The Wage Standard: What's Wrong in the Labor Market and How to Fix It

This book offers a different explanation, focusing on the choices we have made as a society. These choices include those undertaken by major employers who have shaped the terrain of wage-setting here in America—leading to decades-long wage stagnation, particularly for those without a college degree. This is a story where corporate pay strategies are shaped by the crosscurrents of historical upheavals in union organizing, labor market structures that determine competition, macroeconomic policies that determine availability of jobs, and pay regulations such as minimum wages. While technology and globalization undoubtedly factor in, their impact is filtered through institutions and corporate decisions.

From the late 1930s through the 1940s, America enacted policies and built institutions that helped narrow pay differentials—producing a major reduction in wage inequality that economists Claudia Goldin and Robert Margo later termed the "Great Compression." For decades after World War II, typical workers—blue—and white-collar alike—moved ahead in step with the broader economy. The story of how this arrangement came to be is a fascinating one, involving changes in wage-setting practices at some of the country's most iconic companies—like General Motors (GM)—and driven by social movements and union organizing, particularly by the United Auto Workers (UAW). Technological change, like electrification, did shape this era, too, but it was mediated by institutions and history.

If GM and the UAW sound familiar from recent headlines, it's because the historical arc I explore in this book is still unfolding today. Fast-forwarding from the late 1940s through the early 1980s, earnings of most American workers grew in unison. Both blue—and white-collar workers benefited from the economy's growth during this time. This social compact forged through the upheavals of the twentieth century—often referred to as the "Treaty of Detroit" after a landmark 1950 agreement between General Motors and the UAW—laid the foundation for this shared prosperity.

Then came the 1980s and 1990s, which saw the erosion of what I call the wage standard: the idea that there is a societally acceptable range of pay for most jobs. Contrary to some economic narratives, the job market is not a well-oiled machine that seamlessly matches the right workers with the right companies at a pay rate determined solely by impersonal market forces. Don't get me wrong: Supply and demand definitely matter when it comes to wage formation. But they matter in an environment teeming with all sorts of different business strategies, pay norms, institutional forces, and macroeconomic environments. These other factors mean that if you want to make sense of what happened to job quality and inequality, the hidden explanations involve choices made by people rather than inescapable economic forces. As I will keep coming back to throughout the book, major American employers, for example Walmart and General Motors, have considerable discretion when it comes to setting wages. There are a lot of differences among wage policies chosen by employers—with similar workers often getting very different pay at different companies. And when contexts shift, wage policies change, too, moving the balance between good and bad jobs.

Here's an intriguing fact: In 1980, large employers generally paid substantially higher wages than smaller companies, offering even non-college-educated workers a solid path into the middle class. By the 2010s, however, that large-employer advantage had largely disappeared for blue-collar workers.

One reason large employers used to pay more was to uphold a sense of fairness and internal equity. Profitable companies shared their wealth broadly (a practice economists call rent-sharing), especially when unions were strong enough to influence wages—even in nonunion firms. Norms also prevented pay scales from drifting too far apart; it would have been unseemly for a leading employer to lavish pay on white-collar staff while offering paltry wages to service workers. These fairness norms didn't appear out of thin air: They were forged through conflict and upheaval in the first half of the twentieth century. Once established, they helped keep wage disparities in check throughout the post-World War II era, buoyed by strong unions, wage regulations, tax policy, and a commitment to full employment. CEOs certainly outearned janitors, but the accepted degree of inequality within a single workplace was limited by these shared notions of fairness.

Those norms crumbled in the 1980s and 1990s. Companies began sharing far fewer rents with blue-collar workers, partly because newcomers like Walmart had no historical constraints shaping their pay policies. Meanwhile, older corporations adopted cost-cutting strategies—often championed by business schools—that further undercut rent-sharing.

Few figures illustrate these seismic shifts in corporate norms as vividly as Jack Welch. As CEO of General Electric from 1981 to 2001, Welch championed relentless cost-cutting and placed an unwavering emphasis on shareholder returns. Dubbed "Neutron Jack" for his willingness to shed thousands of jobs, Welch also popularized "rank-and-yank" performance reviews, which forced out the lowest-rated employees. His model became a blueprint for other big corporations. By the 1990s, many firms had embraced Welch's brand of aggressive management, often at the expense of workforce stability and pay equity. Where companies once aimed for long-term loyalty and broadly shared gains, they now focused on short-term profitability, amplifying the breakdown of the wage standard.

Another way to bypass internal equity norms was to reclassify who counted as part of a company. If a company like Apple employed its own janitors, it might feel obliged to pay them in line with corporate fairness standards. But outsourcing those roles to contractors put those wages "out of sight, out of mind," and service contractors competing on cost could drive wages ever lower. Outsourcing thus became a potent tool for dismantling pay norms.