Topsy-Turvy in the World of Wages

Peter Temin's paper "Inequality and Institutions in 20th Century America" dissects the story of labour and wages from the 1940s to the early 2000s. It discusses factors behind rising wages and income equality in the "golden age" of 1945-1980. It then argues that a "Washington Consensus" in the wake of the stagnation of the 1970s turned the tables on labour and led to the past 25+ years of wage stagnation and growing inequality:

A central feature of post-World War II America was mass upward mobility: individuals seeing sharply rising incomes through much of their careers and each generation living better than the last. The engine of that mobility – John Kennedy’s rising tide – was increased labor productivity.

It therefore is problematic that recent productivity gains have not significantly raised incomes for most American workers.2 In the quarter century between 1980 and 2005, business sector productivity increased by 71 percent. Over the same quarter century, median weekly earnings of full-time workers rose from $613 to $705, a gain of only 14 percent (figures in 2000 dollars3). Median weekly compensation - earnings plus estimated fringe benefits - rose from $736 to $876, a gain of 19 percent. Detailed analysis of this period shows that college-educated women are the only large labor force group for whom median compensation grew in line with labor productivity.

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We have argued in this paper that the current trend toward greater inequality in America is primarily the result of a change in economic policy that took place in the late 1970s and early 1980s. The stability in income equality where wages rose with national productivity for a generation after the Second World War was the result of policies that began in the Great Depression with the New Deal and were amplified by both public and private actions after the war. This stability was not the result of a natural economy alone: it was also the result of policies designed to promote it. We have termed this set of policies the Treaty of Detroit.

The new policies, which we have grouped under the title of the Washington Consensus, also originated in a time of economic distress, albeit nowhere near the distress of the 1930s. In a process similar to the experience of the Great Depression, policy makers—unable to comprehend the macroeconomic causes of distress—instituted microeconomic changes in an attempt to ameliorate the macroeconomic problems. In both cases, the measures taken were only partially successful, and recovery came from diverse influences. The microeconomic changes, however, had durable impacts on the distribution of economic production.