Explaining America's Growing Wage Gap

As just about everyone is aware, wage inequality in the United States has been rising since the 1970s.  According to a recent analysis by Lawrence Mishel, John Schmitt and Heidi Shierholz connects the widening gap between the top floor corner office dwellers and the rest of us to an array of economic policies that I will cover in this posting.

Here is what the authors observed about wage inequality, looking at four points in the overall distribution; the 10th percentile (the bottom 10 percent of earners), the 50th percentile (the median or the midpoint of all earners), the 90th percentile (the top 10 percent of earners) and the 99th percentile (the 1 percent):

1.) Between 1979 and the mid-1980s, the wage gap between the 10th percentile and the median grew strongly, however, starting in the late 1980s, wages at the bottom began to catch up to the wages in the middle.  Since the 1990s, the wage gap between the bottom and the median have remained steady.

2.) Since 1979, the distance between the wages at the top and the middle began to diverge.  In 1979, a worker in the 90th percentile earned 1.95 times what a median worker earned.  By 2013, this had grown to 2.42 times.  This is in contrast to the wage gap between the 10th percentile and the median which only grew until the mid-1980s.

3.) Over the past decade, the wage difference between the 90th percentile and the median expanded, however, the wages of college-educated workers grew only slightly faster than the wages of the non-college educated worker.  In other words, after 1995, the wage premium paid to college graduates grew at a slower rate than it did between 1979 and 1995.

4.) Between 1979 and 2007, the inflation-adjusted annual wages of the top one percent of earners rose by 156 percent, and by 362 percent for the top 0.1 percent.  This compares to 34.1 percent for wage earners in the 90th to 95th percentile and only a 17 percent average for all workers in the bottom 90 percent of earners.

Let's look at the author's explanations for their observations.

1.) The Wage Gap Between the Bottom and the Middle:  As I noted, the gap between these groups grew between 1979 and 1990 for one key reason; there was no action by Congress to raise the federal minimum wage during the period from 1981 until 1990 as shown on this chart:

This means that during the decade, the purchasing power of the minimum wage declined by about 30 percent.  An analysis shows that, in the case of the female workforce, roughly two-thirds of the growth in the wage gap between the 10th percentile and the median between 1979 and 2009 can be explained by trends in the minimum wage.  The reason that the wage gap between the bottom and the middle has remained relatively steady since the 1990s is the fact that the minimum wage grew in real terms by 14.6 percent between 1989 and 2000 and by a further 7.8 percent between 2000 and 2011.  The increases in the minimum wage from $3.80 in 1990 to $7.25 in 2009 kept the gap between the bottom 10 percent and the middle of the earning pack relatively consistent.

2.) The Wage Gap Between the Middle and the Top:  The long expansion of the wage gap between the middle and top earners stems from several policies; deunionization, foreign trade policies, higher levels of unemployment as a result of monetary and political policies and industrial deregulation.  All of these factors have had a strong negative impact on middle income wages.

Here is a graph showing the decline in union membership from 1930 to 2003:

The long decline in the power of unions has impacted middle income earners the most; this factor explains three-quarters of the expanding wage gap between those who are high school graduates and those who have college degrees over the years between 1978 and 2011.  Overall, deunionization can explain one-third of the growing wage inequality for men and one-fifth for women. 

Another factor that has impacted the wage gap between workers with a college education and those without has been the downward pressure on the wages of non-college educated workers by increased trade with less developed nations, particularly China,  as production has moved to offshore locations  As we can see on this graph, growth in the wages paid to middle income manufacturing workers since 1980 has been far lower than in the period from the late 1960s to the early 1980s and is now at its lowest level in two generations:

As well, wage growth at the middle have been pushed down by higher levels of unemployment over much of the last 40 years which can be attributed to two factors; the monetary policies of the Federal Reserve during the 1980s that increased the level of unemployment during the high interest rate period and the failure of governments to stimulate the economy through spending during recessions.  In the case of the Fed, its monetary policies are deliberately crafted to keep unemployment just high enough that there is no upward pressure on wages since higher wages push that dreaded inflation upwards and we all know how much central bankers hate inflation.

Industrial deregulation (i.e. airlines, inter-state busing, utilities) has also had a strong negative impact on wages for blue collar, middle income earners.  Between 1979 and 1988, about 7 percent of the rise in male wage inequality can be attributed to deregulation in various industries.

3.) The Wage Gap Between the Top One Percent and the Rest:  Most of the increase in wage inequality has taken place between the top one percent and the bottom 99 percent.  This is a result of two factors; the massive growth in the compensation of CEOs and the expansion of the very well-paying financial services sector.  Executives/managers and the financial sector accounted for 58 percent of the growth in the income share of the top one percent and 67 percent of the growth in the income share of the top 0.1 percent.  While we generally compare the wages of CEOs to their worker drones, it is interesting to see the growth in CEO compensation compared to the earnings of their 0.1 percent peers; in 1979, CEOs made 3.16 times what the top 0.1 percent earned, by 2010, this had risen to 4.70 times.  CEO earnings have become so massive that they form a subset of their own, even among the top 0.1 percent of all earners.

It is interesting to see that certain deliberately implemented policies by governments, the Federal Reserve and the corporate world have led to increasing wage inequality over the past 40 years.  Low and middle income earners have become increasingly powerless in their attempts to gain higher wages, resulting in the obvious fact that they are being left behind economically.