Economic analysis often ascribes these trends to some combination of globalization, technological change and rising monopoly power. But our research suggests that a more compelling explanation is the broad-based decline in worker power. As workers have become less able to share in the profits generated by their firms, income has been redistributed from employees to the owners of capital. That has contributed to higher income inequality along class and race lines.
The evisceration of private-sector unions is the most obvious example of the decline in worker power. At the peak, one-third of the private-sector workforce belonged to a union; that number is now 6 percent. But other factors also affect the degree to which workers can share in firms’ profits. Because of increased shareholder activism, rising levels of debt, increases in private equity and changing corporate norms, businesses are increasingly run for shareholders rather than their stakeholders. Ruthless management tactics involving precise measurement of workers’ day-to-day activity have become widespread.
Meanwhile, workers at large firms or in highly paid industries (such as manufacturing, construction or transportation) used to earn large wage advantages, as they shared in the profits generated by their companies, but these benefits have declined by half since the early 1980s. An increasing number of workers are outsourced domestically, employed by staffing or temp agencies or misclassified as independent contractors, reducing their ability to share in the profits of the main firm they work for. And the real value of the minimum wage is lower than it was in the 1970s.
Why did this happen? Some portion of the decline in worker power may have been an inevitable outcome of globalization or technological change. But our research — which examines shifts in labor shares and corporate profits across different industries — indicates that changes in policy, norms and institutions are the most important explanatory factors. This view is supported by the fact that the legal and political environment has been tilted substantially in favor of shareholders and against workers since the 1980s, a trend exemplified by the expansion of state right-to-work laws undermining unions’ ability to fund themselves and the increasing corporate use of union avoidance tactics, both legal and illegal. The fact that the decline in unionization, the rise in income inequality and the fall in labor’s share of income have all happened to a greater extent in the United States than in much of the rest of the industrialized world also suggests an important role for U.S.-specific explanations.
What should be done? A traditional economic argument is that policy should let markets function competitively and then rely on progressive taxation and spending to redistribute income afterward. It is this kind of thinking that lies behind advocacy of negative income taxes or, more recently, for a universal basic income. But progressive institutionalists have long argued for pre-distribution alongside redistribution, strengthening worker power by changing the structure of labor market institutions.
We believe both ingredients are required. Strengthening worker power can be an important countervailing force against firms’ dominance in product and labor markets, as argued famously by John Kenneth Galbraith. And it’s not necessarily the case that it is more efficient to reduce inequality through after-the-fact transfers and taxes than by strengthening unions beforehand. After all, taxes create distortions and alter incentives — and moving to a system with more centralized bargaining may actually reduce the distortionary effects of taxation. When something is a big problem — as is inequality in America today — it is appropriate to tackle it from multiple angles.
Of course, there is a risk that by raising wages, such policies might lead to an increase in unemployment. Indeed, our research suggests that the decline in worker power may have contributed to the long-term decline in average U.S. unemployment (until the current crisis). The risk of increased unemployment should not be dismissed lightly, particularly as unemployment disproportionately affects lower-income people and people of color. But it is possible to bolster the power of labor without excessively restricting hiring. There is reason to believe, for example, that allowing bargaining at a broader level than just the individual firm — such as sectoral collective bargaining — would reduce the negative effects of unionization on unemployment. We must also consider the type of unemployment that policies might create; an increase in short-term unemployment as workers spend more time searching for good jobs is less problematic than the development of a two-tier labor market where unprotected “outsiders” spend long periods in unemployment or are unable to access good jobs at all.
Overall, we believe that increasing worker power must be a central and urgent priority for policymakers concerned with inequality, low pay and poor work conditions. If we do not shift the distribution of power toward workers, any other policy changes are likely to be short-term and insufficient.