Paper of the Day: Levy and Temin on Income Inequality


Samuelson devoted his column yesterday to a very interesting new paper from

Frank Levy and Peter Temin of MIT. For those

of us who prefer to read original papers rather than the journalism based on

them, the paper can be found here.

The basic idea behind the paper is that between World War II and 1980 or so,

a set of institutions led by strong labor unions helped to ensure that workers’

income kept up with productivity gains. Since then, however, capital has gained

the upper hand over labor. What’s more, all of these developments were encouraged

by government policy:

The early postwar years were dominated by unions, a negotiating framework

set in the Treaty of Detroit, progressive taxes, and a high minimum

wage – all parts of a general government effort to broadly distribute the

gains from growth. More recent years have been characterized by reversals

in all these dimensions in an institutional pattern known as the Washington


The authors convincingly show a steady decline in workers’ bargaining power

over the past 50 years, as calculated by the proportion of their productivity

gains which end up in their paychecks.


Thoma has a nice response to Samuelson on the question of whether this rise

in inequality is a good thing or has helped the US economy. As for me, I’m also

interested in the term which the authors use to describe the state of affairs

from the Reagan years onwards: the Washington


This is a term coined by John Williamson in the late 1980s,

designed to apply not to the US but rather to policy prescriptions for developing

countries. It’s been distorted wildly since then, to the point at which Williamson,

who has reasonably solid leftist credentials (at least by US standards), has

more or less disowned

it. In any case, however, there is very little in the Washington Consensus

about labor unions being a bad thing, and there’s no hint that productivity

gains should accrue to capital more than labor. (Quite the opposite, in fact,

since the purpose of the Washington Consensus was to help the world’s poor.)

All the same, Levy and Temin pose an interesting question for Democratic presidential

candidates. If you want to reduce inequality, what are you going to do about

it? To be sure, you could start taxing the rich more. But are there more directly

pro-worker things you could do as well – things which would place you

solidly in the legacy of JFK? And can those things really work in an era of


This entry was posted in economics, labor. Bookmark the permalink.