florida has very weak state labor laws and no state enforcement agency to investigate alleged abuse. A conservative majority of the state legislature, along with then-Governor Jeb Bush, eliminated Florida’s Department of Labor and Employment Security in 2002. By establishing its own investigatory body, Miami-Dade stepped in to address an issue on which the state had explicitly decided to no longer act.

Despite a clear problem with wage theft in Florida—as illustrated by the success of the Miami-Dade ordinance—state lawmakers in 2019 attempted to negate Miami-Dade’s wage theft ordinance and prohibit all counties in Florida from enacting measures to combat wage theft. The bill would have overturned wage theft ordinances across the state and prevented local governments from establishing any ordinance governing the conditions of employment within that jurisdiction.8 The legislation would have prohibited local laws on everything from minimum wage, paid sick days, and fair scheduling laws to ban-the-box policies and wage theft victims’ rights (Haddow, Gad, and Fleury 2019). The bill died in committee, although similar legislation has passed in other Southern states (Riverstone-Newell 2017).

Table 9 displays the number of workers in Florida and in Miami-Dade County who are likely experiencing minimum wage violations. Of the 456,177 workers in Florida who are likely subject to minimum wage violations, 223,983 are women. Substantial numbers are also Black (72,076) and Latinx (128,642). The failed bill to prohibit wage theft measures would have denied communities the opportunity to protect these workers from this egregious exploitation.

Table 9

For the city of Miami, this bill represented an even more direct attack on Black and Latinx workers. Of the estimated 44,914 Miamians who experience minimum wage violations, 32,338—or nearly three-quarters—are Latinx. There are also more Black workers than white workers experiencing minimum wage violations in Miami.

The estimates in Table 9 apply the statewide overall share of minimum-wage-eligible workers who have experienced minimum wage violations—7.3%—from Cooper and Kroeger 2017 to the number of minimum-wage-eligible workers in each demographic group. This likely results in an undercount of the number of women and workers of color who experience minimum wage violations, since they actually experience these unfair practices at higher rates than the overall workforce. Women in Florida experience these violations more often than men (8.4% of minimum-wage-eligible workers vs. 6.4%), as do Black and Latinx workers (Cooper and Kroeger 2017).

It is also possible that the prevalence of wage theft is lower in Miami than in the rest of the state, thanks to the wage theft ordinance. However, there is evidence that many cases of wage theft in Miami go unreported and that the agency tasked with enforcement does not have adequate resources or a broad enough jurisdiction to handle cases efficiently (Hernandez 2012). In any case, eliminating Miami-Dade’s authority to regulate wage theft would disproportionately leave women and Black and Latinx workers worse off; policymakers must defend against this. At the same time, policymakers should prioritize strengthening the enforcement mechanisms for the ordinance.

Salary history bans: West Virginia

In 2019, the West Virginia state legislature sought to block cities from enacting salary history bans. Disclosing prior salaries during the hiring process can perpetuate and compound salary inequities throughout a worker’s career by undermining their ability to bargain during salary negotiations. Research has shown that salary history bans raise wages for all workers, in particular women and Black workers.

To close racial and gender pay gaps, policymakers across the country have begun to ban employer questions about pay history (Douglas 2019). However, as with wage theft, some lawmakers have tried to proactively preempt local action on this issue. In West Virginia, this led to a bill that would have—in addition to interfering with a whole host of other local labor standards and nondiscrimination regulations—blocked cities in West Virginia from enacting salary history bans (Haddow, Gad, and Fleury 2019). Although this sweeping bill died in committee, it signals a clear desire from lawmakers to interfere with local action on worker’s rights issues.9

Gender and racial wage gaps are real, large, and persistent. In 2019, the typical woman worker was paid just 85.0% of what her male peers were. These inequalities persist, and are in fact larger, between women and men with more education. Racial wage gaps are even more egregious, with the typical Black and Latinx worker being paid about three-quarters the hourly wages of white workers, 75.6% and 74.6%, respectively (Gould 2020).

When workers face lower pay from the beginning of their career, disclosing their prior salaries during a hiring process can perpetuate and compound these inequalities throughout their career by undermining their ability to bargain over pay during negotiations over a job.

A recent report confirmed the effectiveness of salary history bans and found that these bans also make employers more likely to include salary ranges in their job postings. Among all “job-changers,” workers experienced a 5% increase in pay after salary history bans were enacted. Women and Black workers saw particularly strong effects, with women who change jobs seeing an 8% increase in pay and Black workers seeing a 13% increase (Bessen, Meng, and Denk 2020). Since Black workers and women experience outsized effects, these policies help shrink existing pay gaps. The report estimates that salary history bans reduce the gender wage gap by 48% for job-changers and found an even stronger effect for the Black–white wage gap.

As shown in Figure G, the gender wage gap in West Virginia is apparent among workers at all wage levels. The typical woman in West Virginia is paid just 78.8% of what the typical man in West Virginia is paid. And even for those who earn the most, the gender wage gap is inescapable. At the 90th percentile, male wage earners in West Virginia are paid $40.07 an hour, which translates into $83,300 for a full-time, full-year worker. This is 20.7% more than their female peers, who are paid $33.19 an hour, or $69,000 annually.

Figure G

A salary history ban would boost the wages of West Virginian workers by helping to even the playing field as workers go into wage negotiations. This, along with the related mitigating effects on pay inequalities, are strong reasons why legislators should champion salary history bans at the state and local levels. Preempting local action on salary history bans would harm workers in West Virginia—and particularly women and workers of color.

Preemption and the pandemic

Many Southern states that relied on limiting the authority of local governments before the onset of the pandemic in 2020 have made broad use of preemption during the pandemic. Many executive orders issued since by Southern governors have outlawed local public health measures that were stricter than the standards set by the state:

• A Mississippi executive order issued on March 24, 2020, forbade political subdivisions (including cities and counties) from imposing social distancing regulations or business shutdowns stricter than the state’s (LSSC 2020a).
• On April 7, 2020, the governor of South Carolina issued an executive order explicitly disallowing local stay-at-home orders stricter than the state’s.10
• In Florida, an executive order issued on April 1, 2020, “clarified” that state-level orders superseded local ones. The next day, the governor explained that cities could still enact stricter coronavirus-related protections. The ensuing confusion resulted in local officials being reluctant to enact stay-at-home orders or require businesses to close (Lemongello, Man, and Rohrer 2020).
• On March 26, 2020, the governor of Arkansas issued an executive order prohibiting local stay-at-home requirements, arguing that such regulations would interfere with essential operations and commerce (LSSC 2020b).
• On May 11, 2020, Texas Attorney General Ken Paxton threatened to sue city officials in Austin, Dallas, and San Antonio unless they rolled back “unlawful” local emergency orders that imposed stricter public health safety measures than the state allowed (Platoff 2020).

The pandemic, far from being a “great equalizer,” is deepening existing inequalities along racial lines. The virus has taken the lives of Black, Indigenous, Pacific Islander, and Latinx people at higher rates than white people (APM 2020). This inequality of health outcomes is coupled with an economic crisis that is disproportionately affecting communities of color. Black and Latinx workers face economic conditions that have left them particularly vulnerable to this crisis. They are paid less, are more likely to be living in poverty, and are less likely to have access to paid sick leave than white workers (Gould and Wilson 2020; Gould, Perez, and Wilson 2020).

Black workers are more likely to be front-line workers—employed in essential industries such as health care, child care and social services, and grocery, convenience, and drug stores—putting them and their families at even greater risk and compounding the existing health inequalities they face. About one in six front-line workers are Black, even though only one in nine workers are Black in the overall workforce. At the same time, Black workers are less likely to have health insurance and to have paid leave than white workers (Gould and Wilson 2020).

Latinx workers are less likely than other workers to be able to work from home, leaving them prone to job loss or exposure to coronavirus on the job. In particular, Latinx workers are disproportionately employed in the leisure and hospitality industry, which experienced the largest job losses of any industry at the beginning of the pandemic. Latina workers, who already had a higher unemployment rate than white workers, experienced the largest spike in unemployment between February and April of any group (Gould, Perez, and Wilson 2020).11

Preemption plays a role in reinforcing these inequalities when it is used to directly hamper local policies intended to mitigate the public health and economic fallout of the pandemic. It could instead be used to ensure that health and economic equity is being advanced evenly across a state. Misuse of preemption has also prevented localities in some states from enacting policies that would have made them better equipped to deal with the pandemic, including paid sick leave, eviction moratoria, and municipal broadband. As a result, these localities are unable to ensure that their residents have access to sick leave during a pandemic, secure housing during an economic crisis, and better internet access when it is needed to attend work and school (Haddow et al. 2020).

Conclusion

In the face of the COVID-19 pandemic and resulting economic crisis, cities and states should be working together to enact policies that will protect their residents’ health and promote equity during both the crisis and the recovery. Instead, some state policymakers continue to interfere with local policymakers’ authority to enact and enforce policies to protect their residents. During this pandemic, preemption has too often stifled local responses and generated confusion.

The public health and economic crises stemming from COVID-19 have disproportionately impacted the same communities that had already seen their power limited by state government interference in local democracy. Poor wages and working conditions, limited public investments, and higher rates of incarceration resulting in higher poverty rates have left Southern populations particularly vulnerable to the current economic crisis (Blair and Worker 2020a). Southern policymakers have also ensured that the region has particularly low access to unemployment insurance, paid sick leave, and health care (Blair and Worker 2020b).

In the cases outlined here, Southern lawmakers prevented local action that would have improved economic outcomes for low-income workers, especially low-income women and people of color. These are populations that had already been left particularly economically vulnerable by American institutions, and now these populations are suffering disproportionately from a dual public health and economic crisis (Wilson 2020). As discussed earlier, the present-day failures of American institutions are also rooted in historical policies and practices intended to limit the rights and freedoms of Black people and entrench white supremacy.

Rather than allowing for policies that would improve employment outcomes, wages, and working conditions, state lawmakers and corporate interests have collaborated to prevent progress. State interference fundamentally undermines the ability of cities to address problems with targeted solutions that address the needs and reflect the values of their communities. Because of the deliberate, long-time use of preemption to maintain the racial and economic order, workers in the South who were already vulnerable before the pandemic are now struggling with the effects of widening and deepening inequities.

Acknowledgments

The authors thank Jori Kandra, Melat Kassa, and Daniel Perez, EPI research assistants, for their attention to detail; Krista Faries as the lead editor for this project; and Naomi Walker and Lynn Rhinehart for their overarching guidance and support. We thank Local Solutions Support Center for their partnership and generous support for this project. We also thank the research and grassroots organizations across the South who served as thought partners on this report for their work advancing racial and economic justice in the region. Finally, we thank the workers and communities whose lives are impacted by these policies every day and who are leading organizing and advocacy efforts so that people and families can thrive and make ends meet.

Notes

1. In this section, Nashville refers to the consolidated city-county metro of Nashville-Davidson County. Nashville accounts for the vast majority of Davidson County’s population and the city and county governments have been consolidated since 1963 (Bucy n.d.). Unless otherwise noted, statistics for “Nashville” represent Nashville-Davidson County.

2. Since data for Louisville are not included in Collins et al., we use nearby cities (Cincinnati, Cleveland, Columbus, and Memphis) to get a range of estimates. Of that group, Memphis had the lowest share of gig workers (1.0%) and Columbus had the highest (2.0%). Number of tax filers retrieved from https://www.irs.gov/statistics/soi-tax-stats-county-data-2016, August 3, 2020.

3. Comm. Substitute for S.B. 2112, 2020 Sen., Reg. Sess. (Miss. 2020).

4. S.B. 2689, 2014 Sen., Reg. Sess. (Miss. 2014).

5. Diller explains that the Louisiana constitution states that “[n]o local governmental subdivision shall…except as provided by law, enact an ordinance governing private or civil relationships.” Yet despite this strong language, courts in Louisiana have generally weakened or struck down local measures based on other grounds, rarely invoking the state constitution.

6. In straight, nominal terms, the median wage for construction workers was 21.9% higher in prevailing wage states versus states without prevailing wage laws. When the wage values are adjusted using the Bureau of Economic Analysis’s Regional Price Parities to account for regional price differences, the gap narrows to 13.0%.

7. Nationally, the May 2019 median wage for construction workers was $22.80 hourly and $47,430 annually. Median hourly wages by race/ethnicity are calculated by applying the ratio of each race/ethnicity’s median annual wages to the overall annual median and hourly median from the Occupational Employment Statistics.

8. S.B. 432, Sen. (Fla. 2019).

9. H.B. 2708, House (W.V. 2019), bill status.

10. S.C. Exec. Order 2020-22.

11. For a detailed exploration of the dual health and economic crises that are deepening the inequalities faced by Black and Latinx workers, see Black Workers Face Two of the Most Lethal Preexisting Conditions for Coronavirus—Racism and Economic Inequality and Latinx Workers—Particularly Women—Face Devastating Job Losses in the COVID-19 Recession.

Appendix tables

Appendix Table 1

Appendix Table 2

Appendix Table 3

Appendix Table 4

Appendix Table 5

Appendix Table 6

Appendix Table 7

Appendix Table 8

Appendix Table 9

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