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By Root 1307 0

forces have brought prosperity to many workers around the world. China’s gross domestic product per person tripled over the last decade, to $7,200, as manufacturers have relocated production there to take advantage of its cheaper workforce. Since 1990, the share of the Chinese population living on less than a dollar a day dropped from 60 percent to 16 percent. But in the United States, this intense competition upended many of the agreements and institutions that governed the labor market through much of the twentieth century. Eastman Kodak is going through a wrenching transformation as film gives way to digital imaging. In 2009 it discontinued Kodachrome, which had been around for seventy-four years. And it lost $232 million. Its workforce has dwindled to fewer than twenty thousand, less than a third of its staffing at its peak.

Unions, once tools to obtain higher wages from employers, have lost power. Private-sector workers represented by unions make about 21 percent more than those who are not, a premium that is worth about $148 per week. Union contracts remain useful in recessions—when employers look for easy places to cut costs. But unions are dying off as unionized firms shrink or go out of business while new arrivals resist them tooth and nail. Over the past thirty years, the share of workers in the private sector covered by collective labor agreements plummeted from almost 21 percent to 7 percent.

Until the 1970s, Detroit’s Big Three carmakers made nine out of ten cars and light trucks sold in the United States. General Motors was known as Generous Motors. By 2009, the Big Three’s share of the American market was about 45 percent. General Motors and Chrysler went bankrupt, rescued by a government bailout. The United States still has an auto industry, but most of it grows in non-union shops outside Michigan. In 1999, about 38 percent of the nation’s autoworkers were covered by union contracts. In 2008 only 25 percent were. This emergent auto industry is unlikely to provide the generous pay and benefit packages that union shops once did.

PAYING SUPERMAN

The American labor market is about as ruthless as it gets for a rich industrial nation. Western European social democracies have many rules mandating minimum holidays and maximum working hours. Higher minimum wages and tax rates on high incomes favor more homogeneous wages. The American workplace, by contrast, is mostly about free competition—unblemished by government interference. The job market is structured with one objective in mind: to reward success. It has led to an enormous pay gap between the best and the rest.

In 1989, the San Francisco Giants, the most expensive team in Major League Baseball, paid a median salary of $535,000, more than five times the median wage at the Baltimore Orioles, the cheapest club at the time. Big as it seems, the gap is small by current standards. In 2009, the New York Yankees paid a median wage of $5.2 million, nearly twelve times more than the Oakland Athletics at the bottom.

A similar dynamic is on display in the corporate suite. In 1977, an elite chief executive working at one of America’s top one hundred companies cost about 50 times the wage of its average worker. Three decades later, the nation’s best-paid CEOs made about 1,100 times the pay of an average worker on the production line. This change has separated the megarich from the simply very rich. A study of pay in the 1970s found that executives in the top 10 percent made about twice as much as those in the middle of the pack. By the early 2000s, the top suits made more than 4 times the pay of the executives in the middle.

An elegant economic proposition takes a stab at explaining this phenomenon. In 1981 the University of Chicago economist Sherwin Rosen published an article titled “The Economics of Superstars.” In a nutshell, Rosen argued that technological progress would allow the best performers in a given field to serve a bigger market and thus reap a greater share of its revenues. But it would also reduce the spoils available to the less gifted in the business.