Download Inequality and Institutions in 20th Century America Frank Levy and

Inequality and Institutions in
20th Century America
Frank Levy and Peter Temin
Economic growth raises living
standard
• But a rising tide does not necessarily lift all
boats
– A rising GDP does not raise everyone’s
income
• Median real annual earning of male BAs
did not rise, 1989-2004.
– Real GDP per hour rose 44%
BPI fell after 1980
• Median wage / labor productivity
Where did the rest of GDP Go?
• Piketty and Saez (2003) found that the
income share of the top 1% rose
dramatically
• Half of income growth since 1980 went to
top 1%
• The rest appears to have gone to rich
workers below the top 1%
– Capital share did not rise
Previous research on wages
• Mostly focused on the benefits of
education
• Both HS and college graduate wages fell
relative to productivity
• Although the gap between them widened
BA/HS median wage rose
Figure 2
BA/HS Earnings Premium based on Bargaining Power Indices
2.5
2
1.5
BA/HS Earnings Premium - 35-44 Year Old
men
1
0.5
0
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Education is only part of the story
• We argue the declining BPI is due to a
change in institutions
• From the Treaty of Detroit
• To the Washington Consensus
• Specific stories (education, trade,
technology) are set within this overall
change
Plan of presentation
• Data analysis
• The Treaty of Detroit
• The end of the Treaty
– Reducing workers’ BPI
• Connecting our data and story
• Conclusions
BPI numerator
• Nominal median wages
• Multiplied by the ratio of supplements to
wages
– Only available for all workers
– May underestimate gaps between workers
– But will not affect trends
BPI denominator
• Nominal GDP
• Divided by persons engaged in production
• NB: capital share of GDP has no trend,
1960-2000
– Reallocation is within wages
– P&S report that high incomes are now in
earnings, not returns to capital
More detailed BPI for college grads
Figure 3
BPI based on FT Weekly Earnings for Men and Women BA's,
ages 25-34, 35-44, and 45-54
1.400
1.200
1.000
Male 45-54 BA
Male 35-44 BA
Male 25-34 BA
Female 45-54 BA
Female 35-44 BA
Female 25-34 BA
0.800
0.600
0.400
0.200
0.000
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
More detailed BPI for HS grads
Figure 4
BPI Based on FT Weekly Earnings for Men and Women HS Graduates,
ages 25-34, 35-44 and 45-54
1.000
0.900
0.800
0.700
Male 45-54 HS
Male 35-44 HS
Male 25-34 HS
Female 45-54 HS
Female 35-44 HS
Female 25-34 HS
0.600
0.500
0.400
0.300
0.200
0.100
0.000
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
BPI for all full-time workers and
income share of the top 1%
Figure 5
BPI based on all FT Workers + PS Top 1 percent share
0.700
18.00%
16.00%
0.600
14.00%
0.500
12.00%
0.400
10.00%
All FT Workers, Ages 21-65
P+S top 1 percent share
8.00%
0.300
6.00%
0.200
4.00%
0.100
2.00%
0.000
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
0.00%
2010
Institutions
• FDR did not know macroeconomics
• Made many changes in micro-economic
institutions
• NIRA (1933), replaced by NLRA (1935)
– Supreme Court rejected NIRA in 1935;
accepted NLRA in 1937
• Promoted unions and collective bargaining
• As did worker demands in the Depression
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19
42
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44
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86
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00
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02
20
04
Top income taxes also rose
Figure 7
Top Income Tax Bracket Rate
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Wartime changes
• Emphasis changed from wages to
production
• NWLB (1942) mediated
• Frozen wages, no strikes or lock-outs
• Benefits were not included as wages
• Exempted from taxes
• Legacy: procedures and people
Truman’s 1945 conference
• Invited only 36 business and labor leaders
• Signaled that government would be
involved
– “third man in the ring”
• Statement by Chairman of the US C. of C.
– “Labor unions are woven into our economic
pattern of American life, and collective
bargaining is a part of the democratic
process. I say recognize this fact not only
with our lips but with our hearts.”
Taft-Hartley Act, 1947
• Demonstrated business opposition to
unions
– Restricted some union practices
• But still kept most previous agreements
• Government began to edge out of the ring
• Unions turned to private bargains
Reuther and Wilson, 1948
• Wilson, CEO of GM, wanted labor peace
– Reuther recently had survived an attempted
assassination
• GM proposed a two-year contract with:
– COLA: cost of living adjustment
– AIF: annual improvement factor
• UAW would give GM control of production
– And labor assignment
Reuther’s attitude
• Reuther agreed to the plan and wage
formulas “only because most of those in
control of government and industry show
no signs of acting in the public interest.
They are enforcing a system of private
planning for private profit at public
expense” (Lichtenstein, 1995).
Renewal for 5 years
•
•
•
•
Ford agreed, added pensions
GM signed on readily
Chrysler agreed only after a long strike
Fortune called the UAW-GM contract the
Treaty of Detroit
Life under the Treaty of Detroit
•
•
•
•
•
Pattern bargaining
Relative wages moved together
Far more widely than the auto industry
Contract issues also moved together
But there was still some labormanagement conflict
Proportion of workers in work
stoppages
Figure 8
Persons Engaged in Work Stopages as Proportion of All Workers
0.050
0.045
0.040
0.035
0.030
0.025
0.020
0.015
0.010
0.005
19
47
19
50
19
53
19
56
19
59
19
62
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65
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68
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80
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01
20
04
0.000
Persons in Work Stopages as Percent of All
Workers
Benefits of the Treaty of Detroit
• Expanding middle class
– People could afford single homes, cars
• Enhanced upward mobility
– People lived better than their parents
• A safety net for industrial change
– Workers taking a pay cut from a lost job could
get back to original pay quickly
Stagflation
• The Vietnam War produced stagflation
• Not understood with 1970s macro
– Similar to FDR in the Depression
• Treated as microeconomics by Carter
– Appointed Fred Kahn (IO) as inflation czar
– Supported deregulation to fight inflation
Changing labor law
• AFL-CIO proposed minor changes to labor
law in 1978
– Reaffirming the Treaty of Detroit system
• Passed in the House by 257 to 163
• But filibustered in the Senate
– It would have passed a vote
• Employers were dead set against the bill
Reagan’s changes
• Supported Volcker (appointed by Carter)
– Accepted unemployment to stop inflation
• Reduced tax rates on top incomes
• Broke the strike of air controllers
– Even though they had supported him
Industrial fluctuations
• Declining dollar in the 1970s had helped
wages
– Rural Renaissance
• Rising dollar in the 1980s hurt workers
– Rust Belt
• Loss of postwar industries put unions
under siege
– Fluctuations made for rapid transitions
Washington Consensus
• Theory followed practice
• Argued that deregulation promoted
progress
– Everyone would benefit
• Inequality was the price of progress
– Could be offset by ex-post redistribution
But redistribution was never done
• Reagan allowed the minimum wage to fall
– A cause of inequality
• NLRB had been politicized by Eisenhower
– Reagan appointed a management consultant
– Decisions favored companies
• Work stoppages fell (shown earlier)
– Discouragement rather than conflict
Clinton continued the Washington
Consensus
•
•
•
•
Favored deregulation
Promoted globalization
International competition for jobs
Norms of equal wage gains faded, hurting
college graduates
• NB: Clinton did some ex-post redistribution
– Expanded the EITC
Connecting the Dots,I
• Domestic tests
• Treaty of Detroit affected NE conditions
– Its demise reduced North-South wage
differences
• Fewer strikes
– Days lost to work stoppages declined
– Not explicable by skill-biased tech. change
Connecting the Dots, II
• International tests
• US has low real-wage stability
– Stability of US real wages has been falling
• Countries with large unions grew as fast
– Wash. Consensus may be more “efficient”
– But it does not affect the rate of growth
• Country variation in inequality
– Inequality did not grow since 1980 in
Germany, France, Japan, etc.
Conclusions
• Institutions changed during times of stress
– But stress did not dictate the nature of
institutions
• Washington Consensus not inevitable
– Deregulation, low minimum wages, low taxes
for high incomes, and destruction of unions
• Could be changed if the will was there
– Will it take another disaster?