The Affordability Crisis Is a Wage Crisis 

The summer before my junior year of college, I worked at a beachside fast-casual restaurant in Long Island, flipping burgers for $12 an hour, the state minimum wage. It was a great gig. I could walk to work, the pay was decent, and I got to hang out at the beach after my shift. What I didn’t realize at the time was that I wasn’t just working a summer job but I was an unknowing participant in a large-scale experiment. Starting in 2018, New York State embarked on a bold policy to gradually raise the minimum wage toward a $15-an-hour target. California and Washington, D.C., were also undergoing similar campaigns in response to public pressure from organizations like the Fight for $15 movement. Started by fast-food workers in New York City in 2012, the movement spread and helped raise wages in several states. At the time, the Fight for $15 was heavily criticized by those who predicted a spike in unemployment and cuts to employee hours. Yet nearly a decade after the policy was implemented, none of these predicted effects materialized. Indeed, empirical testing showed that the increase in the minimum wage had small, if any, discernible effects on unemployment.  

The Wage Standard: What’s Wrong in the Labor Market and How to Fix It
By Arindrajit Dube
Dutton, 320 pp.

Arindrajit Dube has spent his career producing exactly this kind of evidence. In The Wage Standard, he puts it all together—and makes the case that workers have been leaving money on the table. A professor of economics at UMass Amherst, Dube skewers popular arguments against raising the minimum wage. In a perfectly competitive labor market, this is true. Ideally, wages are set by companies that compete for employees, so employers usually have little discretion in setting wages. Yet as Dube argues, the labor market is not nearly as competitive as abstract models presume. 

To understand the divergence, Dube argues, it’s important to examine the degree to which firms have “monopsony power.” A monopsony describes a situation in which there is a single buyer of goods or services, which can be contrasted with a monopoly in which there is a single seller. In areas where there is little alternative employment or a high degree of friction in transitioning jobs, firms have greater monopsony power and thus greater discretion in setting—and importantly, holding down—wages. To measure this, Dube examines how sensitive the labor supply is to price changes, both in the rate at which employees quit firms and in the rate at which they are recruited. Taken together, he suggests that companies can get away with paying workers up to 20 percent less than they would under a perfectly competitive system.

In a monopsonistic labor market, strong unions, tight labor markets, and public pressure drive up wages. Tight labor markets lead to competition between employers, raising wages and compressing wage inequality. Throughout history, strong labor movements have helped set high standards and expectations for worker pay in industries such as manufacturing. Thanks to public pressure, even today, companies voluntarily raise their corporate minimum wage in response to campaigns like the Fight for $15.  

This leaves the obvious question: If wages are this malleable, what might a reasonable new floor look like? Surveying the research, Dube argues that an increased minimum wage, pegged at around two-thirds of the median wage across states and sectors, would be a compelling standard. Despite concerns about employment and inflation, Dube presents ample evidence that such increases don’t trigger serious job losses or price increases. In one study on the restaurant industry, researchers examined 420 pairs of contiguous counties across state borders to determine the effect of minimum wage increases from 1990 to 2019, and the results showed no discernible effect on employment in states with the increases.  

These gains don’t just benefit those at the bottom but also carry spillover effects on workers in higher-income brackets, including those in middle-wage jobs. The Wage Standard also lays out a case for a sector-based wage approach, a practice regularly employed in other Western countries, and ideally determined by wage boards in each state through consultation with both businesses and workers. If implemented widely, Dube argues that workers could see wage increases up to the 90th percentile of earners, erasing nearly half of the increase in wage inequality since 1980, without serious consequences for employment or prices.

Critics of Dube’s claims note that the United States today is quite different from the one he outlines in historical examples. The last 60 years have seen a decline in unionization, as well as a shift to a largely post-industrial economy, in which manufacturing jobs that were once bastions of unionization have declined and been replaced by low-skilled, highly automatable service jobs. Further, the importance of “knowledge jobs,” or positions requiring an advanced degree or extensive education, has increased in both value and scope. According to a working paper by the San Francisco Federal Reserve, from 1980 to 2010, the college wage premium (defined as the weekly earnings gap between college and non-college-educated workers) rose from 38.8 percent to 74.7 percent as the number of college graduates entering the labor force increased. Coupled with competition from globalization, which has eroded pay and outsourced formerly stable positions over the last 60 years, this alone helps explain rising wage inequality.

Dube allows that these structural changes, while substantial, are by no means the definitive story. As evidence, he highlights comparative cases from similarly post-industrial Western OECD economies with lower inequality than the U.S. Further, real-world examples such as wage compression following the COVID-19 pandemic, and data on the effects of high employment and high minimum wages, demonstrate that we can reduce inequality and raise pay.

Where the book shines is in its consistent grounding of theoretical predictions with real-world data and natural experiments. Indeed, most of the claims it presents are exhaustively supported with real-world evidence. Alas, this academic work has duplicative segments and repetitive prose. Yet an excess of connective tissue can be forgiven, considering how much meat there is here.

Where the book falls flat is its failure to show how its goals might be achieved politically. And Dube understates the extent to which previous changes relied on a confluence of high worker power and relatively weak corporate power. While his book provides a fantastic account of the feasibility of increasing the minimum wage, it would be difficult to suggest, for example, that the primary reason we’ve yet to raise the federal minimum wage is that it was considered economically infeasible, especially considering its broad bipartisan support. Though it is largely outside the scope of the book, for those of us concerned with achieving some of his more ambitious policies, it is worth considering how we might rebuild the political will needed to overcome corporate-controlled politics.

Adding further complexity, the rise of AI and robotics presents a challenge for workers attempting to rebuild a former base of power. Here, Dube remains optimistic, stressing the uncertainty of the gains AI might bring (rather than replace employees, might it help increase the productivity of regular employees compared to their higher performing counterparts?), but also the need for strong countervailing institutions like unions to ensure that gains made do not just flow to the top. Whether this optimism can survive in an environment in which Silicon Valley leaders seem to have already decided that its role will be to substitute rather than complement labor remains an open question. 

What The Wage Standard does best is highlight the great discretion we have to increase wages and the wisdom of bold steps to reduce inequality. For advocates, it buttresses arguments calling for better wages. For policymakers, it offers a dose of courage by expanding the conventional wisdom about what is responsible economic policy. 

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