New ‘Social Compact’ needed to combat wage stagnation

Without such a policy, most of the gains from growth will continue to flow to the country’s richest, while the average American’s income stagnates.

Authored by MIT professors Thomas Kochan and Frank Levy alongside other EPRN members, the report describes the breakdown in the U.S. economic structure over the past few decades, and identifies policies that will be necessary to drive the current economy and workforce forward.

According to the report, general upward mobility — the heart of the American Dream, in which each generation lives better than the last — is increasingly under threat for many Americans. As illustrated by the paper’s earnings statistics, the average 40-year-old man with a high school diploma earned more in 1980, adjusted for inflation, than a similar man earned in 2009. At the same time, top incomes grew sharply and the highest-earning 1 percent of households — those who earn more than $370,000 annually — now take home about 21 percent of the nation’s total income.

These data stand in marked contrast to the mid-20th century, in which the economy enjoyed a boom that trickled down to working and middle-class Americans thanks to post-Depression New Deal legislation and other economic policies that characterized the era.

“In the decades after World War II, the American middle class expanded dramatically because most workers shared in the gains from economic growth,” says Thomas Kochan, George Maverick Bunker Professor of Management at the Sloan School of Management. “American workers could count on regular raises because wages rose with increases in productivity.”

“As the link between productivity and wages broke down, families and the government turned to borrowing and credit to support living standards,” says Frank Levy, MIT professor of urban economics. “These options are no longer sustainable.”

The original postwar Social Compact was sustained by a combination of economic growth, union bargaining power, government policies and enforcement, and organizational practices that reinforced wage norms based on productivity. Though not conflict-free, the compact helped shape three decades over which the income of the average family doubled. However, it unraveled in the face of 1970s inflation, imbalances created by technology and globalization, the decline of unions and collective bargaining, deregulation, and the nation’s emphasis on financial engineering at the expense of producing goods and services.

“What is needed is a new Social Compact, not in the mirror image or with the same institutions of the original Compact, but with policies, institutions and organizational practices suited to the current economy and workforce,” Kochan said.

It will take a similar system of public and private actions to lay the foundation for a new Social Compact, and to sustain it long enough to make up for the past 30 years of wage stagnation. Kochan and Levy believe the ideas suggested in the EPRN paper will serve as good starting points for a national dialogue about how to get the economy working again for the majority of workers and their families.

The full text of “Addressing the Problem of Wage Stagnation” is posted on the Employment Policy Research Network (EPRN) website.

EPRN is a startup project of 120 researchers from 50 universities in economics, labor, management, employment and sociology. The EPRN web site is a project of the Labor and Employment Relations Association (LERA), a national not-for-profit, non-partisan organization that includes labor, management and “neutrals.”  Grants from the Rockefeller and Russell Sage foundations have supported the EPRN 2010 startup.

contact: Marta Buczek, MIT News Office
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