Explaining the Rising Wage-Productivity Gap of the 1980s: Effects of Declining Employment and Unionization

Abstract

This paper investigates causes of the dramatic increase in the wage-productivity gap—the divergence between the growth rates of aggregate productivity and real wages - in the post-1981 period. Using a two-step estimation procedure which incorporates three-digit industry wage regression coefficients into an aggregate wage growth identity equation, it finds that employment decline within unionized industries explains 18% of the post-1981 increase in the gap and that declining union ability to raise wages may explain as much as another 25%. Imports, on the other hand, do not appear to explain the gap independently of employment effects.

Are computers driving real wages down?

“…However, the drop in the unionization rate after 1973 accounts for about 40% of the slowdown in earnings growth on the basis of the growth accounting decomposition. These results are as robust as those reported in Freeman (1993), Ferguson (1996), or Gordon (1996).…”

“…Freeman (1993) argues that the decline in union power in the American economy and/or the decline in the real value of the minimum wage since the late 1960s, has removed the ''safety net" that was supporting the wage level of unskilled workers and allowed it to fall. Ferguson (1996), using three-digit industry level data on unionization, and aggregate time-series data on wages for the period 1978-1986, estimates that 18% of the increase in the gap between real wage growth and aggregate labor productivity growth can be ascribed to the decline in unionization, and that perhaps another 25% is due to the reduced ability of unions to raise wages. Gordon (1996) argues that the changes in these two factors are part of a broader range of institutional changes that occurred in the 1980s, which allowed American corporate mangers to exert increasing pressure on workers, partly in reaction to rising international competition.…”

Skills, Computerization, and Earnings in the Postwar U.S. Economy

“…There is also some evidence, though even weaker, that the decline in unionization, at least after 1973, has led to a reduction of earnings for non-supervisory workers. These results are not as strong as those reported by Freeman (1993), Ferguson (1996), or Gordon (1996).…”

“…Freeman (1993) argued that the decline of unions in the American economy and/or the decline in the real value of the minimum wage since the late 1960s removed the "safety net" supporting the wage level of unskilled workers, thereby allowing it to fall. Ferguson (1996), using three-digit industry level data on unionization and aggregate time series data on wages over the period [1978][1979][1980][1981][1982][1983][1984][1985][1986], estimated that 18 percent of the increase in the gap between real wage growth and aggregate labor productivity growth could be ascribed to the decline in unionization and perhaps another 25 percent to the declining ability of unions to raise wages. Gordon (1996) argued that the change in these two factors was part of a broader range of institutional changes in the 1980s in which American corporate mangers exerted increasing pressure on workers, partly in reaction to rising international competition.…”

Do Unions Affect Labor's Share of Income: Evidence Using Panel Data

“…If the increase in this gap is due in part to declining unionization, then there will be a positive relationship between unionization and labor's share of income. Ferguson (1996) finds that 18 percent of the growth in the wageproductivity gap after 1981 is explained by a decline in employment in unionized industries. Furthermore, he finds that another 25 percent of the growth in the wage-productivity gap was explained by a decline in the ability of unions to raise wages, a decline in union bargaining power.…”