A new paper by Frank Levy and Peter Temin makes the important point that rising inequality in the U.S. is not just the result of the free play of market forces, but also of a changing institutional landscape which has altered the bargaining environment between workers and employers. Here is what they say:
Many economists attribute the average worker’s declining bargaining power to skill-biased technical change: technology, augmented by globalization, which heavily favors better educated workers. In this explanation, the broad distribution of productivity gains during the Golden Age is often assumed to be a free market outcome that can be restored by creating a more educated workforce.
We argue instead that the Golden Age relied on market outcomes strongly moderated by institutional factors. Following the literature on economic growth that emphasizes the role of institutions in economic outcomes, we argue that institutions and norms affect the distribution of economic rewards as well as their aggregate size. Our argument leads to an explanation of earnings levels and inequality in which skill-biased technical change, globalization and related factors function within an institutional framework. In our interpretation, the recent impacts of technology and trade have been amplified by the collapse of these institutions, a collapse which arose because economic forces led to a shift in the political environment over the 1970s and 1980s. If our interpretation is correct, no rebalancing of the labor force can restore a more equal distribution of productivity gains without government intervention and changes in private sector behavior.
Among other useful stuff in the paper is a "Bargaining Power Index" for labor between 1950 and 2005. This is defined as the ratio of median compensation (including fringe) to non-farm business sector labor productivity. The index shows steady decline trough this period, especially since the mid-1980s.