I got the chance to talk with Arin Dube about his new book The Wage Standard, which I highly recommend, in the Substack Live video above. Back in February 2013, President Obama called for a $9 minimum wage, and that being front-and-center for liberal economic audiences was so new that I interviewed Dube for the American Prospect (“Minimum Wage 101”) to hand-hold readers through the basic economics of it. A lot has changed in that 13 years! This book is an excellent summary of it.
Questions about vibes and AI are at the end, but also check out three more technical ones I asked: (1) was UI actually better than keeping people on payrolls in 2020? (2) how do we understand the relationship between the 2021-2023 wage compression and inflation? And (3) as AI research reorients us to thinking of the economy as an aggregation of tasks, instead of workers or firms, what can we learn from the idea of monopsony?
I plan on trying to do these more often; if you have a book you’d like to discuss please reach out yourself or through your publisher.
AI-generated transcript. Confirm via video before any quotations.
Introduction
Mike Konczal: Alright, we’re live. New television era. I’m very excited to be here talking about the book The Wage Standard with the economist and friend of the blog, Arin Dube.
I want to start by saying I love this book. I thought it was really good, and I highly recommend it. Three things about it. One: if you don’t know very much about the current debates around the labor market and wages and the minimum wage, it catches you up fast. It’s very accessible. Anyone who’s generally interested but doesn’t have background would learn quite a bit. Two: I try to keep up on this, and I learned a bunch. I got refreshed on things I’d forgotten, weird side debates I wasn’t aware of. So even if you feel like you know a lot of the stuff in this book, even if you know what monopsony looks like on a supply and demand curve, you’ll still learn from the book, which is impressive. Third: even if you don’t like these arguments, even if you’re very conservative or very neoclassical, or you just don’t like left-liberal economics, you’ll still get the best version of these arguments. They’re presented fairly, with technical parts in the appendix, but you’ll be caught up on how people in the broader center-left coalition are thinking about this.
So congratulations on a great book. It reflects a whole career of excellent work on this. I want to start by asking: what led you to write it? Economists don’t often do books.
Arin Dube: Thanks for having me, and thanks for the conversation.
Mike Konczal: You should do an introduction too. I forgot to introduce you more properly. Talk about where you teach and what you study.
Arin Dube: I’m a professor of economics at UMass Amherst, here in Massachusetts. That’s where I’m talking from.
The book is a culmination in some ways of a lot of work I’ve done on the topic. I’ve written on what minimum wages do. I’ve written about market power in the labor market, monopsony, as the word goes. But most of that is geared toward academics, particularly other economists; I’m trying to publish in economics journals. More and more it’s struck me that ultimately, if we want to have a conversation about wages, it needs to be done in a broader context, with people who aren’t studying economics. And yet these ideas are important to understand and wrestle with.
So I really wanted to have a broader conversation, and this book is an attempt at that, about a really simple point at a certain level. That simple point is that most American workers deserve a raise.
What’s the basis of the argument? The starting point is that between 1980 and 2019, overall productivity in America grew by something like 73%. People at the top, their wages grew by something comparable. But the median wage grew only by 23%. And at the bottom, the 10th percentile, even less. So the question becomes: why did this happen, and what can we do to make it better?
That’s really the core of the book. Let’s try to understand how the labor market works, and when it works well for people, because sometimes it does. But other times, potentially for long stretches of time, it doesn’t. Then try to unlock that mystery and actually make the market work better, with supporting institutions that can ensure more broad-based prosperity.
In many ways, I started writing this book early in the pandemic. I started writing, for example, about when the market can produce broad-based prosperity, because we actually had, for extended periods, broad-based wage growth in the United States during the 50s and 60s, and even more recently, in the late 1990s and the late 2010s. So the question becomes: what’s going on in those periods that makes us grow together, when at other times we just grow apart?
While I was writing this, we went through a period of a very different sort of labor market, a very tight one, with really strong wage growth at the bottom. It was uncanny because I was writing about ideas that were actually happening right outside, which made it exciting but also challenging, because I was trying to figure out what was going on in real time. The aim is really to engage with this broader set of topics, and hopefully with a broader set of readers, about what we can do to make sure there’s better pay in this country.
How Wages Are Set: Skills, Firms, and Monopsony
Mike Konczal: That’s great. You mentioned the pandemic. We have some viewers, so thank you for joining us; feel free to throw questions in the live chat. We’re definitely going to talk about all things pandemic, the Beveridge curve, inflation, and the vibecession. And the last question, in about 40 minutes, will be on AI. So if you’re excited to hear Arin on AI, you have to wait until the very end.
The book is great because it presents things as a series of economic ideas and debates, and then walks through the literature, how it evolves, and the tools, technology, and data you have access to. There are two big conceptual debates whose evolution you explain. One is what happens with minimum wages, a view that sees markets as very competitive and thus assumes a minimum wage would kill off a lot of low-wage jobs. You introduce the audience to the notion of monopsony and explain that. On the other hand, there’s this idea of human capital. People may have heard of it in an education context: the idea that wages for most people are basically set as a function of personal skills. You bring in the idea of superstar firms, and the idea that firms really matter. I’d love for you to talk through both of those as a set of economic ideas and debates.
Arin Dube: Let me start with the idea of how wages are set, because there’s a really interesting historical arc here. One view, like you said, is basically that wages are rewards for skills, compensation for what skills people bring to the market. That’s certainly a very important part of what wages are, but it’s not the only part.
The idea that employers actually have some degree of choice, some discretion in setting pay, is at the heart of what the word monopsony means. Literally, monopsony means a single buyer of something, in this case, labor. But that’s not really what the theory of a monopsonistic labor market is about. There are many employers. It’s just that employers have some degree of choice, some degree of market power, where they choose: are we going to go for a high-wage strategy, or a low-wage strategy? That choice can lead to different people getting paid differently, and it can also explain certain mysteries about the labor market. I’ll come back to those.
The basic idea that employers have some choice in setting pay goes back in some ways to Adam Smith. But the term monopsony was coined by Joan Robinson in 1933, a British economist well known for many things. In this case she laid out the theory. In the mid-20th century there was actually a good amount of empirical work supporting it, much of it done by more institutionalist labor economists who went and surveyed factories. Sumner Slichter, for example, surveyed a bunch of factories in the Boston area and documented that, look, there are actually different wages being paid in the same labor market for fairly narrow occupations.
Those ideas had some currency at the time, but they weren’t fully convincing because some economists were concerned that maybe these workers weren’t really the same. Even within narrow occupations, there are differences in skills, effort, and so on, and those are what drive the wage differences. So it took some time, and it took the advent of better data to settle the question. The better data took the form of matched employer-employee data, administrative data that allows us to track nearly everyone in the labor market as they hop from one job to another, and see what they actually get paid.
With that, you can see what happens if someone changes jobs. For example, we know Walmart wages are lower than wages paid by Target, a similar retailer. But is it the case that the same worker gets paid differently if they actually work at Target versus Walmart? The answer turns out to be: yes, they do. This reflects that it’s not just a matter of the skills you bring to the table. It’s also a choice employers have about what sort of wages to pay.
That’s a big part of what I try to highlight in the book. In many ways, the wage stagnation that has happened in different periods over the last 40, 50 years can be thought of as reflecting a set of choices: choices by employers about what wage strategies to pursue, and choices by policymakers about what supporting policies and institutions to provide.
Even though these ideas have been around for a while, we’ve seen a huge increase in research on these topics in the last 10 years. So it’s a particularly good time to tell these stories, because they’re also very active and vibrant research topics in academic economics. Connecting that to broader policy-relevant questions, with a broader audience, is one of the aims of the book.
The Minimum Wage: Natural Experiments and Channels of Absorption
Mike Konczal: That’s great. You do a great job of summarizing the minimum wage literature. Again, for people without background, but also for people with it, you have a good sense of how those debates evolved, what evidence was brought in at different points, and where it stands now. You talk about how for some people, if the minimum wage goes up, obviously something has to fall apart. And you talk about three Ps, productivity, prices, and profits, and what happens, and what we should think of it, especially in the broader center-left.
I also want to bring up an argument you hear sometimes. I’ve seen this on Econ Twitter. There’s a paper by Anna Stansbury and co-authors saying, yeah, there’s no job loss with the minimum wage, but the jobs might get worse. In their paper, there might be more injuries. I don’t know how robust that is. How should people who support higher wages and support minimum wages think about the likely consequences across these different dimensions?
Arin Dube: I’m going to go back a little bit and then come back to the question about the channels. So just so everyone’s clear: we used to set the minimum wage at the federal level and adjust it fairly regularly. Between 1938 and 1980 or so, the minimum wage would go up periodically and it kept up with overall productivity of the economy, for the most part, and with wages generally. That was the basic pattern.
Then something happened. Starting with President Reagan, who did not raise the federal minimum wage during his two terms, we started going for really extended periods without any increase in the federal minimum wage. We’ve now gone over a generation. In fact, we’ve gone something like 17 years without raising the federal minimum wage, which is a first.
In general, this is a terrible way to set policy. Whatever you think the right level of the minimum wage is, going for 15 years or more and then suddenly increasing it is not a great way to do it. It’s a dysfunctional way of setting policy. But there’s a silver lining to a dysfunction like that: it becomes a natural experiment that allows us to actually study what happens. Because when the federal government stopped raising the minimum wage, some of the states stepped in. States as the laboratory of democracy in the United States is a long tradition, and the minimum wage became one such thing.
Suddenly you have these natural experiments: New Jersey just raised its minimum wage in 1992, but neighboring Pennsylvania did not. What happens? This, of course, is the very well-known study by David Card and Alan Krueger that I talk about in the book, which really shook up the discipline of economics and pushed us to think hard about the impact of the policy. Because they found that it surprisingly did not lead to fewer jobs in fast food in New Jersey compared to Pennsylvania. That was a big shocker, because most economists thought the opposite would happen. In the mid-80s, The New York Times had an editorial saying the right level of the minimum wage was zero, relying on the then-common sense that this is something with a large negative impact, including reduced jobs.
At this point we have a bunch of work that builds on this original Card and Krueger study. Some studies differ. Some find positive employment effects, some negative. But overall the body of evidence suggests employment effects are very small. One important takeaway: if we look at the last 15 to 17 years, we’re running a particularly profound natural experiment, where you have 30 states that have raised their minimum wage and 20 that have not. These differences have now been around for over 12 years. These are not short-term effects. You might think, oh, maybe in the short run things are muted but in the long run things matter more. I don’t know what the long run is, but 12 years is a pretty long time.
Anyone can do this. It’s very easy. Just look at restaurant employment per capita in those 20 states versus the 30 other states and track it. You don’t have to do anything sophisticated. It’s very clear: wages have grown a lot more in the 30 states than in the 20 others, and employment looks pretty much the same. It becomes really hard to argue that the kind of minimum wages we’ve actually enacted in the United States have had a large employment effect.
So then the question is: if it’s not employment, what is it? What are the channels of absorption? Here too we have a good amount of evidence. One thing that happens is that as these jobs become better, fewer workers quit and fewer leave. So it reduces turnover. The monopsony theory we talked about also helps us understand why employment may not fall. Simply put, when employers are choosing to pay a lower wage, they’re going to have more vacancies. They’re okay with that because, even though they don’t like vacancies, they also don’t like to pay higher wages, so they’ll live with vacancies more than raise the wage when they’re trying to maximize profit and have some monopsony power. But what happens if the government steps in and says you have to raise wages? Then your vacancies may actually fall, because you’ll have an easier time recruiting and retaining workers. So you may end up killing vacancies and not killing jobs to a certain extent. That’s in fact consistent with a lot of the evidence we find.
This also has a knock-on productivity effect, one of the three Ps. We see it in lower turnover. We also see it more directly in, for example, the retail sector, where value-added per worker rises beyond anything caused by changes in prices. The third channel is prices, because prices do go up somewhat when the minimum wage rises. But the way to think about it is that this is a fairly small increase in price compared to the much larger increase in wages for low-wage workers. Overall, higher-income consumers end up paying a little more for a burger to substantially raise wages at the bottom. And finally there’s some reduction in profits, which again is consistent with the idea that employers have some degree of market power.
Now, on your question about other potentially negative impacts on job quality: the Stansbury et al. paper you mentioned used city minimum wage differences across California and found that higher minimum wages are associated with more injuries. I take the paper seriously. It will be important to see if it replicates in other contexts. But it’s important to keep in mind the broader issue. The question is, are these jobs overall better? The answer is overwhelmingly yes. Even in their estimates, only a small fraction of the job value is offset by injuries.
We know these jobs are getting better because, as I said, you see very sharp reductions in separations. A great example comes from a paper I just put out a couple of weeks back, looking at the California fast food minimum wage. It’s a particularly high sectoral minimum wage affecting large fast food chains. Because these jobs are substantially better now than other jobs, turnover reduction is just off the charts. It fell a huge amount. That’s basically people voting with their feet, or in this case, not voting with their feet, not moving, which reflects that these are much, much better jobs.
So to me it’s pretty clear that a large body of evidence suggests job quality rises. Are some offsets possible? Yes. But, and I think the authors would agree, the implication, if there were greater injuries from work intensification in some settings, isn’t that you shouldn’t raise wages, but that you should also have better OSHA enforcement and stronger workplace standards. Higher pay and safe work aren’t substitutes. They can be a joint policy problem.
Full Employment, Wage Compression, and the Post-COVID Inflation
Mike Konczal: That’s great. I think it’s good to talk about COVID and the business cycle associated with it now and do some technical stuff. As a broad thing, your book has a great discussion about full employment and how, especially since 1980, basically the only time real wages adjusted for inflation actually go up over longer periods is the handful of years in which unemployment is below 5% or close to whatever is estimated as the natural rate. In periods where unemployment is quite high, as it’s been since 1980 and especially during the Great Recession, real wages don’t grow. They may even fall for many people outside of that tightness.
Obviously we had a period of very tight labor markets following the reopening in 2021 and 2022 in particular, with lots of job openings available and the unemployment rate reaching basically its lowest level since the 1960s, 3.5% for a brief period. Even now, with all the chaos, it’s still about 4.3% over the past year and a half.
Let’s approach the first question in a couple of steps. There was also very significant wage compression. You document this with co-authors and it’s in the book as well. Wages at the bottom grew much faster, maybe even 10% adjusted for inflation, compared to the top, where they grew much slower (more negative at the beginning, then picking up). So you have significant wage compression, wages at the bottom growing faster than those at the top, when in general over the last 50 years, especially since 1980, it’s been the opposite. That’s the definition of rising inequality, and that’s what we’d seen.
Should we understand that wage compression to have been an important component of the inflation wave that we saw during that period? CPI growth peaks at about 10% in 2022. A lot of that is the war in Ukraine, gas prices. But we also saw huge shifts basically across the board, including in what we often think of as wage-intensive, labor-intensive services. How do you see the relationship between the two? Did we have to pay an inflation cost to get that wage compression?
Arin Dube: It’s useful to think about what drives the compression. What drives the compression is a tight labor market. The question is, does a tight labor market necessarily cause inflation? Of course, higher wages: if I suddenly increased everyone’s wages by 10%, that would tend to have an impact on prices. But the question isn’t that. The question is, when you have a low unemployment rate, does that always produce inflation?
In a normal environment, without a major supply-side disruption, the answer often is no, not necessarily. One of the things I talk about in the book is how the Federal Reserve learned in the late 1990s, and then again in the late 2010s, that in fact the unemployment rate could fall a lot more than was the conventional wisdom, and that did not produce an inflationary boost. There was no big inflation in the late 1990s. There was no big inflation in 2019. In fact, the inflation rate was undershooting the target. But those periods also produced some degree of compression and broad-based wage growth, particularly strong wage growth at the bottom.
One of the things I argue is that if you look at the period between 1979 and 2019, pretty much if you just look at the seven years with a really tight labor market, and some evil-genius supervillain snapped their fingers and made those seven years disappear, what would happen? Well, if you’re at the top, the 90th percentile, your real wage growth averaged over this period would go from about 1.1% to 1%. Barely anything. But if you’re at the bottom, the 10th percentile, your real wage growth would go from an already small 0.3% to zero. Nothing. Nada.
So tight labor markets are really the periods when you actually see real wage growth, and lots of those have happened without producing an inflationary burst. We did have an inflationary burst, which was very painful for many people, following the reopening after COVID. The question is, was that inflation a necessary part of the compression? I would argue not. There are a few ways to see why.
One is to look across the U.S. and ask what happened in states that became particularly tight versus other states that did not. Using that cross-state variation, you can fit what’s called a wage Phillips curve. Florida was a particularly tight labor market. Did wages rise more there than in Massachusetts? The answer is yes. In tighter labor markets, wages grew faster, particularly at the bottom. That’s step one.
Step two: did prices also rise particularly strongly in those states where the bottom wages rose? You can use regional price differences and say, let’s deflate the wage using real regional prices and not a national-level price index. If it turned out that bottom wage growth really fueled most of the inflation, then once you use regional prices, the bottom wage growth would look a lot more meager. It would partly undo itself. Is that what happened? We’re in the process of revising the paper, and we show: no, it makes a very tiny difference. Regional prices did not sharply pick up in the same way that bottom wages grew in tighter labor markets. That makes me think wage growth at the bottom was not a major driver of the overall inflation.
In fact, wages were struggling to keep up with price growth. So yes, wages grew, but in some ways they had to grow. Otherwise you’d have major negative real wage growth. And we did have negative real wage growth for many people in 2021 before wages actually picked up. It’s a messy situation. Learning the lessons of what a tight labor market does when you’re in the midst of a major supply disruption is not the ideal way to learn. But that’s what happened.
We can also look at other time periods, which is why it’s important to compare what happened when we had a tighter labor market that was not concurrent with a major supply-side shock. That helps us understand the broader lesson. And the broader lesson is really important, because we’ve actually spent more time closer to full employment in the last 10 years than we did in the 40 prior. Not surprisingly, we’ve actually had better wage growth in the last 10 years than we did in the 40 years prior. But if we fail to understand that lesson and say, “don’t bother with full employment, it’s going to lead to inflation,” even though I don’t think that’s true when it’s not coupled with a major supply disruption, then we will potentially lose that. And if we can’t extract the signal from the noise, it’s going to be hard to defend gains that we’ve actually made. And we have made gains, as I discuss in the book.
Mike Konczal: Yeah, absolutely. As you said, overall wages were negative at peak inflation in 2021 and 2022. If you run it under more sophisticated Fed modeling, in general prices are leading wages during this period. Wages don’t predict prices, they don’t come first and cause businesses to raise prices in response. What you see in sophisticated models is that nominal wages (the number on the paycheck) jump but the real value falls during peak inflation, and then afterwards nominal wage growth slows. So you’re getting less of a big number on the check, but you can buy more. That fits a supply-shock story, where workers are trying to catch up to all the stuff that’s happened and they follow this mimic pattern as the supply shock comes off. That’s kind of my basic model of the story, and I think it fits pretty well.
Also, if it really was wages causing it, lots of things can happen in the world. Models aren’t concrete, right? But you’d have to expect a real labor market disruption in order to bring down inflation, which we did not see. Unemployment went from 3.5 to 4.3, but basically 4.1 by the time the disinflation was over. That’s a zero increase, when most people thought you’d need a big jump if wages were really the central driver. And the inflation was everywhere, but the wage growth wasn’t.
Unemployment Insurance, the Great Reshuffle, and the Job Ladder
Mike Konczal: I have a more technical question, but I hope people stay on. There was a really big debate early in the COVID recovery about what to do with the fact that all these businesses had shut down. Speaking at a very high gloss: a lot of peer countries, especially in Europe, basically paid employers to keep people on payroll, “air-quote” working, even though they weren’t, to keep that employment relationship going. In the United States, we basically allowed the severing of that relationship by giving money to people in the form of unemployment insurance, very stepped-up UI, which is a whole other conversation, but very generous for the United States and I think quite revolutionary. Crucially, people were unemployed for a period.
A lot of people at the time were very nervous: oh no, being employed is important for people, for their skills, for their sense of purpose; thus when we try to reopen, these people will be dislocated and it’ll be hard for them to find work. My read, and I’m curious where the labor economics literature is coming in on this, is that because people had money in their pockets, demand was strong enough that there were lots of job openings. It was very easy for people to find them. Those job openings skyrocketed and then fell mechanically as we reopened, which I think threw off a lot of people. That resorting allowed people to upskill into better jobs. If you look at the aggregate data, and you talk about this in your book, a lot of the wage growth was from job switching, and a lot of the switches were into higher-paying, better jobs. I call it the great upskilling; people used to call it the “great quitting,” but that wasn’t accurate, and you have a great history of this in the book.
Obviously a lot of things are in play here, and we were more unequal so there’s more room for wage compression. But I’m curious what you make of that initial decision to go to unemployment insurance instead of preserving matches. Because there’s a Fed study I’ll link to when we put this online that I think links it to the unique productivity growth and wage growth we saw.
Arin Dube: Look, I’m on the record in early 2020, right at the very beginning of the pandemic, on policy calls with other economists saying we have to preserve the matches. Because it’s really costly if you don’t, to build good matches again. In Germany, for example, they use work-sharing. Instead, we’re just throwing people out of jobs and onto unemployment benefits. But apparently that’s the only way we can do it, then we need to provide a generous UI benefit. But gee, wouldn’t it have been better if we could have done what Germany was doing and preserved the matches? That was my understanding, and I think it was a common one. It wasn’t unreasonable.
But here’s the thing. What if I tell you those matches weren’t that good? Maybe they were crappy matches. And there’s a reason for that: we spent over a decade after the Great Recession where the job ladder had just stopped working. For listeners, the job ladder is basically the process through which people move from worse jobs to better jobs. Generally you’re going to have this churn, and generally upward movement in terms of job quality. That just stopped after the Great Recession. Maybe by 2019 it had really kind of started picking up. Quit rates had risen. But that meant we had this huge stock of pretty poorly paid positions, more so than even at other times in our country’s history.
So it was ripe for what I call the great reshuffle, where people basically move out of these positions and find better ones. And what better time to do that if you’re already one step removed from the work? And yes, if you have some money in your pocket, you may be a lot more willing to look around.
Now, the part that’s not accurate is that some people felt more generous UI benefits would lead people not to work. There’s a good amount of research on this, and while there’s some disagreement, the general set of findings is that it had fairly modest impact on whether you were working or not. But it may have played a role in how likely people were to actually look and search for better jobs.
The other interesting thing: there’s evidence that people who are at the worst-paid or really poorly paid positions often don’t realize there are better options out there. This has been shown in the data. So maybe suddenly, if people start moving and you learn that half your co-workers quit, presumably they got some job, you think, maybe I should look around more. There may be a multiplier effect. This is hard to know for sure. There is, of course, people who quit and put it on TikTok, “how I quit,” and those things may have accelerated some of it.
But whatever the reason, what is absolutely true is that this led to a reallocation of work, a reshuffling of people up the job ladder. That in turn put pressure on those low-paying positions to upgrade their pay. That was important. It also means people were more likely to be at more productive companies and workplaces. That actually has what we call in my work with Autor and McGrew a “double dividend.” You’re actually increasing productivity in the economy by reallocating workers to higher-productivity locations.
What’s also interesting is that something like this also happened, a bit before COVID, in Germany. We see a reduction in wage inequality from reallocation and a tighter labor market in the 2010s in Germany. The authors of that paper said they saw what was going on in the U.S. that we were documenting, went back, and found evidence consistent with it. So I think we’re gaining a general understanding of why a tighter labor market is not just good for workers, and of course it’s good for people looking for a job when there are more jobs. It actually makes the market function more efficiently, in some ways more competitively, than if you have a very slack labor market. Which highlights, again, the importance of a full-employment economy.
The Vibecession
Mike Konczal: We’ll start to wrap up with two more questions. Up to this point you’ve been very grounded in the evidence. Everything you’ve alluded to or mentioned has peer-reviewed studies behind it, and you’ve really dotted the i’s and crossed the t’s. The next two questions we can be a little speculative on: the vibecession and AI.
We had this great recovery in terms of GDP and jobs. It’s not so much that consumer sentiment and negative opinions on the economy are negative because there are good reasons to be concerned. Housing markets are very tough right now, among other things. But sentiment readings are at record lows and they’re much more pessimistic than we’d expect given the fundamentals. Various studies try to put more things in to predict why consumer sentiment and opinions on the economy are so low. They tend to point to the fact that prices went up, but sometimes (I’m not a hardcore rational expectations guy, but I always want a little bit more than that), I want more. What do you make of the way consumer sentiment has evolved over the last couple of years, given the labor market and wage growth?
Arin Dube: This is interesting, because of course in the last year there’s some pretty objective reason for people to have that vibe. A lot of us have said this on Twitter, that inflation has eroded real wage gains for the last year. That’s an important thing to keep in mind.
But this has been going on for some time. This is tricky because there’s some amount of negativity bias that might arise. Some people have argued and shown evidence that economic news coverage has at times been more negative than fundamentals warranted. But at a certain level there was some legitimacy to the bad vibes. What I try to do in the book is to acknowledge that you can have legitimately bad vibes, but it’s also important to tease out the positive parts, because otherwise we get stuck in a self-defeating loop.
What’s the reason for the bad vibes? Part of it is something we’ve known for a while: people don’t like a jump in the price level. That’s really clear from a bunch of pieces of evidence. People don’t like higher prices, even for the same real wage. But it wasn’t even that real wages always rose. In fact, real wages first fell before they caught up and grew, and it was messy.
For low-wage workers, the bottom third of the workforce, real wages did grow very strongly. For example, the 10th percentile grew by a total of 15% real wage growth after COVID, between 2019 and 2025. That was about the same as it had grown in the 40 years prior. So five years versus 40 years. But if you’re in the middle, that wasn’t really the case. So there was a lot of dissatisfaction.
What I do think is important, again, this is me talking about extracting the signal from the noise, is that if we conclude that nothing happened, that no gains were made, that things were just really terrible, then we lose sight of the fact that we actually have had better real wage growth, more broad-based real wage growth, in the last 10 years than we did in the 40 years prior. If we don’t get that, then we get all the doom and gloom, and we lose sight of what works. And that’s my real plea: we have to understand what works. You can be unhappy. There are reasons. The book documents the long-run reasons for legitimate dissatisfaction with the way the American economy has worked and not worked. But if we don’t get what works, then we’re going to repeat our failures of the past, and that would be bad.
Mike Konczal: Yeah, I agree. And it’s tough because you think of the trade-offs. There was a lot of fiscal stimulus in 2021. Maybe that added one percentage point to inflation. The estimates are very complicated. But if that also gave you a real wage recovery and a really good labor market recovery that itself wasn’t particularly inflationary. If you had the same inflation, but the real wage growth would have been much lower. And unemployment didn’t really fall below 5% or 4.5%. How much worse would that situation have been? We see it in a lot of peer countries.
Arin Dube: Exactly. We see the economic consequences, and we see very similar political outcomes of anti-incumbent sentiment. So the idea that if we’d simply done no fiscal policy, or monetary tightening had happened a lot earlier, yeah, I believe that could have led to some reduction in inflation. But look around: not every country, or even most countries, did the fiscal and monetary stimulus we did, and it didn’t lead to better outcomes overall for the typical worker in those countries. So be careful what you wish for, because you could get stuck with much of what you don’t like, plus some new bad things. That probably wouldn’t be good.
AI and the Labor Market
Mike Konczal: To wrap up: artificial intelligence. Obviously everyone’s very concerned and focused on the labor market. Obviously the people creating it are making very big predictions about what’s going to happen to the labor market. I talk to random people at daycare pickup, and someone I know is retraining to be a nurse because she was doing work that’s very AI-exposed. There’s a really wide anxiety about it. As an empirical labor economist, what are you watching for? How are you approaching this as a question about what could happen?
Arin Dube: It is just really weird that I can’t think of too many cases where we have a major technological change and the people really advocating for that technology are mostly out there saying how it’s going to destroy the economy and livelihoods. It’s a very peculiar situation. I don’t know what’s making it that way.
Mike Konczal: It was probably good for fundraising. It’s probably bad for building data centers, and we’re seeing a lot of that.
Arin Dube: But frankly, we do not know. I do not believe anyone really knows. There are layers of uncertainty. Part of it is in the technical space: what happens in terms of actual large language model development, whether it’s going to continue at the same rate or not. Then there’s the economic part, and this is where I think people are sometimes very naive about how adoption actually works. There are lots of examples of new technologies that didn’t lead to the miracle productivity growth you might expect.
One way economists think about this is the O-ring theory: when you have a bunch of tasks, you need all of them to work. Maybe you can improve productivity on nine out of 10 tasks using AI, just to be really generous. But then you’re stuck with that one task where there’s no productivity increase, and that prevents you from getting the boost you might otherwise expect. So how those tasks fit together, and how workplaces rearrange them, are the big questions. They can limit both the gains and the losses from AI.
In general, I’m very agnostic about where I see the impact, because I can see arguments that it would substitute for tasks of a certain sort, but it can also augment the capabilities of some people in ways that could boost productivity, including for workers who haven’t really gained much from technological change in the last 40 years, including blue-collar workers. So I can see pretty different types of impacts on wages and inequality. There’s just a lot of uncertainty.
What I’m trying to pay attention to, frankly, is my students. I see this in my classroom: students who are graduating, there’s a lot of nervousness and dissatisfaction and uncertainty about what’s going to happen. That’s really painful. And it’s not aided by some wild speculations we sometimes hear from people.
One thing I think is clear is that there’s always a tendency to over-interpret the data. For example, there was a lot of discussion that young college graduates more exposed to AI were the ones seeing unemployment rise. But there’s a strong counter-argument that the unemployment rate rise has actually been broader, including for non-college workers, which would be hard to explain using AI as the main thing. So be careful about interpreting secular trends from cyclical patterns. That’s probably always a good thing to keep in the back of our minds.
Mike Konczal: That’s a great way to conclude, but I want to ask one more technical question. I’m just curious on your quick opinion. You’ve got two more minutes. I’m noticing, obviously trying to read a little bit more into the sophisticated modeling of what AI might do. In Acemoglu’s papers from the late 2010s there’s this real focus on approaching the economy as a series of tasks, where previously people maybe were thinking of human capital (individual workers) or aggregates of firms. Now it’s an aggregate of tasks. Does monopsony still provide a useful framework if we’re all going to start wrapping our heads around the economy as a series of tasks over the next few years?
Arin Dube: Absolutely. In fact, one of the things in the revision of the paper with Autor and McGrew is a model of how technological change interacts with tightness and labor market power, monopsony power. We argue that in fact a slack labor market makes the impact of technological change more unequal. This is very relevant when we think about AI. Imagine you have some technological change that displaces workers. If you have other forces tightening the labor market, you’re not going to have the same kind of wage differentiation and wage inequality growth that might otherwise happen. In contrast, if you have a very slack labor market, there’s nothing pushing back against the monopsony-increasing aspect of technological change.
So this is where thinking about how we govern the technology is also a really important point. In the book I talk about the Writers Guild example. The Writers Guild union struck and were able to get not just better streaming residuals and better pay, but also the ability to have protection against the use of AI to replace the work they’re doing. That’s a good example of why we need better institutions, including the sectoral approach I put forward in the book. In a world of AI, in a world of technological change, you need better governance to decide and to shape how the technology affects the labor market. We don’t have to think of the technology as simply something that happens to us. We can also shape it. And I strongly believe that.
Mike Konczal: That’s a great way to conclude it. Arin Dube, the book again is The Wage Standard. I highly recommend it. Thank you again for taking the time.
Arin Dube: Thanks for having me.
