Unions, Bargaining Power, and Income Inequality

Yesterday the Bureau of Labor Statistics released their annual data on labor force unionization. It did not catch any headlines because it was not surprising. Union membership rates continued to decline in 2014 to 11.1% of the workforce. To many Americans, unions seem like relics. The labor union has become a fringe institution. But for the last few years, I have thought a lot about the connection between the decline of labor unions and the rise of income inequality in the United States. Income inequality has become a hot button issue this decade, but few are making the explicit connection between the declining bargaining power of labor and the widening gap between rich and poor.

On November 4^th 2014 Eduard Porto had a piece in the NY Times on how best to mitigate the growing income inequality in the United States. Porto’s thesis is essentially that direct redistribution of wealth has not effectively created a more egalitarian society and different, alternative methods need to be placed on the table. I take some issues with Porto’s analysis of redistribution efforts. Many argue that American wealth redistribution is ineffective and our system allows for even more corporate rent seeking that distorts any positive redistribution effects. Nevertheless, his suggestion is valid in that redistribution alone does not necessarily address the root causes of growing income inequality.

Thomas Piketty’s Capital in the Twenty-First Century can take a lot of credit for reintroducing the subject of redistribution into the American discourse. His use of a broad historical approach to analyze the structural realities of wealth inequality has garnered a lot of well-deserved attention. He argues that as we move back to a low-growth regime, which has been the historical norm, the rate of return on capital relative to growth will increase (r>g) and with it the importance of inherited wealth and structural inequality. This has led to more people advocating for direct redistribution from the wealthiest to the rest in order to establish a more egalitarian society.

While this analysis deserves attention and further discussion, the value of Porto’s point is valid in that inequality is a multidimensional issue and there are several causes to consider. Redistribution only addresses part of the problem. One vital cause that is present in the literature, but absent in the public discourse, is the institutional change that has occurred in the labor-management landscape since the 1980s. Proto mentions at the end of his piece,

“To the extent that widening inequality is caused by the yawning gap between the epicurean pay deals in the executive suite and the stagnant wages paid to those on the shop floor, it might best be addressed at the level of the corporation, not by government.”

What Porto is suggesting here is that the bargaining power of labor has significantly weakened relative to that of the managers and top-earners in the labor market. How has the bargaining power changed over the last half-century and how has this contributed to income inequality? What kind of institutional changes could reverse the trend of growing income inequality?

First let us look at how inequality has changed over the last 50 years or so.

Figure 1 shows the GINI coefficient of the United States from the end of World War II to 2012. The GINI is not the most telling measurement of inequality, but it is widely used and understood. For our purposes, it reveals the undeniable reality of growing inequality. The First and Second World Wars, and their aftermath, saw a compression of income inequality. By the 1970s, inequality begins to rise significantly and by the 1980s the trend picks up speed.  

 There is a wide literature on causes of income inequality. Scholars like Thomas Lemieux (2013) make the argument that wage setting institutions like labor unions play a vital role in establishing levels of inequality. He provides empirical evidence that the de-unionization of the American workforce contributed to rising inequality, particularly at the extreme ends of the earnings spectrum. He also suggests that this might explain why the United States and the United Kingdom, which have declining unionization rates, have experienced rising inequality while other advanced economies have not.  Likewise, Calderon and Chong found statistical evidence that de-unionization, along with other labor market institutions, significantly influences income inequality. Not only is there evidence of de-unionization increasing income inequality overall, but Richard Child Hill found evidence that unionization created a more egalitarian distribution of income between black and white workers in the United States. 

In figure 2, we can see the U.S. unionization rate since the end of World War II. The trend is unmistakable. Unionized labor has been declining since its height in the mid-1950s. Particularly since the 1980s, unions have fallen out of fashion in the American labor market and American public opinion.

However, organized labor only represents half of the story. On the other side of the earnings spectrum we have seen a dramatic change as well. The wealthiest Americans have seen their income increase significantly during the same period of time. The graphic below shows the share of national income going to the wealthiest 10% of Americans, from 1948 to 2013.  

Once again, the trend is clear. Since the late 1970s and early 1980s, the wealthiest 10% of Americans have seen their share of national income increase dramatically. I use the top 10% because within that decile are primarily individuals who earn their income as managers, lawyers, and through various sources of white-collar labor. At the 1% level, and more so at the 0.1% level, we would see a similar trend. However, within that group capital earnings become more significant, which is a topic for another discussion.

Piketty notes that this radical change in compensation for the very wealthy followed a cultural and ideological shift in America. With a return to a more classical economic perspective, many Americans saw compensation as a purely market function. As such, wages should reflect the marginal productivity of workers. The higher compensation, therefore, reflects their marginal productivity and market value of the super-managers.

Marginal productivity, as a mechanism for setting compensation levels, has been challenged by many political economists (i.e. Marx's labor value theory). Most recently, Piketty argues that it is extremely difficult to make the case that the compensation of high income earners reflects marginal productivity since they do not have a clear reproducible task that can be easily measured the way additional units of output on a factory floor can be. Besides, it is absurd to suggest that the marginal productivity of a senior manager has changed so significantly over such a short period of time. 

Piketty argues that the increase follows the change in compensation practices that allow top executives to set their own salaries or otherwise have salaries set by corporate compensation committees, which are made up of members who earn similar salaries. This trend followed changes in social norms within the United States and the UK (but not the rest of the Western world) that viewed such extravagant compensation as legitimate. So even compensation set by stockholders is likely a reflection of arbitrary enthusiasm for profits (meanwhile real wages have been stagnant for poor and middle class workers). This significantly boosts the relative bargaining power of top managers. 

So where can we go from here?How do we boost earnings at the lower-end of the spectrum and dampen the earnings at the top to a more sustainable and equitable level?

The Dode-Frank bill passed in 2010 has at least started the public discussion on regulating executive pay. The rules hashed out by the SEC and other regulators include non-binding shareholder votes on executive compensation or so called “say-to-pay votes”, requires disclosure of compensation versus performance evaluations, and assets the independence of compensation committees, among other things. However, this is likely to have little affect on bridging the gap in bargaining power between the wealthy and the poor. There needs to be a bottom-up approach to reorganizing labor and empowering them to justly bargain for compensation that more accurately reflects what they add in value to a product or service.

Many labor advocates long for the days when labor unions were at their peak. However, unions have had their fair share of problems: cronyism, racism, and political rent-seeking to name a few. Americans tend to have a poor opinion of labor unions, which makes them a hard sell to the public. Additionally, the labor landscape has changed significantly. Workers move between fields, careers, and positions with more fluidity than in the past.

While traditional unions might still have a role, other organizing units might become more important. The alt-labor movement has picked up speed since the 1990s. alt-labor organizations are not unions, in that they do not have collective bargaining rights, but they allow for workers to organize, protest, and form a collective voice. This has allowed for quick mass mobilization. Groups like the Coalition of Immokalee Workers and the Restaurant Opportunities Center have been effective for uniting dissenters from within their working communities. Such organizations could find fertile ground among the Walmart greeters and Starbucks baristas.

Another alternative could be for workers to take on a more entrepreneurial approach. I do not mean that workers should all take out loans and start a business of their own.  Duflo and Banerjee revealed in their book Poor Economics that the majority of the world’s poor are in fact entrepreneurs. In other words, most men and women living on a dollar a day are running micro-enterprises of their own. Most of these businesses are operationally low-hanging fruit. The last thing we want is to reproduce this model in the United States.

The economist Richard Wolff has a different idea. In his book Democracy In Action: a Cure for Capitalism, Dr. Wolff describes the idea of Workers-Self-Directed-Enterprises (WSDE). The WSDE is a practical application of Marx’s labor value theory. The WSDE is a company that is owned and operated by the workers. The workers themselves are the shareholders and board members of the company. While this is difficult to implement on a large scale, implementing more worker entrepreneurial enterprises will raise the wages of labor while mitigating the astonishing rise of management’s compensation.

Ultimately, we might want to see an expansion of a variety of different approaches. This will include labor unions, alternative labor movements, and new creative ways to blur the line between labor and management, giving workers more autonomy and freedom to bargain for a bigger slice of the profits. This might begin the process of making the bargaining landscape more egalitarian and reducing inequality in the United States. The one thing that is clear is that if we ignore the bargaining dynamic at play, and its contribution to growing inequality, we can drift towards an ever-widening gap between the wealthy and the rest, which will have disastrous consequences for our society.