Dani Rodrik’s blog features a paper by MIT economists Frank Levy and Peter Temin that argues that rising income inequality in the US isn’t simply the result of market forces, but also institutional behavior and prevailing social values:
Many economists attribute the average worker’s declining bargaining power to skill-biased technical change: technology, augmented by globalization, which heavily favors better educated workers. In this explanation, the broad distribution of productivity gains during the Golden Age is often assumed to be a free market outcome that can be restored by creating a more educated workforce.
We argue instead that the Golden Age relied on market outcomes strongly moderated by institutional factors. Following the literature on economic growth that emphasizes the role of institutions in economic outcomes, we argue that institutions and norms affect the distribution of economic rewards as well as their aggregate size. Our argument leads to an explanation of earnings levels and inequality in which skill-biased technical change, globalization and related factors function within an institutional framework. In our interpretation, the recent impacts of technology and trade have been amplified by the collapse of these institutions, a collapse which arose because economic forces led to a shift in the political environment over the 1970s and 1980s. If our interpretation is correct, no rebalancing of the labor force can restore a more equal distribution of productivity gains without government intervention and changes in private sector behavior.
The paper combines some novel analyses with a Depression-to-present-day narrative of evolving labor-business-government relationships (one nice touch is a comparison of starting salaries at Cravath versus that of average graduate degree holders to illustrate the rise of “winner take all” inequalities).
Government also gave signals through tax structures and other mechanisms of their view of the appropriate level of labor compensation. For example, when Kennedy implemented tax cuts, the Council of Economic Advisers announced wage and price guidelines that indicated that labor should share pro rata.
I strongly recommend you read it; it is well written and provides useful historical perspective.
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This article aligns well with some of my recent thinking, toying with the question: “Why aren’t productivity gains translating into higher wages?”
Post-Keynesian notions of “absolute advantage” (instead of “comparative advantage”) in any near-term sense, of China and India for example, make it hard to see how we here in the US are to compete anytime soon.
Meanwhile our dollar continues to slide, which eventually will correct the situation by bringing down American labor to world standards, but not without huge dislocations. So much for the so-called “Washington Consensus”. Post-Keynesians have been blasting away at “Washington Consensus” for quite some time. But few have been listening.
In addition, technological advances are displacing and destroying jobs at light speed (creative destruction) with computerization (CAD’s, accounting systems and legal systems, etc.), computerized robotics and networked communication systems.
This is, of course, the second half of the Levy-Temin notion that we’ve seen a “shift of income from labor to capital”, as a result of declining bargaining power of “the average worker”. Yes the bargaining power has diminished, but the whole idea of an “average worker” (traditional laborer, etc.) seems to be vanishing.
I see sea changes coming in how we address political economy in the future, likely a post-crash future. Near-term, I see troubled waters ahead re: markets and more, as frothy market conditions move around the world.
Could this be the end of Adam Smith’s dream of “free market” capitalism? Could this be the beginning of awareness that what we have (and have had for some time) resembles more Robert Heilbroner’s “Capitalism as a Regime” (from Behind the Veil of Economics). Might one do well to better understand David Korten’s When Corporations Rule the World or other studies of oligarchy?
As to education as a “fix”. Let’s just say, “No Way!” It might be part of a solution, but education, by itself is no panacea.