Dani Rodrik’s blog features a paper by MIT economists Frank Levy and Peter Temin that argues that rising income inequality in the US isn’t simply the result of market forces, but also institutional behavior and prevailing social values:
Many economists attribute the average worker’s declining bargaining power to skill-biased technical change: technology, augmented by globalization, which heavily favors better educated workers. In this explanation, the broad distribution of productivity gains during the Golden Age is often assumed to be a free market outcome that can be restored by creating a more educated workforce.
We argue instead that the Golden Age relied on market outcomes strongly moderated by institutional factors. Following the literature on economic growth that emphasizes the role of institutions in economic outcomes, we argue that institutions and norms affect the distribution of economic rewards as well as their aggregate size. Our argument leads to an explanation of earnings levels and inequality in which skill-biased technical change, globalization and related factors function within an institutional framework. In our interpretation, the recent impacts of technology and trade have been amplified by the collapse of these institutions, a collapse which arose because economic forces led to a shift in the political environment over the 1970s and 1980s. If our interpretation is correct, no rebalancing of the labor force can restore a more equal distribution of productivity gains without government intervention and changes in private sector behavior.
The paper combines some novel analyses with a Depression-to-present-day narrative of evolving labor-business-government relationships (one nice touch is a comparison of starting salaries at Cravath versus that of average graduate degree holders to illustrate the rise of “winner take all” inequalities).
Government also gave signals through tax structures and other mechanisms of their view of the appropriate level of labor compensation. For example, when Kennedy implemented tax cuts, the Council of Economic Advisers announced wage and price guidelines that indicated that labor should share pro rata.
I strongly recommend you read it; it is well written and provides useful historical perspective.