Paper of the Day: Levy and Temin on Income Inequality

Robert Samuelson devoted his column yesterday to a very interesting new paper from Frank Levy and Peter Temin of MIT. For those of us who prefer to read original papers rather than the journalism based on them, the paper can be found here.

The basic idea behind the paper is that between World War II and 1980 or so, a set of institutions led by strong labor unions helped to ensure that workers' income kept up with productivity gains. Since then, however, capital has gained the upper hand over labor. What's more, all of these developments were encouraged by government policy:

The early postwar years were dominated by unions, a negotiating framework set in the Treaty of Detroit, progressive taxes, and a high minimum wage - all parts of a general government effort to broadly distribute the gains from growth. More recent years have been characterized by reversals in all these dimensions in an institutional pattern known as the Washington Consensus.

The authors convincingly show a steady decline in workers' bargaining power over the past 50 years, as calculated by the proportion of their productivity gains which end up in their paychecks.

Mark Thoma has a nice response to Samuelson on the question of whether this rise in inequality is a good thing or has helped the US economy. As for me, I'm also interested in the term which the authors use to describe the state of affairs from the Reagan years onwards: the Washington Consensus.

This is a term coined by John Williamson in the late 1980s, designed to apply not to the US but rather to policy prescriptions for developing countries. It's been distorted wildly since then, to the point at which Williamson, who has reasonably solid leftist credentials (at least by US standards), has more or less disowned it. In any case, however, there is very little in the Washington Consensus about labor unions being a bad thing, and there's no hint that productivity gains should accrue to capital more than labor. (Quite the opposite, in fact, since the purpose of the Washington Consensus was to help the world's poor.)

All the same, Levy and Temin pose an interesting question for Democratic presidential candidates. If you want to reduce inequality, what are you going to do about it? To be sure, you could start taxing the rich more. But are there more directly pro-worker things you could do as well – things which would place you solidly in the legacy of JFK? And can those things really work in an era of globalization?