Inequality and institutions in the U.S.

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.

Comments

[Karl Smith]

I am not familiar with the bargaining power literature. However, from this post it seems like a maintained hypothesis is that there is significant economic rent to be split between capital and labor or the varying types of labor.

Is this true?

Or is it the case that the ratio of marginal to average productivity differs greatly between all workers and the top 99.5%.

If its the later then that is all the more evidence that what we need is a higher proportion of skilled workers in the work force.

[happyjuggler0]

Dani Rodrik,

What do you think of this article by Gary Becker and Kevin Murphy called "The Upside of Income Inequality"? http://www.american.com/archive/2007/may-june-magazine-contents/the-upside-of-income-inequality

Also, my understanding of the jump in earnings after the 1986 tax act that, amongst other things, took the top income tax rate from 50% to 28% is basically a mirage thanks to radically reduced use of "loopholes". Am I wrong? If not, then one needs to mentally, or actually, adjust the post-86 two year jump in the graph downwards back to trend, and go from there. It seems otherwise inexplicable how the wealthiest earners got a huge jump in income over that two year period and then settled to a relative stable trend again.

After that adjustment to the data, in conjunction with the Becker/Murphy data on returns to education, then I find it hard to believe the institutional hypothesis is as robust as your graph implies it might be.

[happyjuggler0]

By the way, the other jump during the bubble of the late 90's is surely due to that bubble. That isn't about bargaining power, it is about being in the right industry at the right time, with most workers in those dot coms getting stock options.

[Justin Rietz]

Is there a clear definition of what "institutions" means? It's hard to react to the article due to this ambiguity.

[paine]

are we talking about the same thing here

the job income of most of us
human commodities
vs the job income
of the top 150k of us
let alone
the top 15k of us

what's the rent going
to uniqueness ??

top of the heep
rewards
are a function (in part )
of the size of the heep

the rent accruing to
movie stars
may be
related to the stakes

and ceo types may have
merely finally more fully exploited
their insider bargaining power
their implicit profit sharing arrangements
regardless of performance incentives

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