The level of inequality — which fell during the New Deal but has risen dramatically since the late 1970s — corresponds to the rise and fall of Unions in the United States. Take a look at this graph showing union membership and the income share claimed by the richest 10 percent of Americans over time. As union membership has fallen to around 1920s levels, economic inequality has worsened substantially.
Unions help workers achieve higher wages. Union members in the United States earn significantly more than non-union workers. Over the four-year period between 2004 and 2007, unionized workers’ wages were on average 11.3 percent higher than non-union workers with similar characteristics. That means that, all else equal, American workers that join a union will earn 11.3 percent more — or $2.26 more per hour in 2008 dollars — than their otherwise identical non-union counterparts.
Unions help ensure that American workers’ wages grow with their productivity. Workers helped the economy grow during this time period by becoming ever more productive, but they received only a small share of the new wealth they helped create. Throughout the middle part of the 20th century when unions were stronger, American workers generated economic growth by increasing their productivity, and they were rewarded with higher wages. But this link between greater productivity and higher wages has broken down.
Prior to the 1980s, productivity gains and workers’ wages moved in tandem: as workers produced more per hour, they saw a commensurate increase in their earnings. Yet wages and productivity growth have decoupled since the late 1970s. Looking from 1980 to 2008, nationwide worker productivity grew by 75.0 percent, while workers’ inflation-adjusted average wages increased by only 22.6 percent, which means that workers were compensated for only 30.2 percent of their productivity gains.
The cost of benefits — especially health insurance — has increased over time and now accounts for a greater share of total compensation than in the past, but this increase is nowhere near enough to account for the discrepancy between wage and productivity growth. For example, according to analysis by the Center for Economic and Policy Research, between 1973 and 2006 the share of labor compensation in the form of benefits rose from 12.6 percent to 19.5 percent.
If American workers were rewarded for 100 percent of their increases in labor productivity between 1980 and 2008 — as they were during the middle part of the 20th century — average wages would be $28.53 per hour —42.7 percent higher than the average real wage in 2008.
Slow wage growth has squeezed the middle class and contributed to rising inequality. But increasing union coverage rates could likely reverse these trends as more Americans would benefit from the union wage premium and receive higher wages. If unionization rates were the same now as they were in 1983 and the current union wage premium remained constant, new union workers would earn an estimated $49.0 billion more in wages and salaries per year. If union coverage rates increased by just 5 percentage points over current levels, newly unionized workers would earn an estimated $25.5 billion more in wages and salaries per year. Non-union workers would also benefit as employers would likely raise wages to match what unions would win in order to avoid unionization.