Now consider the US case. Two economists, Claudia Goldin and Lawrence Katz, systematically compared the following two evolutions in the period 1890–2005: on the one hand the wage gap between workers who graduated from college and those who had only a high school diploma, and on the other the rate of growth of the number of college degrees. For Goldin and Katz, the conclusion is stark: the two curves move in opposite directions. In particular, the wage gap, which decreased fairly regularly until the 1970s, suddenly begins to widen in the 1980s, at precisely the moment when for the first time the number of college graduates stops growing, or at any rate grows much more slowly than before.1 Goldin and Katz have no doubt that increased wage inequality in the United States is due to a failure to invest sufficiently in higher education. More precisely, too many people failed to receive the necessary training, in part because families could not afford the high cost of tuition. In order to reverse this trend, they conclude, the United States should invest heavily in education so that as many people as possible can attend college.
The lessons of French and US experience thus point in the same direction. In the long run, the best way to reduce inequalities with respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education. If the purchasing power of wages increased fivefold in a century, it was because the improved skills of the workforce, coupled with technological progress, increased output per head fivefold. Over the long run, education and technology are the decisive determinants of wage levels.
By the same token, if the United States (or France) invested more heavily in high-quality professional training and advanced educational opportunities and allowed broader segments of the population to have access to them, this would surely be the most effective way of increasing wages at the low to medium end of the scale and decreasing the upper decile’s share of both wages and total income. All signs are that the Scandinavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive.2 The question of how to pay for education, and in particular how to pay for higher education, is everywhere one of the key issues of the twenty-first century. Unfortunately, the data available for addressing issues of educational cost and access in the United States and France are extremely limited. Both countries attach a great deal of importance to the central role of schools and vocational training in fostering social mobility, yet theoretical discussion of educational issues and of meritocracy is often out of touch with reality, and in particular with the fact that the most prestigious schools tend to favor students from privileged social backgrounds. I will come back to this point in Chapter 13.
The Limits of the Theoretical Model: The Role of Institutions
Education and technology definitely play a crucial role in the long run. This theoretical model, based on the idea that a worker’s wage is always perfectly determined by her marginal productivity and thus primarily by skill, is nevertheless limited in a number of ways. Leave aside the fact that it is not always enough to invest in training: existing technology is sometimes unable to make use of the available supply of skills. Leave aside, too, the fact that this theoretical model, at least in its most simplistic form, embodies a far too instrumental and utilitarian view of training. The main purpose of the health sector is not to provide other sectors with workers in good health. By the same token, the main purpose of the educational sector is not to prepare students to take up an occupation in some other sector of the economy. In all human societies, health and education have an intrinsic value: the ability to enjoy years of good health, like the ability to acquire knowledge and culture, is one of the fundamental purposes of civilization.3 We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others. Everyone would be by turns teacher or student, writer or reader, actor or spectator, doctor or patient. As noted in Chapter 2, we are to some extent already on this path: a characteristic feature of modern growth is the considerable share of both output and employment devoted to education, culture, and medicine.
While awaiting the ideal society of the future, let us try to gain a better understanding of wage inequality today. In this narrower context, the main problem with the theory of marginal productivity is quite simply that it fails to explain the diversity of the wage distributions we observe in different countries at different times. In order to understand the dynamics of wage inequality, we must introduce other factors, such as the institutions and rules that govern the operation of the labor market in each society. To an even greater extent than other markets, the labor market is not a mathematical abstraction whose workings are entirely determined by natural and immutable mechanisms and implacable technological forces: it is a social construct based on specific rules and compromises.
In the previous chapter I noted several important episodes of compression and expansion of wage hierarchies that are very difficult to explain solely in terms of the supply of and demand for various skills. For example, the compression of wage inequalities that occurred in both France and the United States during World Wars I and II was the result of negotiations over wage scales in both the public and private sectors, in which specific institutions such as the National War Labor Board (created expressly for the purpose) played a central role. I also called attention to the importance of changes in the minimum wage for explaining the evolution of wage inequalities in France since 1950, with three clearly identified subperiods: 1950–1968, during which the minimum wage was rarely adjusted and the wage hierarchy expanded; 1968–1983, during which the minimum wage rose very rapidly and wage inequalities decreased sharply; and finally 1983–2012, during which the minimum wage increased relatively slowly and the wage hierarchy tended to expand.4 At the beginning of 2013, the minimum wage in France stood at 9.43 euros per hour.
FIGURE 9.1. Minimum wage in France and the United States, 1950–2013
Expressed in 2013 purchasing power, the hourly minimum wage rose from $3.80 to $7.30 between 1950 and 2013 in the United States, and from €2.10 to €9.40 in France.
Sources and series: see piketty.pse.ens.fr/capital21c.
In the United States, a federal minimum wage was introduced in 1933, nearly twenty years earlier than in France.5 As in France, changes in the minimum wage played an important role in the evolution of wage inequalities in the United States. It is striking to learn that in terms of purchasing power, the minimum wage reached its maximum level nearly half a century ago, in 1969, at $1.60 an hour (or $10.10 in 2013 dollars, taking account of inflation between 1968 and 2013), at a time when the unemployment rate was below 4 percent. From 1980 to 1990, under the presidents Ronald Reagan and George H. W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008. At the beginning of 2013 it stood at $7.25 an hour, or barely 6 euros, which is a third below the French minimum wage, the opposite of the situation that obtained in the early 1980s (see Figure 9.1).6 President Obama, in his State of the Union address in February 2013, announced his intention to raise the minimum wage to about $9 an hour for the period 2013–2016.7
Inequalities at the bottom of the US wage distribution have closely followed the evolution of the minimum wage: the gap between the bottom 10 percent of the wage distribution and the overall average wage widened significantly in the 1980s, then narrowed in the 1990s, and finally increased again in the 2000s. Nevertheless, inequalities at the top of the distribution—for example, the share of total wages going to the top 10 percent—increased steadily throughout this period. Clearly, the minimum wage has an impact at the bottom of the d
istribution but much less influence at the top, where other forces are at work.
Wage Scales and the Minimum Wage
There is no doubt that the minimum wage plays an essential role in the formation and evolution of wage inequalities, as the French and US experiences show. Each country has its own history in this regard and its own peculiar chronology. There is nothing surprising about that: labor market regulations depend on each society’s perceptions and norms of social justice and are intimately related to each country’s social, political, and cultural history. The United States used the minimum wage to increase lower-end wages in the 1950s and 1960s but abandoned this tool in the 1970s. In France, it was exactly the opposite: the minimum wage was frozen in the 1950s and 1960s but was used much more often in the 1970s. Figure 9.1 illustrates this striking contrast.
It would be easy to multiply examples from other countries. Britain introduced a minimum wage in 1999, at a level between the United States and France: in 2013 it was £6.19 (or about 8.05 euros).8 Germany and Sweden have chosen to do without minimum wages at the national level, leaving it to trade unions to negotiate not only minimums but also complete wage schedules with employers in each branch of industry. In practice, the minimum wage in both countries was about 10 euros an hour in 2013 in many branches (and therefore higher than in countries with a national minimum wage). But minimum pay can be markedly lower in sectors that are relatively unregulated or underunionized. In order to set a common floor, Germany is contemplating the introduction of a minimum wage in 2013–2014. This is not the place to write a detailed history of minimum wages and wage schedules around the world or to discuss their impact on wage inequality. My goal here is more modest: simply to indicate briefly what general principles can be used to analyze the institutions that regulate wage setting everywhere.
What is in fact the justification for minimum wages and rigid wage schedules? First, it is not always easy to measure the marginal productivity of a particular worker. In the public sector, this is obvious, but it is also clear in the private sector: in an organization employing dozens or even thousands of workers, it is no simple task to judge each individual worker’s contribution to overall output. To be sure, one can estimate marginal productivity, at least for jobs that can be replicated, that is, performed in the same way by any number of employees. For an assembly-line worker or McDonald’s server, management can calculate how much additional revenue an additional worker or server would generate. Such an estimate would be approximate, however, yielding a range of productivities rather than an absolute number. In view of this uncertainty, how should the wage be set? There are many reasons to think that granting management absolute power to set the wage of each employee on a monthly or (why not?) daily basis would not only introduce an element of arbitrariness and injustice but would also be inefficient for the firm.
In particular, it may be efficient for the firm to ensure that wages remain relatively stable and do not vary constantly with fluctuations in sales. The owners and managers of the firm usually earn much more and are significantly wealthier than their workers and can therefore more easily absorb short-term shocks to their income. Under such circumstances, it can be in everyone’s interest to provide a kind of “wage insurance” as part of the employment contract, in the sense that the worker’s monthly wage is guaranteed (which does not preclude the use of bonuses and other incentives). The payment of a monthly rather than a daily wage was a revolutionary innovation that gradually took hold in all the developed countries during the twentieth century. This innovation was inscribed in law and became a feature of wage negotiations between workers and employers. The daily wage, which had been the norm in the nineteenth century, gradually disappeared. This was a crucial step in the constitution of the working class: workers now enjoyed a legal status and received a stable, predictable remuneration for their work. This clearly distinguished them from day laborers and piece workers—the typical employees of the eighteenth and nineteenth centuries.9
This justification of setting wages in advance obviously has its limits. The other classic argument in favor of minimum wages and fixed wage schedules is the problem of “specific investments.” Concretely, the particular functions and tasks that a firm needs to be performed often require workers to make specific investments in the firm, in the sense that these investments are of no (or limited) value to other firms: for instance, workers might need to learn specific work methods, organizational methods, or skills linked to the firm’s production process. If wages can be set unilaterally and changed at any moment by the firm, so that workers do not know in advance how much they will be paid, then it is highly likely that they will not invest as much in the firm as they should. It may therefore be in everyone’s interest to set pay scales in advance. The same “specific investments” argument can also apply to other decisions by the firm, and it is the main reason for limiting the power of stockholders (who are seen as having too short-term an outlook in some cases) in favor of a power-sharing arrangement with a broader group of “stakeholders” (including the firm’s workers), as in the “Rhenish model” of capitalism discussed earlier, in Part Two. This is probably the most important argument in favor of fixed wage scales.
More generally, insofar as employers have more bargaining power than workers and the conditions of “pure and perfect” competition that one finds in the simplest economic models fail to be satisfied, it may be reasonable to limit the power of employers by imposing strict rules on wages. For example, if a small group of employers occupies a monopsony position in a local labor market (meaning that they are virtually the only source of employment, perhaps because of the limited mobility of the local labor force), they will probably try to exploit their advantage by lowering wages as much as possible, possibly even below the marginal productivity of the workers. Under such conditions, imposing a minimum wage may be not only just but also efficient, in the sense that the increase in wages may move the economy closer to the competitive equilibrium and increase the level of employment. This theoretical model, based on imperfect competition, is the clearest justification for the existence of a minimum wage: the goal is to make sure that no employer can exploit his competitive advantage beyond a certain limit.
Again, everything obviously depends on the level of the minimum wage. The limit cannot be set in the abstract, independent of the country’s general skill level and average productivity. Various studies carried out in the United States between 1980 and 2000, most notably by the economists David Card and Alan Krueger, showed that the US minimum wage had fallen to a level so low in that period that it could be raised without loss of employment, indeed at times with an increase in employment, as in the monopsony model.10 On the basis of these studies, it seems likely that the increase in the minimum wage of nearly 25 percent (from $7.25 to $9 an hour) currently envisaged by the Obama administration will have little or no effect on the number of jobs. Obviously, raising the minimum wage cannot continue indefinitely: as the minimum wage increases, the negative effects on the level of employment eventually win out. If the minimum wage were doubled or tripled, it would be surprising if the negative impact were not dominant. It is more difficult to justify a significant increase in the minimum wage in a country like France, where it is relatively high (compared with the average wage and marginal productivity), than in the United States. To increase the purchasing power of low-paid workers in France, it is better to use other tools, such as training to improve skills or tax reform (these two remedies are complementary, moreover). Nevertheless, the minimum wage should not be frozen. Wage increases cannot exceed productivity increases indefinitely, but it is just as unhealthy to restrain (most) wage increases to below the rate of productivity increase. Different labor market institutions and policies play different roles, and each must be used in an appropriate manner.
To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills. Over the long run, minimum wages and wage sch
edules cannot multiply wages by factors of five or ten: to achieve that level of progress, education and technology are the decisive forces. Nevertheless, the rules of the labor market play a crucial role in wage setting during periods of time determined by the relative progress of education and technology. In practice, those periods can be fairly long, in part because it is hard to gauge individual marginal productivities with any certainty, and in part because of the problem of specific investments and imperfect competition.
How to Explain the Explosion of Inequality in the United States?
The most striking failure of the theory of marginal productivity and the race between education and technology is no doubt its inability to adequately explain the explosion of very high incomes from labor observed in the United States since 1980. According to this theory, one should be able to explain this change as the result of skill-biased technological change. Some US economists buy this argument, which holds that top labor incomes have risen much more rapidly than average wages simply because unique skills and new technology have made these workers much more productive than the average. There is a certain tautological quality to this explanation (after all, one can “explain” any distortion of the wage hierarchy as the result of some supposed technological change). It also has other major weaknesses, which to my mind make it a rather unconvincing argument.
Capital in the Twenty-First Century Page 36