In many advanced economies, wages have stagnated and labor’s share of the country's income has been diminishing. This has resulted in growing inequality and concern about the future of economic growth as it is consumer purchasing ability that drives the economy (as they stimulate demand). The reason has been usually attributed to globalization and technological progress. However, they often ignore the significance of institutional factors. In this article, we will explore other factors of importance.
The main reason cited for the stagnation of wages is most usually market forces. The literature mentions the dual tendency of economies in this technological age in which there is a limited amount of work in high productivity/ high wage industries, and plentiful work in low productivity/ low wage industries. Owing to globalization and automation, market mechanisms have made labor, especially that of low skill, very available and in abundance (automation and outsourcing). Both factors lead to stagnating wages and a diminishing labor share of the country's income. However, this doesn’t seem to consider that high-wage work was always limited and that historically, as shown by Mishel and Biven (2017), automation in the past has not resulted in stagnating or decreasing real wages but, quite the opposite, it led to better conditions and higher wages.
As such, to account for stagnating wages, we have to consider institutional factors. The bargaining strength of employers and employees plays a more significant role than is often discussed. Since 1970, there has been a push for laws against union and labor rights laws. This is mentioned in a study conducted by Stansbury and Summer. They state that “changes in policy, norms, and institutions” lead to a “legal and political environment … in favor of shareholders and against workers.” The power of unions to strike and other activities were diminished.
Furthermore, there have been changes in business organization structures since 1990 as analyzed by Weil (2014). Managers were more pressured to produce value for shareholders and such then unconventional methods as outsourcing were used. Both factors have diminished the bargaining strength of workers to determine wages. The usefulness of unions has been repeatedly shown. For instance, unions often lead to wage premiums ranging from 10-to 20% (Walters and Mishel, 2003), and “For median…does the writer mean ‘menial’…. workers, declining unionization translates to a loss of $1.56 per hour worked,” (Mishel, 2021).
In addition, an example that clearly demonstrates the role of bargaining strength in determining wages is when a corporation is the only buyer of labor (for instance, Amazon). Due to it being the only buyer of labor, they have greater bargaining strength in determining the wage leading to its decrease (What Amazon does, 2018). …Is this a book or what is it?.... This clearly shows that the balance of bargaining strength plays a role in determining wages.
It seems this push for the narrative that inequality caused by real wage stagnation is primarily due to market dynamics rather than the political and social institutions - human factors- is obstructing the development of effective policy. Policies allowing workers more strength, for instance, allowing unions more power, wage transparency, and safety nets, will help solve the issue.