From LSE USAPP
Slow wage growth since the Great Recession has been puzzling. As the economic recovery has clocked eight years of growth, unemployment has dropped, but real median wages have barely increased. Commentators have looked for explanations in everything from the rise of artificial intelligence to the scarring effects of the decade-old economic crisis. However, slow US wage growth has a longer history. Relative to the rapid growth marking the post-World War II period, median real wages have grown little since the 1970s (except for the economic boom of the late 1990s).
A growing body of research points to the decline in worker bargaining power as a core explanation. The long membership decline of labor unions has made it harder for workers to demand higher pay. In some local labor markets, increased market concentration has left few employers able to dictate terms to workers. The real federal minimum wage has slipped by around 30 percent from its peak in the late 1960s.
In recent research, I found another, more subtle reason why worker bargaining power has declined. When workers bargain over wages with employers, it is not just their clout vis-a-vis their immediate employer that matters. A combination of rising outsourcing and consolidation of large buyers has left more and more workers employed at companies dependent on a few outside buyers for sales revenue. These large buyers can effectively pressure suppliers to reduce wages: If buyers demand price and cost-cutting, often suppliers pass these pressures along to their workers.
These buyers do not see or meet their suppliers’ workers. This social distance means large buyers can ignore the fairness norms and social pressure that would otherwise raise workers’ pay. For example, when companies outsource janitorial or security workers, these outsourced workers face slower wage growth.