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Rex Nutting Archives | Email alerts
Dec. 7, 2011, 12:01 a.m. EST
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "“ The United States is still a very rich country, but the riches aren't trickling down to where they might do some good.
High unemployment remains our greatest economic challenge. But even people who are working full-time are being squeezed by paychecks that aren't keeping up with inflation and by debt levels that are still too high. Workers have lost much of the bargaining power that enabled them (and the nation) to prosper in the post-World War II years.
In the 1950s, 1960s and 1970s, labor costs typically accounted for about 65 cents of every dollar spent by businesses. The rest went to capital, covering such things as rent, interest, profits and taxes. Labor's share has declined over time, and has fallen dramatically since the 2008 Great Recession. Labor now gets just 57 cents on the dollar. Meanwhile, profits have surged to a record share of national income.
If workers got the same share of business income that they did in the period between World War II and 2000, their income would be about $780 billion higher (or about 9% more), according to Michael Feroli, an economist for J.P. Morgan Chase. "That income would have provided a much-needed lift for a sector of the economy reeling from too much debt and too little employment," Feroli wrote in a note to clients. Read Feroli's analysis of the incredible shrinking labor share.
If workers were receiving that income in their paychecks, it'd be a massive stimulus to the economy, creating millions of new jobs and helping struggling debtors pay down their mortgages and other loans.
One might argue that workers don't receive that extra $780 billion because they didn't earn it. After all, in a pure market economy, what you earn is supposed to equal the value of your labor, as determined by your boss. Whatever you get is exactly what you earned. However, we don't live in that idealized world; in our economy, power relationships between workers and owners matter as much as productivity does.
It's hard to argue that American workers aren't productive. In the past 10 years, labor productivity in the U.S. business sector has increased by 25%, but real hourly compensation has risen just 7%. More of the benefits of higher productivity are going to the owners of businesses and less to the workers. How much more? At a first approximation, how about $780 billion?
Over the past 30 years, corporations and business owners seem to have amassed most of the power in the contest between labor and capital.
There are many reasons for workers' loss of economic clout: Globalization, technological change, the shift toward a service economy, tax policies, and more. But one big reason is the decline of collective bargaining power: Workers are much less likely to belong to unions, and the power of organized labor has diminished. In 1960, about 25% of workers belonged to a union; today, it's 12%, and only 7% in the private sector.
One result has been an historic rise in income inequality over the past 30 years. The rich are much richer in comparison with not only the very poor but also in comparison with the almost-rich. Almost all of the increase in income has gone to the top 5% of earners, and much of the increase has gone to the top 0.1%.
There's a widening gap not only between workers and owners, but between the average worker and the highest-paid workers in a firm or industry. Higher returns to education explain part of this increase, but not all.
According to professors Bruce Western of Harvard University and Jake Rosenfeld of the University of Washington, the decline in union membership accounts for between a fifth and a third of the increase in wage inequality since 1973.
In a paper published in the August 2011 issue of the American Sociological Review, they argue that the presence of unions lifts wages and improves working conditions for their members and for nonunionized workers as well, in part because nonunionized companies will pay more to avoid having a union come in, but also because a highly unionized workforce changes the norms of behavior throughout the economy, and its political and social structures. Read Western and Rosenfeld's research.
"Union decline marks an erosion of the moral economy," Western and Rosenfeld wrote. "The moral economy consists of norms prescribing fair distribution that are institutionalized in the market's formal rules and customs. In a robust moral economy, violation of distributional norms inspires condemnation and charges of injustice."
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