JOBS FOR ALL COALITION
13 © February 1998
The Collapse of Low-Skill Wages:
Technological Change or Institutional
David R. Howell, Assoc. Prof.
and Chair, Urban Policy Program, Robert J. Milano Graduate School,
The New School for Social Research
Wage Decline and Inequality Increase
No recent development in the US labor market has been more dramatic
and troubling than the collapse in the buying power of workers
paychecks. In 1973, after rising for almost three decades, average
real (inflation-adjusted) earnings of US workers began to decline.
Average hourly earnings of production and nonsupervisory workers
fell by 15 percent, from $13.89 in 1973 to $11.82 in 1996 (both
in 1996$).1 In other words, average workers earn less now than
their counterparts did several decades ago. Though wages
now are rising very slowly, they have yet to return to 1980s levels,
much less those of the 1970s.
To understand what caused this drop, it is important to recognize
that the steepest fall in earnings took place in the 1980s. At
the same time as real wages plummeted, earnings inequality rose
spectacularly. Especially notable is the widening wage gap between
highly and poorly educated male workers. Two wage trends in the
1980's stand out: the real earnings of college-educated women
grew rapidly (up 14 percent), and the earnings of poorly educated
men declined substantially (down 11 percent for those with just
a high school diploma and 20 percent for those without). The real
earnings of less-educated men also fell in the 1970s, but not
as much as in the 1980s. In that decade, the percentage
declines were three to four times larger; equally significant,
average earnings of college-educated men rose only modestly.
What do these data mean? They mean that the growth of earnings
inequality among men was due mainly to the sharp drop in the earnings
of less-educated workers rather than to increases for college-educated
More important, during the 1980s, the proportion of less-educated
workers able to rely on wages to keep their families out of poverty
tumbled. Between 1979 and 1989, the fraction of employed male
high school graduates who earned less than the poverty line for
a family of four rose from 8 to 15 percent. For men with only
some high school, these rates rose from 13 to 30 percent. Minorities
fared even worse: among the employed, 25 percent of black men
and 41 percent of Hispanic men without a high school diploma earned
incomes below the poverty line in 1989--far more than in 1979.2
In the 1980s, the number of college graduates increased
rapidly, and their growth outstripped the creation of jobs requiring
a college education. Thats a reasonable explanation of why
wages of college graduates increased so modestly in the 1980s.
But what about the collapse of earnings at the bottom of the ladder?
That is almost universally attributed simply to a decline in demand
for low-skilled workers. The claim is that there is a growing
mismatch between the skills required by firms and the skills of
Skills mismatch: technology and trade
Most economists blame the presumed mismatch of skills on technological
change in the workplace.3 Some also argue--though it is controversial--that
there is a surplus of low-skilled workers because competition
from low-wage countries has eliminated many unskilled domestic
jobs. To some extent, these explanations are popular because they
seem to be consistent with reality. We can see that computers,
which are assumed to require upgraded skills (though they sometimes
downgrade skills) are now used in most workplaces. And every shopper
knows about the huge influx of imports of consumer goods.
There is another reason why technology and trade are such appealing
explanations: they fit in nicely with the simple, conventional
view of the labor market.4 According to this textbook analysis,
market forces--the supply and demand for labor--determine wages.
Suppose, for example, there is no change in the supply of less-skilled
workers and the demand for them has been driven down by new technology,
which has created jobs for which they cannot qualify. Suppose,
too, that cheap imports have destroyed many of their usual jobs.
Using this traditional interpretation, both wages and employment
of low-skilled workers would be expected to fall. Their wages
would also be expected to decline relative to those of skilled
workers, who can take the jobs created by the new technology.
What is the main implication of this analysis? It is that
training and upgrading of skills are the only way to raise the
earnings of low-skilled workers, who otherwise are doomed to low
wages. From this perspective, nothing else needs fixing--like
government policies that favor employers, curbs on anti-union
practices, raising minimum wages, and so on.
On the surface, the skill-mismatch explanation seems plausible.
There is, however, little evidence to support it. The mismatch
assumption leads us to expect a sharp reduction in the number
of low-skill (and low-wage) jobs, especially as the supply of
low-skill workers has also declined. That is, the share of the
labor force with less than a high-school education has diminished.
Similarly, the greater demand for high-skill workers should lead
to an increase in high-skill (high-wage) jobs. If both shifts
occur simultaneously, as the skill-shift theorists contend, we
should observe rising joblessness and declining shares of the
low-skill workers in the labor force. But what we actually observe
is quite different. After 1982, the skill distribution is quite
stable. In fact, the low-wage share of employment increased sharply
between 1979 and 1989.
What actually happened to low-skilled workers?
The simple textbook model of the labor market, which lies behind
the skill mismatch explanation, is not the whole story. Wages
are set not only by market forces. Labors bargaining power
is important. Wage-setting institutions (like unions and minimum
wages) do matter. So there is an alternative explanation
for the collapse in wages for the low-skilled--one that puts at
center stage the new confrontational approach adopted by many
employers in the 1980's and a simultaneous shift by government
toward laissez-faire public policies.
The political environment is one in which government policies
have become far more favorable to employers and hostile to workers.
Also, spurred by the success of confrontational labor practices
by some highly visible large firms in trade-sensitive industries,
employers abandoned long-accepted practices
designed to shield workers from the full force of labor market
competition. "Effective" management became synonymous
with "low-road" wage and employment policies aimed at
reducing short-run labor costs. These included challenging the
legitimacy of labor unions and collective bargaining, demanding
wage and benefit concessions, firing strikers and hiring permanent
replacements, relocating plants to low wage sites, outsourcing
to low-wage firms, and relying more on low-wage part-time and
These employment practices were encouraged by Wall Street, which
has put increasing pressure on management to maximize short-run
profits. Government policy greatly facilitated the low-road strategy
by placing the priority on fighting inflation by creating unemployment;
deregulating key industries; allowing
unemployment insurance levels and coverage to erode; weakening
the enforcement of labor laws and anti-trust enforcement; and
by allowing the value of the minimum wage to decline sharply,
thereby undermining the wage floor that had propped up the entire
lower end of the wage structure. The federal
government itself gave the signal that it was respectable to fire
striking workers and hire permanent replacements when President
Reagan fired striking members of the air traffic controllers
union in 1981. And the Reagan recession was the worst since the
Great Depression. It sent annual unemployment soaring
to nearly 10 percent in 1982 and 1983 and 7 percent or above through
1986. What could be a more congenial environment for weakening
unions and forcing workers to accept wage cuts or contingent work?
Recent empirical studies strongly support this alternative explanation
of the wage collapse. So does the anecdotal evidence on wage concessions,
outsourcing, plant relocation, and the use of contingent and part-time
workers. To understand the wage collapse and counter it, these
direct causes must be seen in the larger context of a new, more
competitive business environment. Political and ideological shifts
have lifted the constraints on "low-road" management
strategies whose aim is to reduce costs by beating down labor
rather than by creating high-performance workplaces.
These policy shifts reflected more than just changing business
conditions. Other rich nations faced similar economic challenges
without dismantling institutions designed to protect the living
standards of low-skill workers. The distinguishing feature of
the US wage collapse is in the political, ideological, and institutional
realms. Other nations have chosen to operate under different labor
market rules. As noted labor economist Richard Freeman points
out, "the United States represents the decentralized extreme
in wage setting,"5 and decentralized bargaining is generally
associated with larger wage differences among workers. Still,
since the late 1970s, political and management choices have been
made to move further in this decentralized direction. Wage-setting
institutions that had once provided some protection from the forces
of labor market competition have been undermined or dismantled.
It was no coincidence that among developed countries, only Great
Britain, also relatively decentralized, experienced a comparable
increase in inequality. But the UK experience was different in
one crucial respect: real earnings among the least skilled increased.
The collapse of wages for those with low educational attainment
was a uniquely American phenomenon.
Few would, or should, oppose public sector efforts to raise
the skill level of the workforce, but worker skills have had little
to do with the startling growth in poverty-wage jobs, the drop
in real earnings, and the growth of inequality in the 1980s. We
need to improve our education and training system, but this will
by itself, have much effect on the distribution of earnings, and
certainly not soon. Besides, most jobs will continue to require
less than a college degree, and a labor market that increasingly
offers poverty-wage jobs to these workers provides them with little
means to invest in education and training.
What can we do?
An effective public policy response must address the roots of
the earnings problem: we have relied too much on market forces
to set wages and employment conditions. We need to reestablish
and improve the wage-setting institutions that sheltered low-skill
workers from the worst excesses of labor-market competition and
encouraged management-labor cooperation. While the details of
such a program require careful debate, the direction to take is
clear. A good place to start would be strengthening the ability
of workers to bargain collectively and reversing the steep decline
in the value of the minimum wage since the 1960's. Though collective
bargaining agreements set wage and employment conditions for 18
percent of American workers, they cover more than 80 percent of
workers in Sweden, Germany, Belgium, France, and Austria.6 The
recent increase in the minimum wage will restore it to only 74
percent of its value in 1968. The minimum wage in France is set
at 60 percent of the average wage. This would imply a minimum
wage for the United States of over $7 an hour, roughly its peak
value in real terms, achieved in 1968.
We also need policies that will put us on the road to full employment.
Unions, which have begun an organizing campaign to reverse their
membership erosion, can make greater gains when labor markets
are tight. Sustained tight labor markets will also help push up
wages. Recent welfare "reform" works in the
other direction, by increasing the supply of low-skilled workers
without increasing the supply of jobs, and by workfare programs
which threaten the jobs and wages of regular workers, especially
those in jobs requiring only modest education.7
Faced with an increasingly competitive world, US policy makers
and employers made choices that reshaped the way our labor market
works. Low-skill workers have paid the price for those choices
in the form of sharply declining living standards while high-income
consumers, some highly skilled workers, and
stockholders have benefited. This massive redistribution of economic
well-being cannot be maintained for long: it undermines living
standards and morale and, hence, the productivity of the workforce.
It also undermines our ability to prepare the next generation
for productive work and citizenship. The low-road of wage cuts
and employment insecurity will not create a high-performance economy
and it is not the path being taken by most of our industrialized
competitors. It is time to reclaim control over the way our labor
markets function. Real full employment is needed and that means
decent wages as well as jobs for all.
*This article is adapted from Levy Economics Institute Policy
Brief No. 29, 1997.
1. Average hourly earnings for nonsupervisory
workers (Economic Report of the President 1997, Table B-45) were
deflated by the CPI-U index adjusted to 1982=100 (Table B-58).
Average weekly earnings declined more steeply: by 7.5
percent between 1973 and 1979, 11.0 percent between 1979 and 1990,
and another 1.4 percent from 1990 to 1996 (Table
2. Gregory Acs and Sheldon Danziger, "Educational
Attainment, Industrial Structure, and Male Earnings Through the
1980s," The Journal of Human Resources 28: 3 (1993), 618-648.
3. John Bound and George Johnson., "Changes
in the Structure of Wages in the 1980s: An Evaluation of Alternative
Explanations," American Economic Review 82: 3 (June 1992),
4. Steve J. Davis and John Haltiwanger, "Wage
Dispersion Between and Within US Manufacturing Plants, 1963-86,"
Brookings Papers on Economic Activity: Macroeconomics 1 (1991):
5. "How Labor Fares in Advanced Economies,"
in Freeman, ed., Working Under Different Rules, New York: Russell
Sage Foundation, 1994.
6. Freeman, "Labor Market Institutions and
Earnings Inequality," Boston Federal Reserve Bank, Nov. 17,
7. See the Coalitions welfare packet.
Card, David, Francis Kramarz and Thomas Lemieux.
1995. "Changes in the Relative Structure of Wages and Employment:
A Comparison of the United States, Canada and France," Working
Paper #355, Industrial Relations Section, Princeton University
Karoly, Lynn A. 1994. "The Trend in Inequality
Among Families, Individuals, and Workers in the United States:
A Twenty-Five Year Perspective." In Danziger and Gottschalk,
eds., Uneven Tides: Rising Inequality in America (New York: Russell
June Zaccone, Economics (Emer.), Hofstra University and Helen
Lachs Ginsburg,, Economics (Emer.), Brooklyn College, CUNY