The Declining Worker Power Hypothesis

with Lawrence Summers
Brookings Papers on Economic Activity, Spring 2020

Access paper, appendix, data, and code here

Rising profitability and market valuations of U.S. businesses, sluggish wage growth and a declining labor share of income, and reduced unemployment and inflation have defined the macroeconomic environment of the last generation. This paper offers a unified explanation for these phenomena based on reduced worker power. Using individual, industry, and state-level data, we demonstrate that measures of reduced worker power are associated with lower wage levels, higher profit shares, and reductions in measures of the non-accelerating inflation rate of unemployment (NAIRU). We argue that the declining worker power hypothesis is more compelling as an explanation for observed changes than increases in firms’ market power, both because it can simultaneously explain a falling labor share and a reduced NAIRU and because it is more directly supported by the data.

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