How the Decline of Labor Unions Led to Stagnant Wages

Wages have flatlined even as productivity has gained. Could lower union membership be to blame?

Aug 3, 2014 at 10:42AM

Wage stagnation has been an ongoing problem for some time now, even for those who obtain college degrees. From the years 2000 to 2012, college graduates saw a rise in pay of only 1%. For those with a high school diploma or only a smattering of college, wages actually fell during that time span.

Pay levels for most working folks have been treading water since the late 1970s, even as more wealth has migrated to the top 1% of the population. High earners increased their take of all income from 7.9% in 1979 to 12.9% in 2010, and recovered wages lost during the recent recession much more quickly during the economic recovery of 2009 to 2012.

What happened?
Even as wages stubbornly refused to rise, productivity soared. The Economic Policy Institute noted recently that productivity rose by nearly 65% between 1979 and 2013, while pay rose by only 8.2%. Why have workers been working harder, it seems, while receiving no commensurate wage gains?

There are many theories for why this state of affairs exists. Technological innovations are often cited as reasons for the lack of job growth, as mid-wage jobs disappear, causing a larger gap between low-wage and highly compensated work. 

But something else happened over the last 35 years, as well: labor unions have become less prevalent. From a unionization rate of 35% in the 1950s, union membership fell to around 25% in the 1970s. Now, private-sector unionization is only 6.6%. Might the loss of those champions of the working class have had something to do with the severe lethargy being seen in pay growth? 

A correlation certainly seems likely. The EPI estimates that the erosion of unions accounts for one-fifth to one-third of wage and income inequality since the 1970s. The lack of an inflation-indexed minimum wage explains the rest of the problem.

The lack of union influence has been felt in many ways. For one thing, union members make more money – 13.6% more. In addition to the union wage premium, workers covered by a union contract usually have more employer-based benefits, such as health care. But other, non-unionized workers benefit, too, since collective bargaining has historically been responsible for setting the wage scale in a particular industry, regardless of the presence of a union.

Without unions to enforce the sharing of corporate profits, those at the top have made the most gains, while all others see little or no improvement in their compensation levels. In 2012, the manufacturing sector took in record profits of nearly $290 billion, even as it wrested more concessions from unions. General Electric, for example, now pays new union workers $14 per hour, compared to the hourly rate of $22 it was paying prior to 2005.

Though the unemployment rate has fallen quite a lot in 2014, the median weekly salary hasn't budged since this time last year – while the Consumer Price Index rose by 2.1%. Even as the economy appears to be making a permanent recovery, working Americans continue to see their own economic profiles erode. And, without wage gain pressure from labor unions, this situation is very likely to persist. 

Amanda Alix has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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