The wage myths of the modern economy

Why are wages what they are?

"Traditional economic analysis posits that skills and experience and dangers on the job is what determines wages," Larry Mishel says. "But we know that's partly the answer, but it's not all the answer."

Common wisdom might say it's things like experience, negotiated contracts, and job performance that drive that variation. Our guests today disagree.

"If we go from 1979 to 2017, the hourly productivity grew by about 68%," Mishel adds. "But the hourly compensation of the typical worker grew about 13%. That's a 55% gap."

Today, On Point: Our guests say social factors have seeped into the matter of dollars and cents. We'll bust 'the myths of the modern economy' that help set wages.

Jake Rosenfeld, associate professor of sociology at Washington University in St. Louis. Author of You’re Paid What You’re Worth: And Other Myths of the Modern Economy.

Larry Mishel, former president of the Economic Policy Institute. Labor market economist studying jobs, wages and inequality for four decades. (@LarryMishel)

Federico Mazzoli, VP of products at d-Local.

Back in 2018, you did a fairly large survey of employees, aged 18 and above. You asked them what they believe are the most important factors that determine pay. And what did you find? 

Jake Rosenfeld: “What stood out from the survey is just how ubiquitous American workers feel that their individual performance is as the most important factor in determining their pay. Again and again, nothing ranked higher, including your education level, how many years of experience you've had. We gave a whole list of options. But nothing ranked as highly as individual performance when asked what determines the number on their paycheck. We followed up with a question of, What do you think should determine your pay? And again, individual performance stood out.”

Are you saying that they're wrong, performance is not a significant factor in determining pay?

Jake Rosenfeld: "It's complicated, but in a nutshell, yes. I think many of us are wrong. Certainly your individual performance gets you in the door, gets you hired. But it turns out that most of us aren't paid based on our individual performance, and the fraction of the workforce that is has actually declined over time."

On real evidence of what determines pay

Jake Rosenfeld: “So we're wrong for a number of reasons. ... First, definitional disputes. So one reason that most of us are not paid according to our individual performance at work are measurement disputes. We disagree about what we think we should be measuring in the first place. And so these disputes roil occupation after occupation. Not to be too personal, but take journalism, right? So in journalism, for instance, some journalists say that the true purpose of the field is to produce award winning investigations, while others in the industry prioritize revenue generation.

"To keep it personal, in my own field, higher education. Some professors are going to prioritize teaching and think that we should measure performance and peg pay to how well we do in the classroom, while others believe a university rises or falls on its research.

"So in other words, kind of definitional disputes often stem from disagreements about what our workplaces' product should be. And if we disagree about our workplaces' product, we'll disagree about our own individual contribution to it. And so trying to pay workers based on one measure of productivity, one measure of performance, is going to upset others who are wed to an alternate vision.”

On 'fairness concerns' among employers

Jake Rosenfeld: “We can think of this as fairness concerns. So if you're an employer out there, you've come out, you think with the greatest measurement of your worker's individual performance, you're rolling it out. And then you tell your workers, Hey, look, we want to reward those workers who were performing at a high level, more than those who aren't, who aren't pulling their weight. It turns out that workers don't like that, not only for the kind of surveillance that oftentimes these measures involved, and this comes in various forms.

"My favorite is one that stems from what seems to be a really hardwired tendency in most of us, and that is that we tend to think we're pretty good at our jobs. In fact, most of us think we're better than most of our colleagues at doing our jobs. And that may be a useful characteristic. In some ways, self-esteem has a lot of positive benefits.

"But it's going to cause problems for employers who want to differentiate pay based on a measure of productivity. Because by definition, not all of us are above average at our jobs. So a move like that, to tie pay to individual performance, is going to upset many workers who may incorrectly believe that they are actually more productive than they are. So as a result, most employers don't try it, thus avoiding the kind of fairness issues that arise when workers think that they deserve more than their colleagues.”

On factors that determine American pay over the years

Larry Mishel: “Let me first say that this presumption that you're paid what you're worth is deeply embedded in our employment law and public policy, and to the disadvantage of American workers. And your callers are correct. So, for instance, the idea that you're paid what you're worth means that it is essentially implied that a worker can quit and get a comparable job any time she wants to.

"And therefore, an employer should have the right to fire you any time they want to. And they can fire you for no reason, for good reason, or even a bad reason. So that's what's called the so-called 'at will' employment doctrine in the private sector. That's very pervasive and it's very disadvantaged to workers. We know from the research of the last ten years that when employers cut wages, the free market view says that all the workers should leave, because they can get another comparable job.

"In fact, only a small portion leave. And what that implies is that employers captured 20 to 30% of the overall productivity. And that they saw especially disadvantage for those with low wages without a college education, women and minorities. But let me go to another view of this, which is, you know, what's happened to wages over the last 40 years or so. And we know that wages have been relatively stagnant. I term that they've been suppressed. And they've been suppressed relative to the growth of overall productivity. But why? And some of this is the exact reasons that your callers are saying.

"The largest reason is that the economy has not been at full employment. In fact, there's been excessive unemployment, some of it on purpose, by the Federal Reserve Board and Congress to try to control inflation or to make conditions the way employers like it. Employers like it when there's more workers looking for jobs, and they can just get whoever they want, whenever they want, at whatever they want.

"That alone has cost the American workers around 10% over the last 40 years, and the overall wage suppression has lowered wages by around $10 per hour, around 43%. Another important reason was the globalization, with regard to trading with low wage countries. A third of which Jake is a real expert, is the erosion of unionization, that has caused people more than a dollar an hour. It's really hurt men more than women. Hurt Blacks more than whites.

"We've also had the deterioration of labor standards, such as the minimum wage. And last thing I want to say is that this idea that you're paid what you're worth, is flip to say that anybody who messes with the market determination of wages, meaning what employers want to pay, is going to lead to bad outcomes for workers in the economy. Such as, you shouldn't raise the minimum wage. You can't have generous unemployment insurance benefits. You shouldn't allow unions.

"And what we know from research is that the minimum wage determines the wage levels for the bottom 30% of the workforce. And we know that if you raise the minimum wage substantially, because we've done a lot of that in the last 20 years, and there's been a lot of studies, that it does not adversely affect employment. In fact, what it does is it raises the annual earnings of low wage workers. So we shouldn't use this ideology to disable public policy that establishes equity, and fairness and allows the vast majority to participate in economic growth.”

On the factors of how wages are determined

Jake Rosenfeld: "In terms of kind of accounting for these broader trends in the economy, as Larry's pointed out, we've had a dramatic power shift away from workers towards employers. And I think a kind of key measure of that, we've had the kind of declining of the real value of the minimum wage, but also the just destruction of labor unions throughout the private sector in the United States. From a period in the kind of mid-20th century, when about one out of every three private sector workers belonged to a union, and now we're down to about one out of every 20.

"And then the other dynamics help to explain some of the kind of dramatic rises in pay and kind of wealth accruing among the very top. So once a CEO is able to negotiate an incredibly high salary, mimicry takes over and other companies start to benchmark their own CEO pay to that one particular firm.”

On how to better create a system where people are accurately paid

Larry Mishel: “I say first and foremost that public policy should be focused on creating good quality jobs and empowering workers, restoring the balance of power in the labor market. The most powerful instrument for that is, in fact, keeping unemployment low. And I would say that in this respect, the Biden administration is an exemplar. Because they put everything on the line to stimulate the economy, to get us out of the pandemic recession as quickly as possible.

"And now we have the lowest unemployment in 50 years. We have the greatest Black employment rates in many, many, many decades. And that has enabled the creation of a lot of job openings, which has allowed people to quit and get new jobs. ... It's not that people are quitting a lot. People are switching to better jobs. So if I had one policy it ... would be at very high labor standards like the minimum wage. Restoring collective bargaining. Those are really important policies.”

Harvard Business Review: "You’re Not Paid Based on Your Performance" — "When asked about the rationale for the size of their paycheck, both workers and executives overwhelmingly point to one factor: Individual performance."

Washington Post: "Five myths about compensation" — "Questions of compensation loom large during these pandemic days. Debates rage over whether to raise the minimum wage, what to pay our essential workers and whether our chief executives deserve all their millions."