It is a general rule, if not a law, of the modern business cycle that the working class is the last to gain from the boom and the first to lose from the bust. A recent report by Demos, a progressive think tank, finds that most of the job gains are not only in low-wage industries but in highly unequal ones. The report found that in 2012 fast-food CEOs were earning more than 1,200 times what the average fast-food worker made, and that over the next eight years, some 421,900 jobs will be created in the highly unequal food preparation and serving industry, which includes the fast-food industry.
Bosses in these industries often victimize employees, stealing their wages, firing them without cause and subjecting them to brutal and unpredictable schedules. Workers are often misclassified and thereby denied legal benefits, and they make too little to pay their bills and therefore rely on credit card debt and payday lenders. Turnover rates are high, and workers are frequently subject to the vicissitudes of an unforgiving labor market.
Worker militancy, long ago banished by anti-unionization efforts and terror over the possibility of unemployment, has already shown nascent signs of return. The fast-food strikes in 150 U.S. cities and 30 other countries on Thursday, following those across more than 100 cities last December, highlight the increasing plight of workers and their desire for change. And companies are taking notice. In its most recent SEC filing, McDonald’s worried about risks including “campaigns by labor organizations and activists” and “reputational harm as a result of perceptions about our workplace practices.” In his recent book “Capital in the 21st Century,” French economist Thomas Piketty shows that these high levels of inequality are unlikely to abate in the near future.
American worries about inequality between capital and labor have a long and proud history. The founders, fearful of centralized economic power, believed that property should be owned widely. John Adams said, “The only possible way then of preserving the balance of power on the side of equal liberty … is to make the acquisition of land easy to every member of society.” In a remark that would surely have him branded as a Marxist today, Lincoln proclaimed in 1861, “Labor is the superior of capital, and deserves much the higher consideration.” The key to solving this problem structurally is not merely redistribution through taxation and social programs. Although these ameliorate the worst degradations of our current society, they treat the symptoms of inequality rather than curing the cause. The key to reducing inequality is predistribution — the distribution of income and wealth prior to government redistributive efforts — through higher wages and employee capital ownership.
A higher minimum wage is part of the solution. Catherine Ruetschlin, a policy analyst at Demos, argues that a higher minimum wage would actually “boost the national economy” by giving workers more money to spend on goods and services. Critics allege that a higher minimum wage would kill jobs. However, the most comprehensive meta-study of the minimum wage examined 64 studies and found “little or no evidence” that a higher minimum wage reduces employment. The preponderance of evidence suggests that a higher minimum wage lifts people out of poverty. It also shifts income toward the bottom of the income distribution.
The second part of the solution is to increase stock ownership. Many companies spend billions each year on share buybacks, which help only those who own stocks. Walmart, for instance, spent $7.6 billion on share buybacks in 2012. The benefits of such actions should be spread more widely. In fact, employee capital ownership has a long history in the United States. In 1792, when the U.S. government first subsidized the cod industry, it mandated that three-eighths of the subsidy go to the crew. Any company that refused to sign an agreement promising its workers a share in the profits would not receive government aid. Today, about 47 percent of American workers participate in a profit-sharing agreement. Sadly, however, arrangements are far less common among workers at the lowest end of the spectrum.
The key to reducing inequality is predistribution — the distribution of income and wealth prior to government redistributive efforts — through higher wages and employee capital ownership.
Profit sharing and other forms of employee ownership benefit employees. A study of 40,000 employees at 14 firms found that workers in profit sharing arrangements have higher pay and benefits, greater job security and higher job satisfaction. Profit sharing also helps employers by boosting productivity. A meta-study by Chris Doucouliagos examined 43 published studies and found that profit sharing, worker ownership and worker participation in decision making are correlated with higher productivity. A U.K. study that found employee ownership increased productivity by 2.5 percent confirms this finding.
There are numerous ways to incentivize an ownership society. More progressive capital gains taxation would discourage accumulation at the top. Firms with broad ownership could be favored in federal contracts or economic development projects. Currently, corporations can include “incentive pay” (read: bonuses) as a cost of business (and therefore subject to a lower tax rate). This break should be allowed only to firms that establish incentive pay for all their employees. Ownership policies can be bipartisan. Two of the most vigorous defenders of employee profit sharing are conservative Rep. Dana Rohrabacher and the socialist Sen. Bernie Sanders. Turning workers into capitalists through ownership has been proposed by the more liberal Robert Solow and also the conservative James Pethokoukis.
Another promising idea is “baby bonds.” A “baby bond” grants citizens a small capital stake that becomes available to them when they reach adulthood, which can be used to pay for education or finance a mortgage. Hillary Clinton floated such a scheme — $5,000 for each child — during her 2008 presidential campaign. In Britain, the Child Trust Fund established by the Labor Party in 2005 granted every child born after Sept. 1, 2002, 250 pounds. In the name of “fiscal austerity,” Prime Minister David Cameron eliminated the program and replaced it with tax-exempt junior individual savings accounts, which only exacerbate inequality, because poor and middle-class families often cannot afford to fund such accounts.
A higher minimum wage and broader ownership of assets are complementary goals. The first strikes at income inequality — it raises wages for workers enough to live, which should be the standard. It should be axiomatic that an able-bodied worker produces enough to provide for his or her basic needs. The second tackles the issue of wealth inequality; wealth provides a buffer for workers in hard times, a nest egg for retirement and money to fund education. Our economy has been working very well for some people but leaving the vast majority of Americans with little or no wealth. More and more Americans own no stock, have little saved away for retirement and rent, rather than own, their home. They increasingly have negative wealth in the form of credit card, student and home debt. New research finds that rather than being the result of lavish spending, these debts are an economic inevitability in an increasingly unequal society. Unlike large corporations and wealthy bankers, they are unlikely to be bailed out.
The current system is unsustainable. Inequality is straining our democracy and our shared sense that we’re all in this together. The goal should be to harmonize the interests of capital and labor by granting some control of the former to the latter. James Madison wanted America to be a country with “universal hope of acquiring property.” Today, most Americans can only hope to acquire debt.