Symposium | The Middle-Out Moment Is Here

Keep Empowering Workers!

By Heidi Shierholz

Tagged LaborMiddle Out Economics

In the decades following World War II, the U.S. economy thrived. Economic growth was strong and the fruits of that growth were broadly shared. Not everything in the economy was perfect in the 1950s and ’60s—far from it. There were massive inequities by race and gender, marked by the exclusion of people of color and women from countless labor market opportunities. Nevertheless, a crucial dynamic was in place: As the economy grew, workers all across the wage distribution—low-wage, middle-wage, and high-wage—saw gains. Racial and gender gaps shrank. Growth was strong, and living standards improved across the board.

This positive dynamic was not a foregone conclusion. It was the result of “middle-out” policy choices that ensured that economic growth was both robust and broadly shared (though the term “middle-out” would not be coined until much later). Macroeconomic policymakers targeted sustained low unemployment, the federal minimum wage increased rapidly and regularly and was well enforced, the federal government actively safeguarded workers’ rights to unionization and collective bargaining, and regulations protected many other labor rights.

Starting in the late 1970s, however, policy began to shift in an ill-fated direction. As a neoliberal paradigm took hold and trickle-down economics secured its dominance among members of both parties as the proper way to manage the economy, policymakers went about dismantling the policy bulwarks that were the crucial foundation of robust, broadly shared growth. Macroeconomic policymakers began to tolerate excess unemployment, increases in the federal minimum wage became smaller and rarer, lawmakers failed to update labor law to keep up with relentless attacks on unionization and collective bargaining, and anti-worker deregulatory pushes succeeded again and again.

We all know what happened in those years. Workers lost ground dramatically. In the earlier era, from the postwar period through the late 1970s, productivity had grown 2.5 percent per year on average, while the typical worker’s compensation grew at an average of 2.4 percent. This parity led to life-changing improvements in living standards for working people from generation to generation. But as the policy regime shifted away from the middle-out economics of the New Deal to neoliberal economics, productivity growth slowed dramatically and compensation growth for typical workers absolutely tanked. From 1979 to 2022, productivity grew 1.2 percent per year on average—less than half the pace of the prior period—and the typical worker’s compensation grew by an average of just 0.3 percent. And—after improving in the earlier period—the Black-white wage gap widened.

In 2022, “production and nonsupervisory employees”—a Bureau of Labor Statistics designation covering some 80 percent of the workforce—earned an average of $57,300. If productivity and pay had not diverged since the late 1970s, and instead the average wage for this group had grown at the rate of productivity, a typical worker would have been making $82,000—a 43 percent bump that would equate to nearly $25,000 annually. That would be a life-changing amount of money for working families.

One of the core pillars of middle-out economics is empowering workers—giving them the tools they need to claim their fair share of economic growth. It’s worth emphasizing that there is no silver bullet here: There was a sweeping transformation to neoliberal economics, and we need another sweeping transformation to set us on a path of robust, broadly shared growth. In what follows, I detail some middle-out economic policies that will help close the productivity-pay gap, and what they would mean for working people.

Keep unemployment low. Macroeconomic policymakers should use all levers at their disposal to ensure tight labor markets. This has not been the case for much of the recent decades— outside of the last few years, policymakers have largely tolerated unemployment that is way too high. For example, the turn to austerity in 2011—when the economy was still extremely weak—meant the Great Recession resulted in a full decade of elevated unemployment.

The Federal Reserve Board should set interest rates that achieve its dual mandate of stable inflation and maximum employment. And when the Fed’s tools aren’t enough to generate full employment, Congress and the President must step in with robust relief and recovery measures—like they did with the American Rescue Plan Act of 2021—to generate a robust and lasting jobs recovery.

Why? Tight labor markets raise wages. When the economy is at full employment, employers must constantly compete for workers, boosting workers’ leverage and bargaining power. Plentiful job openings mean workers have outside options, so employers have to pay better to get and keep the workers they need. This is not a small effect—and the effect is stronger the lower down the wage distribution you go. For example, research shows that for very low-wage workers, a 1 percentage point drop in unemployment generates a roughly 1 percentage point boost in annual wage growth (for workers at the median, it’s around 0.6 percentage points, and for workers at the 90th percentile, it’s about 0.4 percentage points).

Further, tight labor markets reliably—and strongly—reduce racial wage gaps. This is because, due to the broad impacts of structural racism on labor market outcomes, Black and Hispanic workers are disproportionately concentrated in the bottom half of the wage distribution. It is also because tight labor markets make racial discrimination more costly for employers. (When there is a line around the block for every job opening, employers can discriminate as they please and still get the workers they need—but when labor markets are tight, that’s less likely to be the case.)

Boost unionization. Policymakers must pass fundamental labor law reforms to ensure workers’ rights to unionization and collective bargaining. There is a massive gap between the share of people who are in a union and the share of people who report they want to be in a union. That gap reflects the failure of today’s labor law to protect workers’ union rights in the face of fierce employer opposition to unions. These reforms would include: imposing meaningful penalties on employers who retaliate against workers for union activity, ensuring that newly unionized workers can reach a first contract by prohibiting employers from delaying the process, banning so-called “right-to-work” laws, prohibiting companies from permanently replacing striking workers, and more.

Why does this matter? Workers in unions have higher wages and better benefits than similar workers who are not in unions. Further, when unions are strong, they also raise wages for nonunionized workers because they help set broader standards. (We recently saw this union “spillover” effect playing out in real time as Toyota, Honda, and Hyundai raised wages for their factory workers—who weren’t striking and aren’t even unionized—immediately following the successful United Auto Workers strikes at General Motors, Ford, and Stellantis.) In addition, unions reduce the Black-white wage gap, because Black workers are more likely to be in unions than white workers and the union pay “premium”—the amount that union workers earn relative to similar workers who are not unionized—is higher for Black workers than white workers. Unions also benefit communities, as high unionization rates are consistently associated with a broad set of positive spillover effects across multiple dimensions, including fewer restrictive voting laws. In the same way unions give workers a voice at work, unions also give workers a voice in shaping their communities.

Strengthen labor standards like the minimum wage and overtime, and their enforcement. The federal minimum wage is currently $7.25 per hour—or about $15,000 a year for a full-time, full-year worker. That’s well under half of what it would be if it had kept up with productivity growth since the late 1970s. Overtime protections are now also abysmally weak, with the overtime salary threshold standing at just $35,568. (This is the salary level at which workers are no longer automatically eligible for overtime when they work more than 40 hours per week.) What’s more, enforcement of labor standards has become so under-resourced that employers are able to steal billions in wages from their workers every year by, for example, not paying legally mandated minimum wages and overtime.

Strengthening labor standards and their enforcement will raise wages and job quality. Gradually increasing the federal minimum wage to $17 an hour and then automatically updating it as prices and wages rise—as in the Raise the Wage Act of 2023—will obviously raise wages for those workers earning less than $17, who are particularly concentrated in states that have kept their minimum wages very low. But it will also raise wages for workers earning slightly above $17, as employers provide these workers increases in order to preserve internal wage ladders. Further, because women and Black and Hispanic men are disproportionately concentrated in jobs that would get a pay bump if the minimum wage were increased, raising the minimum wage would reduce race and gender gaps.

And increasing the overtime threshold would not just raise wages for middle-class workers. It would give them more of an extremely precious resource—their time. If employers actually bear a burden when they add chaos to workers’ lives by requiring them to work extra hours, they are much more judicious in assigning those hours. Notably, the Biden Administration has proposed increasing the overtime threshold to roughly $55,000, a very important step.

Ban noncompete agreements, forced arbitration, and collective and class-action waivers. There is a growing trend of employers requiring workers to sign away their rights as a condition of employment. Noncompete agreements—which block employees from working for a competitor for a period of time if they leave their current job—cut off the only real source of leverage nonunionized workers have: the ability to quit and work somewhere else. Forced arbitration requires workers to resolve workplace disputes in an individual arbitration process that overwhelmingly favors the employer, while collective and class-action waivers prohibit workers from acting together when workplace violations are widespread. All of these should be banned in employment agreements.

The Federal Trade Commission has proposed a rule that would prohibit noncompete agreements. It should be finalized and enforced. Research finds that banning noncompete agreements would raise earnings across the workforce by at least 2 percent. It would also increase innovation and dynamism in the economy—remember, noncompetes don’t just bar workers from taking a job at another firm, they bar them from starting a competing firm, significantly reducing the formation of new companies. Banning forced arbitration and collective and class-action waivers in employment agreements will boost workers’ rights by closing a major loophole that employers exploit extensively.

Address the fissuring of the labor market. One of the most pronounced ways employers have shaped labor market outcomes to their advantage in recent decades is through the “fissuring” of workplaces. Fissuring occurs when lead firms outsource various functions to contractors and subcontractors rather than directly employing the workers who perform those functions. (For example, office buildings used to employ janitors but now typically contract out to janitorial firms.) Research shows that workers in contract firms—janitors, security guards, call center workers, airline workers, truck drivers, warehouse workers, food services workers—earn significantly less than they did when they were employed by lead firms. Under these arrangements, both the lead firm and the contract firm typically control terms and conditions of employment (things like pay, schedules, and job duties), but unless there are strong “joint employment” protections in place, lead firms are able to limit and evade liability for labor standards violations. Policymakers must establish a federal joint employer standard whereby all firms that share control over a worker’s terms of employment are considered to be employers of that worker. This will strengthen workers’ rights by closing another major loophole that employers use to violate labor rights and pay less.

Relatedly, policymakers should strengthen independent contractor protections by establishing a strong, uniform protective legal test for determining employee status, such as the “ABC” test that California adopted in 2019. The misclassification of workers as independent contractors is a pervasive problem affecting millions. Misclassified workers are deprived of rights and protections under federal and state labor and employment laws, including wage and hour protections, antidiscrimination protections, workers’ compensation, unemployment benefits, and the right to organize. Reducing misclassification through a strong and well-enforced legal test will increase worker pay and job quality.

These are the kinds of middle-out policies that will halt and reverse the trends of weak wage growth for working people and rising inequality—trends that were caused by neoliberal economic policy. But remember, neoliberal economics doesn’t just create less equal growth. It creates less growth, period. Since the late 1970s, we haven’t just seen skyrocketing inequality—we have seen much weaker economic growth overall. Notably, that slower growth wasn’t for lack of innovation: There has been a huge degree of transformative innovation over this period (computers, the internet, e-mail and other revolutions in communication, etc.). But the enormous potential for strong growth was not realized.

A key reason for the weak economic growth of the last four decades was rising inequality itself. Total spending in the economy falls as inequality redistributes resources away from low- and middle-income households—who need to spend a much higher share of their incomes on necessities—to higher-income households, which have the luxury of saving money. Inequality’s drag on spending means there is less demand for goods and services, which slows overall economic growth. Further, when workers’ wages are low and their bargaining power is weak, businesses lack incentives to invest in labor-saving—higher-productivity—processes. So, despite strong innovation in the last four decades that had the potential to spur continued strong economic growth, the shift away from middle-out economic policies to neoliberal policies created an economy that was not only less fair; it was also weaker.

What middle-out economics does is generate increases in wages that in turn generate increases in aggregate demand. When the wages of the people who are the most likely to spend are not suppressed—when middle-out economic policies prevail and workers have the leverage to secure fair wages through unions, strong labor standards, and low unemployment—the result is wage-led economic growth. Middle-out economics is good for workers, good for their families, good for their communities, good for the broader economy, and good for the nation.

But it is far from inevitable that policymakers will choose to make the systemic changes a true middle-out policy regime would entail. The tide has begun to shift, but there is an enormous amount of work left to be done—and there are powerful forces fighting to keep the neoliberal model in place. It is crucial that we seize this moment and mobilize in support of a middle-out economic policy regime, and that we remember that boosting the bargaining power of typical workers is the linchpin of any such regime. With anti-democratic forces successfully gaining supporters with the false narrative that the suppression of working people’s wages was the result of immigration and diversity initiatives instead of neoliberal economic policies, our very democracy may depend on it.

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Heidi Shierholz is the president of the Economic Policy Institute in Washington, DC. She is a former chief economist of the U.S. Department of Labor.

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