From the end of World War II through the mid 1970s, the real wages of American workers nearly doubled, moving up in tandem with the growth in productivity. The United States benefited from an implicit social contract: By working hard and contributing to productivity, profits, and economic growth, workers and their families could expect improved living standards, greater job security, and a secure and dignified retirement. This social contract broke down after 1980, as employees lost their bargaining power. Since then, productivity has grown more than 70 percent while real compensation of nonmanagerial workers has remained flat.
Wages for the lowest-paid workers have collapsed even more than for average workers. While conventional explanations for stagnant wages and increased inequality— such as those that emphasize technological changes and increased premium for skills—may be part of the story, they fail to take into account the historical policy and institutional forces that created and sustained the postwar social contract, or to understand what needs to be done to restore it in a way consistent with the needs of today’s workforce and economy.