What explains the broken rungs on the U.S. job ladder?

It’s hard to find a consensus of opinions, but this might come close: Workers want their wages to go up over time, ideally over and above inflation. These raises are what allow them to not just keep pace with the cost of groceries and rent but afford more—nicer neighborhoods, better computers, more berries. At an economy-wide level, this real wage growth (wage growth after adjusting for inflation) means that as society becomes richer and more productive, living standards improve in the population as a whole. It’s what allows children to grow up to be better off than their parents.

Between the late 1940s and late 1970s, Americans enjoyed strong economic performance. Real GDP per capita, a measure of total economic output per person, doubled between 1947 and 1977. So did worker productivity, measured as output per hour. Real wages rose in tandem with these other indicators of economic growth, more than doubling over the same span.

Starting around 1980, the picture changed. The economy continued to grow, but real wages no longer kept pace. Between 1980 and 2020, real GDP per capita and worker productivity both doubled (a 100 percent increase). But real wages grew only 25 percent, former Institute visiting scholar Niklas Engbom and his co-authors explain in a recent Institute working paper. And once demographic changes are taken into account— the workforce has grown older and more educated—real wage growth is close to zero.

The trajectory of productivity growth tells us that the economy is producing more. The flat real wage growth tells us that many workers are not benefiting from that progress. Why? Economists have studied a number of possibilities. The introduction of new technologies, trade exposure, the decline of unions, and the falling real value of the federal minimum wage have all negatively affected wages for American workers over the last four decades.

Engbom and his co-authors examine a complementary explanation: Something about the way workers previously made wage gains over their career has changed.

How the job ladder helps workers reach higher wages

Economists like to use the metaphor of a job ladder to describe how workers progress in pay over their career. A worker gets an entry-level job, acquires skills, then takes a new, better-paying position at a different company.

Nursing is a booming occupation where some can still climb the job ladder that many American workers were once able to count on. This upward trajectory has characterized the nursing career of Lauren Kemp. (Kemp is related to the author.) After earning her Bachelor of Science and becoming a registered nurse, Kemp’s first job was at a nursing home in northeast Ohio, where she assisted residents with activities of daily living and medication. The pay was quite low, Kemp said, lower than many hospital RN positions. After nine months, she found a nursing job in a hospital in Texas where the pay was higher (and cost of living lower). A couple of years later, she started as a traveling bedside nurse—a challenging job but traditionally one that offers the highest wages for nurses. Her path illustrates how job-to-job transitions can lead to higher earnings during a career.

Though the job ladder metaphor has always been idealized, research has found again and again that workers who make more moves from one employer to another experience greater wage gains over their lifetime.

Evidence of a weakening job ladder

How can we know how prevalent Kemp’s experience of upward mobility is among workers generally? In the data, Engbom and his co-authors look for evidence of upward job mobility by comparing the wage distribution of employed workers with the distribution of offered wages to nonemployed workers. Economists expect these distributions to look different for at least three reasons. One, employed workers tend to have more bargaining power to negotiate higher wages when they receive an offer. Two, employed workers tend to be more selective about which jobs to apply to and accept. And three, nonemployed individuals may experience skill loss when not employed.

So, when the distribution of offered wages is lower than the wage distribution of employed workers, that suggests employed workers are receiving higher-paying offers and are climbing that proverbial job ladder. This is “upward job mobility.” In contrast, when the two distributions are very similar, it suggests that employed workers aren’t making much wage gains once employed.

Using data from the Current Population Survey, Engbom and his co-authors find that there was a meaningful gap between the employed wage distribution and the wage offer distribution in the 1980s. However, the gap has narrowed in each of the subsequent three decades. By the 2010s, the two distributions are very similar. In other words, a person who takes a job from nonemployment can expect less wage gain over their years of employment.

This lower wage growth is true across the board: for men and women, for college-educated and non-college-educated workers, for White workers and non-White workers. The group that has seen the most pronounced decline in upward job mobility is younger workers. “The new entrants into the U.S. labor market, they’ve seen a complete collapse of the job ladder over time,” Engbom said. The economists estimate that employed workers today are about half as likely to receive a better-paying outside offer as they were in the 1980s.

To get a deeper understanding of what’s happening to the job ladder, Engbom and his co-authors use the National Longitudinal Survey of Youth (NLSY), which tracks labor market activities and other significant life events for thousands of Americans over several decades. In theory, wage gains after joining the workforce from nonemployment could come from sizeable raises at the same employer or from job-to-job transitions (a term economists use to refer to changing companies).

The NLSY data show that in practice, “job movers” are the ones who experience wage gains while “job stayers” gain very little. And in each decade since the 1980s, the share of job movers has declined while the share of job stayers has gone up. The result: less upward job mobility for workers.

What is causing job mobility to decline?

The data show workers are making fewer moves up the ladder to higher-paying jobs. The next step is to diagnose what has caused this decline in upward job mobility. And the list of possible reasons runs long. These reasons may relate to economy-wide changes, changes to worker preferences, or changes to firm behavior.

Less demand for labor?

One possibility concerns demand for labor in the economy. If demand for labor falls, the rate at which people find jobs will fall too—for all workers. This isn’t what the data show, however. “What we see instead is not much of a decline in the job-finding rate of the unemployed, but a sharp decline in the job-finding rate of the employed,” Engbom said, “which leads us to think about the types of factors that have particularly affected the job-finding prospects of employees.”

Changing worker preferences?

Other potential explanations stem from the preferences of workers. For instance, maybe workers are moving to jobs that pay less but have better perks and benefits. Or maybe people aren’t changing employers because it is hard for them to move, period, due to rising interest rates or dual-career households. Engbom and his co-authors investigate each of these potential explanations, but they don’t find evidence in the data for either one.

Changing firm behavior?

Employer behavior could also be making it more difficult for workers to move to higher-paying jobs. Two recent trends deserve scrutiny. First, employment opportunities in local labor markets are often concentrated among a small number of employers. This makes it harder to shop around for jobs because there just aren’t that many employers. Second, firms have increasingly required employees to sign non-compete agreements, a tool explicitly designed to limit job mobility for workers. When the economists dig into these trends, they find they matter a lot.

Nowhere to go: The prevalence of employer concentration

Economists typically measure employer concentration by looking at the number of firms in a local labor market and the share of local employment those firms have. Using the variation in employer concentration across states and across time, Engbom and co-authors find that states with larger increases in concentration also experienced larger declines in upward job mobility. Specifically, workers in states where employer concentration increased more received fewer better-paying job offers from new employers. North Dakota and Florida stand out as the states with the largest increases in concentration since the 1980s. The economists estimate those states’ rates of upward job mobility are the second lowest and seventh lowest in the country.

“If you think about a town back in the days with maybe 10 employers that you could shop for jobs at, you could move across this set of employers,” Engbom said. “If that has shrunk to four today, that just mechanically restricts your ability to find a job. If you’re unemployed, it might not make that much of a difference. You can still find a job. It’s just that once you’re at one of these employers, there’s not that much room for shopping for alternative employment.”

Stay where you are: The prevalence of non-compete agreements

In the early 2010s, new employees of a national sandwich chain were required to sign a document agreeing not to take jobs with the chain’s competitors or work within two miles of one of the company’s stores for two years after leaving employment. These non-compete agreements weren’t just going out to top corporate officers—the hourly workers making the sandwiches had to sign them, too.

“It was hard to see a business need to sign these,” Engbom said. “It was, I think, an intent by the employer to restrict competition for labor.”

And that’s just what happened. There is no reliable data on how the prevalence of non-compete agreements (NCAs) has changed over time, so the economists use NCA prevalence in the last decade as an estimate for their change over time. This prevalence varies across states, allowing the economists to determine that states with higher NCA prevalence experienced larger declines in upward job mobility. Vermont and Delaware have the highest share of workers covered by NCAs. Vermont has the fourth-lowest rate of upward job mobility, while Delaware is closer to the middle.

Economic research focused specifically on the wage effects of NCAs has found meaningful effects. In a 2021 paper, economists Evan Starr and Michael Lipsitz study the effect of a 2008 law in Oregon banning NCAs for hourly and low-wage workers. They find that the monthly rate of job-to-job transitions among hourly workers increased 12 to 18 percent after the ban, and they estimate the wage increase for workers previously bound by an NCA was 14 to 21 percent. And earlier this year, a Federal Reserve Bank of Chicago working paper found that workers with less than a four-year college degree who signed an NCA experienced slower wage growth over the next four years than counterparts without an NCA.

How the broken job ladder slows wage growth

Ultimately, the story Engbom and his co-authors are telling leads back to the puzzle they started with: Why did real wage growth stagnate to such a degree after 1980? Both employer concentration and NCAs make it harder for employed workers to seek new, higher-paying jobs. Recognizing that workers are less likely to leave, employers are offering lower wages. A recent report from The Burning Glass Institute and New York University’s School of Professional Studies describes “a quiet mobility crisis” in the American workforce. “Large numbers of professionals remain steadily employed but experience prolonged stagnation in wages, responsibility, and advancement,” the report states. Analyzing the career histories of 1.3 million workers, the authors find that between 20 and 30 percent have experienced midcareer stall, defined as no promotion and less than 5 percent wage growth over five years. This might seem like a brief time frame, but stalled workers see lower earnings over their lifetime. “Career momentum matters,” the report concludes.

Real wages have come under pressure from many sides over the last four decades. “We want to emphasize that ours is not a competing explanation but rather a complementary explanation that there’s something about the structure of the U.S. labor market that has changed over and above those changes in technology or trade,” Engbom said. Research identifying the causes may help point to policy solutions to unstick wages and return the economy to a situation in which economic growth, productivity, and wages all move together.