The Wage Standard: What's Wrong in the Labor Market and How to Fix It

CHAPTER 1

A RAISE DEFERRED

If you're like most working Americans, I have some good news: You probably deserve a raise!

Now, you very well may share this sentiment—after all, most of us believe we're doing a decent job. But here's the kicker: In this case, chances are, you're right. You might wonder how I could possibly know that, since we've likely never met. I've never been to your workplace, and we've never shared a meal or even a coffee. So how can I be so sure?

Well, it has everything to do with my job. I study how people get paid, and why they earn what they earn. My work involves poring over mountains of data, analyzing how companies set wages, and examining the ripple effects of those decisions on employees, customers, and companies themselves. I've researched what happens when businesses compete to attract talent and what unfolds when governments step in to establish pay standards. A few years ago, I even advised the United Kingdom's government on setting its minimum wage policy. These experiences have given me a unique perspective on how companies—your employer included—figure out what to pay.

Here's the truth: Over the past half century, many working- and middle-class Americans have received paychecks smaller than they should be, even as our society has grown more prosperous. In this book, I aim to show you why—and, more importantly, how—we can change the labor market to work better for us all.

The Wage Standard tells the story of how we got here, the choices that led to this situation, and the steps we can take to give America a raise. Let's start with a thought experiment. Imagine we were time-traveling anthropologists transported back to 1980 to study the American economy. What would seem familiar? What would feel completely different?

Life in 1980 was, in many ways, a world apart from our own. If you wanted to buy a TV, you might head to a department store like Sears, where a 19-inch color RCA television would cost the equivalent of $1,700 today (as in 2023 dollars, after adjusting for inflation). These TVs were clunky and expensive, and they required manual adjustments for a decent picture. On your way home, you might drive to a supermarket called Alpha Beta—yes, that was a real chain—in a car without keyless ignition, built-in navigation, or even airbags, likely getting around sixteen miles per gallon. Inside the store, you'd find few pre-prepared meals, no exotic fruits out of season, and hardly any imported food products.

Fast-forward to today, and the differences are staggering, but the most notable is economic: America has become a far wealthier society than we were forty-five years ago. One way to measure this progress is by looking at how much American workers produce from an hour of work. After accounting for inflation in a manner consistent with how pay is measured, and subtracting the portion of output needed to replenish machinery, buildings, and so on, American workers' overall hourly productivity rose by 73 percent between 1980 and 2019. That statistic alone shows how much wealthier our society has become: We can produce over 1.7x as many goods and services in an hour as we did forty years ago. To put this in perspective, a 73 percent gap in current overall income is roughly the difference between America and countries like Estonia or Poland.

But how have wages grown since 1980? If everyone's wages had risen in step with overall productivity—and if the shares of income going to labor and capital had stayed the same—then real (inflation-adjusted) wages could have grown by as much as 73 percent between 1980 and 2019. But is that what actually happened? Or did wages evolve in a way that diverted much of the productivity gains to top earners and business owners rather than to most workers?

During our hypothetical trip back in time, imagine asking the employees at Alpha Beta how much they were making. To find out what their wages looked like—and how they've changed—we can turn to the Current Population Survey (CPS), a monthly federal survey based on household interviews. According to the CPS, the average hourly wage for retail workers in 1980 was about $14.60 in today's dollars. Fast-forward four decades: If we repeated the survey in 2019, just before the pandemic, we'd find that their average pay had risen to only about $17.40, a 19 percent increase in the real (or inflation-adjusted) wage.

In other words, while the broader economy has changed in dramatic, fundamental ways—becoming much richer overall—wages for many workers have remained much more suppressed. Even as economy-wide productivity climbed by 73 percent, the purchasing power of frontline retail workers grew much less—only by around 19 percent. That's a striking—and sobering—gap, reminding us that economic growth alone doesn't guarantee broad-based prosperity.