By Joseph R. Blasi, McClatchy-Tribune News Service
For Labor Day, let’s talk bluntly about labor’s fair share of the profits and of the productivity of the economy. The hard truth is that labor, meaning the wide middle class, is not receiving its fair share. There is no clear-cut reversal of the middle class’s declining fortunes in sight and no new ideas on the big radar screen. From the end of World War II until the early ’70s, productivity of the economy increased, and wages after inflation also went up. The middle class shared in the fruits of their labor and received a significant portion of the efficiencies of the entire economy. This is no longer the case. Now, there is a huge gap between the substantial increases in efficiency and productivity and the middle-class pay envelope. According to the Economic Policy Institute, productivity went up about 25 percent from 2000 to 2012. How much did compensation increase? Only about 7 percent. Economists measure labor’s shares of income versus the income that the owners of capital receive for investing in the inputs – the companies, machines, products, services, innovations, and knowledge – that comprise everything that the economy produces. It should be no surprise that labor’s share has been falling. The Bureau of Labor Statistics says labor’s share of the total income of the economy has fallen from around 65 percent to about 58 percent recently. Other estimates are just as dire.
Where is this income going? Gary Burtless, a senior fellow in economic studies at the Brookings Institution, says it is going to the owners of capital and those who loan them money. His estimates, using Congressional Budget Office data of what happened to the middle class from 1979 to 2010, suggest a long-simmering middle-class crisis. These new data provide the most comprehensive long-term picture of what has happened to the middle class in the last three decades. They are noteworthy because they take into account the lower taxes and greater transfer payments – such as food stamps – of the less well-off, while also taking into account the higher taxes and many sources of income of the more well-off. From 1979 to 2010 the top 1 percent of households saw their after-tax income grow by about 202 percent. The next 4 percent of households saw their income grow by 79 percent. What about the middle class, that chunk including 60 percent of households just above the bottom 20 percent and just below the top 20 percent? The wide middle class’ after-tax income grew by 36-45 percent. In other words the top 1 percent saw their incomes grow by about five times that of the middle class when pretty much everything is taken into account.
The story of why this is happening is the big story of what has happened to labor this Labor Day. According to Arthur B. Kennickell and others from the U.S. Federal Reserve Board, the top 10 percent of wealth owners now own about 75 percent of all wealth in the entire country. The bottom 50 percent of wealth owners that includes a large chunk of the middle class owns only about 1 percent of all wealth. The 40 percent of middle-class citizens just below the top 10 percent, the middle class that used to do very well after World War II, owns just about 25 percent of all wealth. What is the nature of the wealth of the top? It is mostly capital and income from capital. The 10 percent own over 80 percent of all financial assets, including most of the private holdings of the stock market. The top 20 percent according to the Brookings Tax Policy Center – and this should be no surprise given their near monopoly on the ownership of capital – receive almost 90 percent of all capital gains and capital income in the entire economy.
Labor’s problem is that capital no longer shares its fruits with labor because the structure of the economy has changed. Wages and salaries used to be the vehicle for that to happen. This is no longer the case. Why did it change? Unions fought hard for labor’s share after WWII and the slide in union representation to 6.7 percent of private sector workers is part of this story. Globalization is another factor since many industries can bid on a global labor market. Technology is a major factor since automation and computers and software, all owned by the main owners of capital, drive huge efficiencies that replace workers or reduce the number of highly paid workers. A recent study by the U.S. Conference of Mayors finds that this problem was more pronounced in the last six years since the recession officially ended. They found that the jobs lost during the recession paid nearly $62,000 a year on average. The new jobs added since the recession ended pay only about $47,000 a year on average. The average middle-class family does not need a bevy of statistics and economists to tell them that their wages go up about 1-2 percent a year while inflation, health care costs, and the cost of educating their children all together goes up a lot more than that. Did I mention that many middle-class families cannot afford to retire?
The debate about how to respond to this crisis in labor’s share will shape the politics of the next century. Communism and state socialism that shrunk the human rights of hundreds of millions of human beings have failed, so they are thankfully off the table. The Republican vision of successive tax cuts in the range of $1,000 to 3,000 every few years for the middle class is not going to bring that $47,000 a year worker back to an income of $62,000 a year. Moreover, Democrats are not going to be able to muster the political consensus to raise taxes on the rich by several tens of percent and redistribute income to the middle class to make up the difference either. Even if they could, how many members of the middle class want to receive transfer payments rather than receive their wealth from their work or solid investments? Not many. While some citizens clearly lack the education and skills and drive to lift themselves up – and government has a robust role to play here with the focus on children first – no one in their right mind is suggesting that 60 percent of citizens in middle-class households are shirkers, or that only 10 percent of citizens really work hard.
If the concentration of capital ownership and capital gains and capital income at the very top is the source of the problem, then why not figure out ways for the middle class to own more capital and, as owners of capital, receive more of the gains and income from capital in a private market economy? Here are three ideas worth considering.
First, Federal and state governments should update and meaningfully expand the tax incentives for every business in the country to seriously consider offering lower risk broad-based cash or deferred profit sharing plans, employee stock ownership plans such as an ESOP, grants of restricted stock, or a stock option plan to all of their workers. Most citizens do not realize that most federal tax incentives for employee stock ownership and profit sharing – billions and billions over decades – go to subsidizing shares for the top five executives of stock market companies. This is not right. Last quarter, Southwest Airlines shared a third of its profits with every single one of its workers. Google, the poster child of a new economy company, has broad-based profit and gain sharing, stock options, and employee ownership. The riches of all that software get more widely shared beyond the C-suite.
Second, as a future of huge changes in the economy washes over us all, we need to figure out ways for citizens to gain private ownership stakes in the discoveries and technologies, and yes, the robots, of the future. The Alaska Permanent Fund can be a rough guide. Incomes from oil and natural resource leases goes into a fund that is invested by the Alaska Permanent Corporation which pays a dividend check to every Alaska citizen annually. The huge wind and solar energy farms and the robots and Internets of the future should be owned by private citizen corporations in states, regions, cities and towns. These citizen corporations would pay income on this capital in dividend checks to workers whose wages are being driven down. Federal and state governments need to figure out how to jumpstart the finance and the development of such corporations for citizen’s shares. Our men and women in the military, teachers, health care workers, and government employees can also get a share through such mechanisms. If weekly work hours go down, pro-social labor can get in gear to read to the blind, visit and help the aged and infirm, care for children, and get involved in public service.
Third, let’s implement the idea of Gene Sperling, a top economic adviser to many recent presidents, and create a universal 401(k) plan for the middle class with automatic enrollment that could invest in government sponsored annuities to pay guaranteed income for life. And let’s adopt former ADT executive Ray Carey’s idea of having infrastructure bonds that are structured to offer generous dividends as an important asset in such 401k plans. President Obama and the Republicans should name a commission to consider these and other ideas. Unions need to wake up and fight for them too.
Finance, financial service firms, and the wizards and high-income earners of finance have come under the criticism of the middle class for their role in concentrating the privileges of capital. Now is their chance, along with bipartisan government encouragement, to help build an economy that increases labor’s fair share.
Joseph R. Blasi is a professor at Rutgers University’s School of Management and Labor Relations, and author of The Citizen’s Share: Reducing Inequality in the 21st Century.
Photo: Joe Lustri via Flickr
Want more political news and analysis? Sign up for our daily email newsletter!
Copyright 2014 The National Memo