II The Labor Market
Wages in the United States: Trends, Explanations, and Solutions
Abstract Since the late 1970s, two major developments have occurred regarding wages in the U.S.: the stagnation of real wages for various groups of workers and the increase in wage inequality. This chapter examines these trends in some detail and finds that real wages have performed better for women than men and for the more highly educated relative to those with less educational attainment. However, particularly since 2000, few groups have been spared; even workers with 4-year college degrees have experienced some stagnation in real hourly pay. The chapter examines economic theories of wage determination and finds that while skills often play a critical role in both theory and practice, other important wage determinants, most notably the absence of full employment—the persistently slack labor markets that have prevailed over the stagnation/dispersion period—are often underemphasized. The chapter suggests a number of policy recommendations to offset the problems of wage stagnation and increased wage inequality, including greater skill acquisition as well as policies to promote full employment and strengthen eroding labor standards.
Keywords Wage trends • Wage inequality • Wage policy • Economic theories • Labor markets • Unemployment • Trade deficits • Minimum wage • Unions
This chapter provides an in-depth look at historical wage trends in the United States. Though some of the analysis goes as far back as the post-World War II years, most begins in the latter 1970s. This is partly a function of data availability but more of the analysis itself: The two major problems revealed by the analysis—the stagnation of real wages for various groups of workers and the increase in wage inequality— are most evident over the past 35 years or so.
My goal is not simply to show these trends but to explain their movements as well as discuss policy ideas targeted at both wage stagnation and dispersion. Thus, the first part of the chapter presents empirical trends and the second attempts to explain the factors driving these trends and prescribe policy solutions to improve them.
There are, of course, many determinants of both wage levels and trends, including workers' skills and productivity, their ability to interact productively with technology, institutional factors such as unionization and labor laws (e.g., minimum wages, overtime rules), nonwage costs (e.g., employer-provided health benefits), and macroeconomic factors. While I touch on all the above, I find the latter set of factors—macroeconomic ones—to be both important and often underemphasized in wage analysis. The extent of slack in U.S. labor markets (high levels of unemployment) cannot be overlooked when attempting to explain widespread wage stagnation and dispersion, not to mention recent developments in wage trends that are the subject of considerable debate among both economists and the popular press.  Imbalances in trade—persistent U.S. trade deficits—are another seldom broached but germane area of analysis in this space.
Following the empirical section, I review various theories of wage determination common to contemporary economics. Some of these theories, like those that explain the correlation between education levels and wage levels (marginal product theory), have clear linkages to the data (e.g., the ever-present gradient in wage levels by educational attainment). But this theoretical review also finds that most theories assume “equilibrium,” or full employment, in the labor market, meaning a tight matchup between the number of jobs and job seekers. In fact, as noted above and stressed throughout, this assumption is highly unrealistic as far as the U.S. labor market over the past few decades—a time of stagnant and diverse wage growth. It is a particularly incorrect assumption in recent years.
The policy recommendation section that follows builds off this conspicuous omission in the theoretical work by incorporating the “slack problem”—the persistent absence of full employment—into the analysis. This means that along with conventional (but still critical) policy interventions like better access to educational opportunities for those facing such barriers, I also suggest such interventions as wage targeting at the Federal Reserve, smarter fiscal policy, direct job creation, improving labor standards, reducing trade deficits, and generally speaking, reducing slack in the job market, which I identify as a key determinant of worker bargaining power, and thus, wage pressures for many in the workforce.
-  See Janet Yellen's speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, WY, August 22, 2014, federalreserve.gov/newsevents/speech/yel- len20140822a.htm, and David Leonhardt, “Trying to Solve the Great Wage Slowdown,” New York Times, nytimes.com/2015/01/15/upshot/trying-to-solve-the-great-wage-slowdown. html?abt=0002&abg=1.