Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.
The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children. As long as a substantial majority of American adults believe that their children will not live as well as they did, our politics will remain bitter and divisive.
Surely related to middle-class anxiety is the slow growth of wages even in the ninth year of economic recovery. The Phillips curve — which postulates that tighter labor markets lead to an acceleration of wage growth — appears to have broken down. Unemployment is at historically low levels, but the Bureau of Labor Statistics reported Friday that average hourly earnings last month rose by all of 3 cents — little more than a 0.1 percent bump. For the past year, they rose by only 2.5 percent. In contrast, profits of the S&P 500 are rising at a 16 percent annual rate.
What is going on? Economists don’t have complete answers. In part, there are inevitable year-to-year fluctuations (profits have declined in several recent years). And in part, BLS data reflects wages earned in the United States, even though a bit less than half of profits are earned abroad and have become more valuable as the dollar has declined relative to other currencies. And finally, wages have not risen because a strengthening labor market has drawn more workers into the labor force.
But I suspect the most important factor is that employers have gained bargaining power over wages while workers have lost it. Technology has given some employers — depending on the type of work involved — more scope for replacing American workers with foreign workers (think outsourcing) or with automation (think boarding-pass kiosks at airports) or by drawing on the gig economy (think Uber drivers). So their leverage to hold down wages has increased.
On the other hand, other factors have decreased the leverage of workers. For a variety of reasons, including reduced availability of mortgage credit and the loss of equity in existing homes, it is harder than it used to be to move to opportunity. Diminished savings in the wake of the 2008 financial crisis means many families cannot afford even a brief interruption in work. Closely related is the observation that workers as consumers appear more likely than years ago to have to purchase from monopolies — such as a consolidated airline sector or local health-care providers — rather than from firms engaged in fierce price competition. That means their paychecks do not go as far.
On this Labor Day, we would do well to remember that unions have long played a crucial role in the American economy in evening out the bargaining power between employers and employees. They win higher wages, better working conditions and more protection from unjust employer treatment for their members. More broadly, they provide crucial support in the political process for programs such as Social Security and Medicare that benefit members and nonmembers alike. (Both were passionately opposed by major corporations at their inception.)
Today, only 6.4 percent of private-sector workers belong to a union — a decline of nearly two-thirds since the late 1970s. This is the one important contributor to the decline in the relative power of labor, especially those who work with their hands. Workers seeking gigs on their own are inevitably less secure than a group collectively representing their interests. The decline in unionism is also a contributor to the pervasive sense that our political system is too often for sale to the highest bidder.
What can be done? This surely is not the moment for lawmakers to further strengthen the hand of large employers over their employees. Sooner or later — and preferably sooner — labor-law reform should be back on the national agenda, especially to punish employers who engage in firing organizers. We should also encourage union efforts to organize people in nontraditional ways, even when they do not involve formal collective bargaining. And policymakers should support institutions such as employee stock ownership plans, where workers have a chance to share in profits and in corporate governance.
In an era when the most valuable companies are the Apples and the Amazons rather than the General Motors and the General Electrics, the role of unions cannot go back to being what it was. But on this Labor Day, any leader concerned with the American middle class needs to consider that the basic function of unions, balancing the power of employers and employees, is as important to our economy as it has ever been.