How Labor Market Institutions Matter for Worker Compensation

Abstract

Labor markets deviate substantially from the competitive 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 spotlight on the ways in which labor market institutions sometimes work to the detriment of lower-paid workers. 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’ outcomes, 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 concentration, 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 discusses key options for improving worker outcomes.