Joseph R. Blasi: American labor must recover its lost fair share of economic gains

Last modified: Sunday, August 31, 2014

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 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. 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 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.

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.

The debate about how to respond to this crisis in labor’s share will shape the politics of the next century.

The Republicans’ 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.

While some citizens clearly lack the education and skills and drive to lift themselves up, 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.

• 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.

• 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.

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” (Yale University Press). He wrote this for the McClatchy-Tribune News Service.


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