How Labor Market Institutions Matter for Worker Compensation

• DOI: 10.1177/00027162211035965
• Date: 01 May 2021
• Published date: 01 May 2021
• Subject Matter: Institutional Outcomes

ANNALS, AAPSS, 695, May 2021 225

DOI: 10.1177/00027162211035965

How Labor

Market

Institutions

Matter for

Worker

Compensation

By

RYAN NUNN

and

JENNIFER HUNT

1035965ANN The Annals Of The American AcademyLabor Market Institutions And Worker Compensation

research-article2021

Labor markets deviate substantially from the competi-

tive ideal, and policies and institutions affect workers’

outcomes. Over the last 45 years, the dramatic increase

in compensation of high earners and weak or stagnant

growth for low and middle earners have shone a spot-

light on the ways in which labor market institutions

sometimes work to the detriment of lower-paid work-

ers. In this article, we survey several institutions—

minimum wages, private sector unions, noncompete

agreements, and occupational licensing—considering

how they have evolved in ways that affect workers’ out-

comes, given that the labor market is characterized by

uneven distribution of market gains. We describe the

modern labor market as one that substantially features

alternative work arrangements and labor market con-

centration, and we consider the implications of this for

public policy. Those policies, along with the surveyed

institutions, are the focus of our final section that dis-

cusses key options for improving worker outcomes.

Keywords: labor market institutions; wages; labor

market policies

The labor market is the primary or only sub-

stantial source of income for most

Americans, and for working-age Americans it is

the primary source of health insurance.

Understanding the determinants of worker

compensation is therefore crucial for improving

Ryan Nunn is the assistant vice president for applied

research in community development and engagement at

the Federal Reserve Bank of Minneapolis. Previously,

he was a fellow in economic studies at the Brookings

Institution and policy director for the Hamilton Project.

His work has focused on labor market institutions and

outcomes for low- and moderate-income workers.

Jennifer Hunt is a professor of economics at Rutgers

University. She has served as chief economist of the

U.S. Department of Labor and as deputy assistant sec-

retary for microeconomic analysis at the U.S.

Department of the Treasury. Previously, she held posi-

tions at McGill University, the University of Montreal,

and Yale University. Recent research topics include

immigration and wage inequality.

Correspondence: ryan.nunn@gmail.com

226 THE ANNALS OF THE AMERICAN ACADEMY

the well-being of Americans. Even as labor economists’ understanding of the

labor market has grown with time, the labor market itself has changed. Core

labor market institutions have changed radically and in ways that correlate with

significant changes in workers’ outcomes, especially increased wage inequality,

and with changes in employer practices.1

In this article, we present basic facts about wage and nonwage compensation,

describe important labor market contexts like alternative work arrangements

and limited labor market competition, and briefly discuss wage setting. We then

discuss key modern labor market institutions that might reflect or contribute to

lower worker bargaining power: the declining federal real minimum wage, the

historically low rate of private sector union membership, noncompete agree-

ments (NCAs), and the rise in occupational licensing. We conclude with a dis-

cussion of ways in which public policies could be changed to improve workers’

outcomes.

The Distribution of Wages and Nonwage Benefits

For families in the lowest, second, and third quartiles of income (i.e., the bottom

75 percent of all families), on average, between 70.2 and 79.4 percent of total

income was from wages in 2016 (Board of Governors of the Federal Reserve

System 2017). The poorest families receive means-tested government transfers

from programs like the Supplemental Nutrition Assistance Program (formerly

the Food Stamp program), and the wealthiest families receive considerable

income from capital investments. But for everyone else, wages and nonwage

benefits constitute all or nearly all of total income.

Figure 1 makes clear that workers have very different experiences. At the bot-

tom (10th percentile) of the distribution, workers earned only $10.32 per hour in

the first quarter of 2020. At the top (90th percentile), workers earned $47.29 per

hour—up from an inflation-adjusted $43.41 in 2009. Inequality in hourly wages

has been rising for decades, an evolution studied in depth elsewhere in the

volume.

Total labor compensation, including nonwage benefits, tends to receive less

attention than wages despite its importance for understanding worker welfare.

Figure 1 also shows percentiles of these nonwage benefits, expressed in terms of

employers’ cost of provision, for the first quarters of 2009 (nested bar in Figure 1)

and 2020.2 These include health insurance, life insurance, retirement savings con-

tributions, and other components of compensation for which employers incur

explicit monetary costs.

NOTE: The views expressed in this document are the authors’ alone and do not necessarily

reflect those of the Federal Open Market Committee or anyone else in the Federal Reserve

System. The authors are grateful to Chris Riddell, Craig Riddell, and The ANNALS editors and

conference participants for insightful suggestions.