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Obstacles to Middle-Class Pay Growth in Rich Democracies

Lane Kenworthy (University of California-San Diego)

Capitalism has been the engine of unparalleled increases not only in economic output but also in living standards for ordinary people. Even when the rich get a disproportionate share of the proceeds of economic growth, there has tended to be enough "trickle down" that households in the broad middle class and at the bottom see their well-being rise significantly. For those in the middle, this happens partly via government transfers and services but primarily through more jobs and rising wages.

However, capitalism creates incentives for firms to try to minimize labor costs. And since the late 1970s, a variety of developments — computers and robots, globalization, heightened product market competition, the turn to a "shareholder value" orientation in corporate governance, and looser labor markets — have increased firms' incentive to resist wage increases and enhanced their leverage vis-à-vis workers. In some of the affluent democratic nations, especially the United States, the result has been stagnant wages and very limited increases in household incomes despite healthy economic growth.

Is there a solution? I examine various possibilities: faster economic growth, increased education, revitalization of manufacturing, reduced trade and immigration, stronger labor unions, board-level employee participation (codetermination), tight labor markets, minimum wages, profit sharing, and employment-conditional earnings subsidies.

Lane Kenworthy is professor of sociology and Yankelovich Chair in Social Thought at the University of California-San Diego. He is the author of Would Democratic Socialism Be Better? (2022), Social Democratic Capitalism (2020), The Good Society (online), How Big Should Our Government Be? (2016, with Jon Bakija, Peter Lindert, and Jeff Madrick), Social Democratic America (2014), Progress for the Poor (2011), Jobs with Equality (2008), Egalitarian Capitalism (2004), and In Search of National Economic Success (1995).

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