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How to Give American Workers Fair Wages

The labor market has changed over the last 40 years. It's time for labor laws and institutions to follow suit.
Two welders and a riveter make ship boilers at the Combustion Engineering Company in Chattanooga, Tennessee, in June of 1942.

Two welders and a riveter make ship boilers at the Combustion Engineering Company in Chattanooga, Tennessee, in June of 1942.

Earlier today, the Bureau of Labor Statistics released its February jobs report. In the month of February, the U.S. economy added 313,000 jobs, more than expected. The report was hailed by President Donald Trump, who simply tweeted "JOBS, JOBS, JOBS! #MAGA." There was, however, one disappointing metric in the report: Wage growth was essentially non-existent.

For the last 40 years, the typical American worker has seen real wages virtually stall. This persistent wage stagnation has puzzled economists, enraged working-class Americans, and has been cited as a contributing factor in Trump's surprise victory in 2016. Even as the unemployment rate fell steadily from its Great Recession-era peak of 10 percent in October of 2009, real wages for the median American household remained stubbornly flat for years. While wage growth finally seems to be slowly picking up again in recent months, long-term wage growth for most American workers is still dismal.

Last month, the Hamilton Project at the Brookings Institution convened a panel to discuss solutions to this problem; the event coincided with the release of a new e-book from the Hamilton Project that's chock full of proposals to address wage stagnation.

"Coming out of a very deep recession, there's often a single-minded focus on jobs, jobs, jobs," says Jay Shambaugh, an economist and the director of the Hamilton Project. "But as the unemployment rate comes down, at a certain point, it's important to think about what the return on those jobs is. And if you look at the broader sweep of history, the returns to work for the typical worker have not been growing."

Some of the proposals in the book are familiar—increasing investments in human capital or boosting labor demand, for example—but the book also tackles another important driver of wage stagnation: the growing power imbalance between workers and employers.

For a good chunk of the 20th century, labor unions served as a counterbalance to employer power. A large group of employees, with good information, negotiating for wages and benefits as one unit could win a much better deal than a single worker on his or her own. Even workers who weren't themselves unionized often benefited from labor unions' negotiations as non-union employers in a given industry frequently matched union employers' compensation packages to attract good workers.

Today, however, the climate in which workers bargain has changed dramatically. Not only are fewer workers covered by collective bargaining agreements, but many areas have many fewer employers thanks to industry consolidation. And when there are fewer employers in an area, the remaining employers have more power to set wages. Economists refer to this as "monopsonization," and they're increasingly convinced that it both exists and is a problem. In 2016, the Council of Economic Advisors under President Barack Obama released a report on the labor market monopsony. Its conclusion: "There is increasing recognition among economists and policy makers that employers often have some degree of monopsony power in labor markets."

Further exacerbating this situation is the fact that many large employers are also engaging in other practices that significantly reduce a workers' ability to bargain for a higher wage—entering into agreements with other employers not to poach each other's workers or requiring workers to sign non-compete agreements that forbid them from working at competitors, for example.

In response to this growing power imbalance, the book proposes a number of interesting reforms specifically designed to return bargaining power to workers. And while some of those reforms are aimed at strengthening traditional unions, the proposals also don't rely on a union renaissance that may not come.

Various chapters, for example, propose reforming or banning non-compete agreements, banning "no-poaching" agreements, and requiring the government to consider the labor market effects of proposed mergers. In one chapter, the economist Benjamin Harris of Northwestern University also proposes, interestingly, a detailed strategy for increasing wage transparency so that workers have access to the same information as employers. The goal of many of these proposals is, in essence, to recreate some of the conditions that historically enabled labor unions to secure higher wages for members.

"You used to have a union who knew what the fair wage was, and then you had a firm who had good information about what its competitors paid—both sides had full information," Shambaugh says. "But now you've got workers who are very often uninformed, compared to their employer, sitting there trying to bargain. Most economists would say that whoever has better information has a better position in negotiations. If you have a smaller role for unions in the private sector than you used to, then you probably need different rules."

A stated goal of the Tax Cuts and Jobs Act, which the GOP passed last year, is to increase wages for American workers. Since the passage of the legislation, a number of companies have announced bonuses or pay increases for workers, to much applause from GOP politicians. The overall number of workers affected, however, is still small—only about 2 percent of the workforce. Shambaugh, for his part, does expect wages to increase a bit as the economy continues to strengthen, but he's skeptical that the tax reform legislation has much to do with it, or that the increases will be meaningful.

"It's just not clear to me that everybody will benefit even if we do see a lot of economic growth," he says. "If the hope is that productivity and economic growth turns into wage growth, I think you often need to do more than hope. We may need to reform our labor market institutions."