Why are workers’ wages low?

The extinction of the American raise—dead as a dodo, by every empirical measure—has become a truth universally acknowledged. Even Republican House Speaker John Boehner, not a fellow often glimpsed on the barricades with protesting workers, pronounced that “wages are stagnant” in his comments on the most recent employment figures.

Two of our most perceptive economics writers, the New York Times’ David Leonhardt and the Washington Post’s Catherine Rampell, recently authored columns that handicapped the prospects of employers actually beginning to increase their employees’ wages, which, as legend has it, was once a common practice in the United States. Leonhardt glumly observed that the downward pressure on wages imposed by globalization, sclerotic government and technological change might still outweigh the factors working in employees’ favor. Rampell noted that the 15 million Americans who are officially unemployed or who have dropped out of the labor force create a powerful downdraft on workers’ ability to win wage hikes.

Both of these macroeconomic explanations are sound, but they don’t exhaust the list of reasons why profits and capital income, as a share of the nation’s total income, are at record highs, while wages and labor-derived income are at record lows. Nor does the alleged “skills gap” of U.S. workers provide much of an explanation, since “the demand for college-educated workers has actually slowed quite sharply since 2000 and their real wages have been flat,” as economist Jared Bernstein has noted.

Fully documenting the reasons the United States has experienced this epochal upward redistribution of wealth and income requires a look at institutional economics as well as macroeconomics. The distribution of income is a function not just of global forces but also of social and institutional power. And over the past four decades, U.S. workers have suffered a loss of power that may exceed even their loss of income.

Consider, for instance, how Americans succeeded in doubling their real incomes during the three decades following World War II. To be sure, it was a time when the United States dominated the world economy as never before or since, when major corporations had few foreign competitors and were seldom challenged by low-paying start-ups at home. Under those benign conditions, pay raises must have drifted down as the gentle rain from heaven, right?

Wrong. The presumably placid 1950s were rocked by one major strike after another, averaging 300 a year throughout the decade. There are few things as disruptive or unpleasant as a strike, both for the strikers and their communities. But it was by waging these disruptive, unpleasant actions that the greatest generation turned the United States into the first majority middle-class nation in history.

In the early 1980s, employers struck back. Following the lead of President Ronald Reagan, who fired striking air-traffic controllers, major companies began to routinely discharge workers who walked off the job. By the mid-’80s, strikes were in irreversible decline and companies were almost automatically firing workers who sought to form a union.

A new doctrine, first propounded by economist Milton Friedman, took hold in boardrooms and executive suites. The purpose of a corporation, it held, was not to benefit all of its stakeholders—shareholders, employees and the public—but to benefit shareholders only. Boosting profits and the value of the company’s stock by laying off workers, holding down their pay, converting them to independent contractors or shifting their jobs overseas became so common a practice that any company not playing by these rules became the subject of journalistic profiles written in a tone of amazement (as the recent coverage of the Market Basket supermarket chain attests).

By the ’90s, most corporate chief executives had their pay linked to the value of their stock, which many of them were able to boost by having their companies buy back outstanding shares, causing the value of the remaining shares to rise. Over the past decade, under pressure from “activist investors” and with the understanding that boosting share value would send CEO pay soaring, the corporations on the S&P 500 list of the largest publicly traded companies have devoted more than 90 percent of their profits to buying back their own shares and paying dividends to shareholders.

That hasn’t left much for wage increases.

While macroeconomic conditions surely explain some of the problems that have befallen U.S. workers, the institutional changes to American business—above all, the rise of investor power and the decline of worker power—are central to the tale. The case of the vanishing American raise can’t be solved without them.