Wage boards can mitigate market failures on inequality

Wage boards can mitigate market failures on inequality
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During the past 40 years, the United States has seen a tremendous rise in income inequality. While globalization and technological change likely played a role, labor market institutions have been important contributors to these trends — especially the decline of unions.

Taken together, the weight of evidence suggests that we have moved from a negotiated labor market anchored by collective bargaining to one where employers increasingly have power to set wages subject to limited market discipline.

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The share of income going to workers has declined, and broad-based wage growth seems to require tight labor markets that happen for a few years every generation — if we are lucky. 

While higher minimum wages can help those at the very bottom, we lack tools to raise wages for the middle. One solution is to shape the wage structure and set multiple minimum pay standards by sector and occupation.

This pay setting could be done using a wage board that consults with stakeholders, such as business and worker representatives and elected representatives.

The use of sector and occupation boards allows particular job types to have minimum pay standards. This would allow raising wages not just for those at the very bottom but also for those at the middle of the distribution. 

None of this is radically different from what is done in most other advanced capitalist countries. In most European countries, pay standards are set by sectoral bargaining. And as the Australian experience demonstrates, sectoral standards can also be instituted using a wage board system.

In Australia, around 36 percent of the workforce is covered by collective bargaining contracts, while another 23 percent is covered by the wage board system known as “Modern Awards” set by a federal tribunal whose members are appointed by the government to serve until the age of 65.

Most of these are by industry although some (e.g., nurses or pilots) are by occupation. There are 122 such awards, and within each there are a host of wage rates based on skill-requirements or experience.

While most years the minimum pay rates move in tandem, some years the board raises wages at the bottom more to achieve greater pay compression. 

While it is difficult to definitively assess the impact of the Australian system of labor standards, overall trends suggest they are working. Over the past several decades, the median wage in Australia has kept up with the average wage much more than in the U.S., where the median has stagnated since the 1980s.

This evidence is consistent with the view that the labor market helped ensure inclusive prosperity and put a brake on the growth in wage inequality in Australia when compared to the U.S. experience of de-unionization and erosion of wage standards. 

In order to institute wage boards at the national level in the U.S., federal law would need to be changed. In the meantime, at least five states (Arizona, Colorado, California, New Jersey, and New York) already have legislation on the books that allows for constituting wage boards by industry or occupation.

However, these boards have been used infrequently. State experimentation with wage boards to set standards higher up in the wage distribution — as in the Australian case — could play a possibly useful role in mitigating wage stagnation and inequality.

Other states like Massachusetts can use similar strategies to raise middle-class pay.

In a recent study, I evaluated the likely effects of imposing industry-by-occupation standards for different regions in the U.S. The findings were encouraging and suggest that we can expect substantial wage gains for the bottom and middle part of the the wage distribution.

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Reasonable standards can raise median wages by 10 to 15 percent and help it grow with the economy. In other words, wage boards are much better positioned to deliver broad-based gains to middle-wage jobs than leaving wages solely to the workings of the market.

We desperately need more arrows in our quiver to tackle income inequality and wage stagnation. The politics in Washington may be broken, but states can act today to help working and middle-class families. The choice is ours to make. 

Arindrajit Dube is professor of Economics at UMass Amherst who has conducted extensive research on minimum wages, inequality, and structure of the labor market. He is a research associate at the National Bureau of Economics Research, and a founding member of Economists for Inclusive Prosperity.