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A follow-up to the Autor post below this one. This is by David Howell, a professor of economics and public policy at The New School in New York City:
The links between institutions and shared growth, Washington Center for Equitable Growth: …since the 1980s, U.S. economic growth failed to produce enough jobs, and equally important, enough “decent jobs, ” which I defined as those paying adequate wages with adequate hours of work. …
What happened to shared growth? Most economists continue to explain the explosion of earnings inequality with conventional supply-and-demand stories, in which worker compensation is believed to accurately reflect the contribution workers make to production. Thus, in this view, CEOs and financiers have received skyrocketing salaries, especially since the mid-1990s, because they are now contributing dramatically more to their firms and to the economy as a whole.
Similarly, the bottom 90 percent have seen stagnant and falling wages because they’ve fallen behind in the “race between education and technology.” The computerization of the workplace requires greater cognitive skills, but workers have not kept up, as indicated by the slowdown in college graduation rates. Assuming (nearly) perfectly competitive markets, the explosion in wage inequality in this view must reflect a similarly explosive increase in skill mismatch (too many low skill workers, too few high skill ones).
Such arguments leave little or no room for labor market institutions and public policies in the determining changes in the distribution of earnings up and down the income ladder. An alternative view is that institutionally-driven bargaining power is a critical piece of the story, whether it is the noncompetitive “rents” earned by top managers and financiers, or the collapsing power of hourly wage employees. As Thomas Piketty argues in “Capital in the Twenty-First Century:”
In order to understand the dynamics of wage inequality we must introduce other factors, such as the institutions and rules that govern the operations of the labor market in each society [and explain] the diversity of wage distributions we observe in different countries at different times.
All rich countries face challenges from technology and globalization, but only the United States and the United Kingdom show inequality rising to extreme levels.
In order to understand wage inequality and unshared productivity growth in the United States, we must take a much closer look at the ways in which institutions affect labor market outcomes. …