Boosting productivity by boosting capital incomes for workers
Aligning the financial interests of senior corporate executives and shareholders to maximize profits is a strategy that almost goes without saying in today’s business world. These incentives for executives usually come in the form of stock options and other means of access to capital income generated by companies. Rarely, though, are these incentives extended to company employees below the senior management level.
The result is a sharp rise in wealth inequality in the United States—as demonstrated earlier this month and again today by University of California-Berkeley economist Emmanuel Saez and co-author Gabriel Zucman of the London School of Economics in their new National Bureau of Economic Research working paper. But why can’t a broader swathe of employees access these capital-income incentives in order to align their productivity with the expectations of shareholders and in the process perhaps slow the widening wealth gap in the United States?
Profit sharing—broad-based distribution of stock options, employee stock purchase plans, and other capital-income incentives—would give workers a different kind of stake in the productivity of the firms they work for compared to their labor income. Yet these ways of sharing capital income to boost the productivity of workers are as rare in the United States as corporate pay packages with capital-income incentives are ubiquitous. One result is that gains from productivity haven’t been flowing to the majority of workers.
Why would employers and shareholders want to put in place more broad-based capital-income incentives? Research by Richard Freeman of Harvard University and Alex Bryson of the National Institute of Economic and Social Research looked at the differences between workers who took up an employee stock purchase plan and those who didn’t at a large multinational firm. They found that workers who entered into the plan worked harder for longer hours and were less likely to quit or be absent from the job.
Freeman, along with Douglas Kruse and Richard Blasi of Rutgers University, also edited a volume on this topic that contains much more empirical evidence of worker productivity gains engineered through such capital income programs. And Laura Tyson of the Haas School of Business points out that research finds a positive association between profit sharing and productivity.
Of course, there are potential issues with these kinds of “shared capitalism” programs. Workers run the risk of not being diversified enough if they only invest in the stock of their employer. They also run the risk of selling stocks in a panic if a recession hits and thus missing out on the potential upside gains when the economy recovers. An article by Josh Zumbrun in today’s Wall Street Journal shows how this dynamic played out during the Great Recession.
Broadening the base of capital income won’t singlehandedly reduce the dramatic levels in wealth inequality in the United States. But the formidable amount of research and on-the-ground corporate experience with these programs suggests taking a new look at their benefits and their structures. Sharing the gains of capital may align the interests of workers, executives, and shareholders more broadly and boost U.S. productivity, economic growth, and prosperity.