During the period between the Second World War and the mid-1970s, the US enjoyed rapid economic growth, rising incomes for households across the distribution and a decline in income inequality. Since then, growth has continued, albeit at a slower pace. But, as Larry Mishel and Heidi Shierholz document in Chapter 1.1, the incomes of households at the middle and bottom have risen much less rapidly, both in an absolute sense and relative to the incomes of those at the top.

This presents a challenge to social democrats. If growth no longer secures rising living standards for low- and middle-income households, is there anything else that can be done to ensure that these families thrive in the modern economy? In this chapter, I first explore why strategies that worked in the past – namely, wage growth – may no longer work in the future. I then recommend an alternative: high employment. High employment would both raise household earnings and shore up the financing of redistributive government transfer programmes. High employment is not, however, a silver bullet, and I conclude by highlighting other policies that would complement and reinforce its benefits.

The broken link between economic growth and wages

During the early post-war decades, much of the growth in incomes for working-age Americans came from rising wages, which increased more or less in line with the growth of the economy. As Mishel and Shierholz (Chapter 1.1) show, that link has been severed for those in the lower half of the wage distribution. Since the 1970s, real wages in the bottom half have barely budged.

The key to rising wages during the post-war golden age was that many US firms faced limited product market competition, limited pressure from shareholders to maximise near-term profits and significant pressure from unions (or the threat of unions) to pass on a ‘fair’ share of profits to employees. Each of these three institutional features is gone, and it is unlikely that they will return. Moreover, a host of additional developments now push against wage growth: technological change, stagnant educational attainment, the shift of employment from manufacturing to services, a more general trend away from middlepaying jobs, a rise in less-skilled immigration, growing prevalence of winner-take-all labour markets, a shift towards pay for performance and minimum wage decline.