Labor heterogeneity, inequality and institutional change

Introduction Distribution has been central to classical economic theory as well as to the various strands of Post-Keynesian and structuralist macroeconomics. As a simplifying assumption, however, labor is typically taken as homogeneous, and the main focus has been on the functional distribution of income between wages and profits (with rents as an additional category in some versions). Kurz and Salvadori (1995, ch. 11) is a prominent exception but their treatment of labor heterogeneity stays at a high level of abstraction, and a large part of their analysis serves to clarify the conditions that would allow a reduction of heterogeneous to homogenous labor. This chapter, by contrast, has heterogeneity as its focal point: simplifying assumptions of homogeneity may be justified for many purposes, but labor disaggregation is essential if one wants to address some of the most striking changes in inequality over the last 100 years. As shown in Figure 7.1, the long-term variations in the profit share are relatively mild. It drops about 4 percentage points between 1950 and 1980 and then recovers, rising about 2 percentage points during the neoliberal era. The calculation of the profit share raises many issues and the figure may give a misleading impression of the recent trend. CEO pay has increased dramatically, and at least a part of this increase should be included with profits. Adjustments along these lines have been made by Krueger (1999), but even with these adjustments, the functional distribution fails to tell the main story. Figure 7.2 shows a different measure of inequality for the period since 1917. The fluctuations in income share have been particularly strong at the top end, but significant changes have occurred throughout the distribution, and wage movements are central to these changes.1 What is remarkable in Figure 7.2 is not just the increase in the share of the top decile that took place since 1980 but also the “Great Compression” in the early 1940s, when inequality dropped dramatically in just a few years. This development raises the intriguing possibility of a parallel between the 1940s and the present. The neoliberal era from the 1980s, the financial bubbles, and the crisis have similarities with the runup to the great depression, and one might wonder whether the scene has been set for a new compression. The great compression of the 1940s was supported by institutional changes.² Federal legislation in the late 1930s strengthened labor unions, extensions of social insurance improved workers’ bargaining position, and there were important changes with respect to workplace health and safety, minimum wages, and statutory overtime pay. Institutional changes also accompanied the increasing inequality in the de-compression period - federal labor relations law weakened, unions declined, industries were deregulated, and the minimum wage was allowed to fall - and studies by DiNardo et al. (1996) and Lee (1999) find that de-unionization and the falling minimum wage can account for a substantial share of the rise in wage inequality between 1970 and 1988.