The death of the Phillips Curve is the time to lift up new economic indicators

Posted on by Maria Monroe

The U.S. Federal Reserve Board’s “dual mandate” of achieving maximum employment and stable prices is based on an economic rule of thumb known as the Phillips Curve. First postulated in 1958 and named after New Zealand economist William Phillips, the Phillips Curve proposes an inverse relationship between unemployment and inflation—when unemployment drops, inflation generally rises. The thinking behind the curve is that when employment rates are high, employers have to compete for workers, which drives wages up.

But at a congressional monetary policy oversight hearing this past July, Federal Reserve Chairman Jerome Powell made a striking pronouncement: The Phillips Curve is dead.

Why? Consider first the Phillips Curve and the current U.S. labor market. The monthly jobs report from the U.S. Bureau of Labor Statistics shows that the unemployment rate has hovered around a historically low level, between 3.6 percent and 4 percent, for 16 months amid the longest expansion of monthly employment growth on record. But counter to the predictions of the Phillips Curve, these positive top-line numbers have not translated into gains for most U.S. workers. Wage growth remains sluggish and inflation is low. Although he isn’t the first to notice this, Chairman Powell’s testimony added credibility to the idea that the inverse relationship between unemployment and inflation “was a strong one 50 years ago” but now “has gone away.”

The Philips Curve has broken down for many of the same reasons the U.S. economy has seen a dramatic increase in income inequality. Workers simply don’t have the bargaining power to translate increased demand for their labor into higher wages. The demise of unions and the rise of monopsony markets, where people only have the choice to work for a small number of employers, have devastated the bargaining position of workers.

Addressing inequality and the collapse of worker power will require a new analytic lens. The economy of 50 years ago produced prosperity broadly, making one-number statistics useful summaries of economic progress. But now, economic policymaking institutions should embrace economic indicators that shed light on our new, unequal economy. Pivoting to measures of economic progress that are broken down by level of income, race, or gender will provide a better picture of how all U.S. workers and their families are faring.

The economics profession has already realized this and begun filling in the gaps. Economist Xavier Jaravel at the London School of Economics found, in an analysis of price-scanner data, that low-income and middle-income U.S. households actually face higher rates of inflation than the richest households. A new Federal Reserve analysis of how wealth is distributed in the United States shows that since 1989, the wealthiest 1 percent of households have seen their fortunes rise by 600 percent in nominal terms, while the bottom 50 percent have seen just a 60 percent increase.

Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics have proposed reforming how we measure Gross Domestic Product, requiring growth to be reported by income bracket instead of as a single number. Their research shows that since 1980, 65 percent of all U.S. GDP growth has accrued to just 10 percent of the population. The Measuring Real Income Growth Act, championed by Sen. Chuck Schumer (D-NY), Sen. Martin Heinrich (D-NM), and Rep. Carolyn Maloney (D-NY) would make these distributional measures of growth a standard part of our national accounts reporting.

In addition to breaking economic metrics down by income, there is much to be learned by disaggregating data by race and gender. The Phillips Curve obscures underlying heterogeneity in the U.S. economy. “Low unemployment,” for example, is and has been a matter of perception. According to the Bureau of Labor Statistics Employment Situation Report, African American workers generally face double the unemployment rate of white workers. And even periods of strong wage growth have failed to alleviate pay gaps between men and women and white and nonwhite workers, including African Americans and Latinos, who continue to earn significantly less than white men.

The demise of the Philips Curve provides an opportunity to rethink the outdated economic precepts left over from a bygone era. To accurately measure how the great diversity of U.S. families are faring economically, Chairman Powell and others should consider metrics that reflect the economy we actually live in today: one stratified by income level, race, and gender.

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Weekend reading: “Labor Day” edition

Posted on by Maria Monroe

This is a post we publish each Friday with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is relevant and interesting articles we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

This was a big week for Equitable Growth, as we announced our annual round of competitive academic grants for research on the channels by which inequality affects economic growth. The new grants amount to more than $1 million. This is the sixth annual set of grants by the organization, bringing to nearly $5 million the funding Equitable Growth has awarded since its founding in 2013, and the number of scholars at top U.S. universities and colleges receiving grants to nearly 200. “The topics of the funded research are central to addressing the challenges faced by U.S. workers and their families,” writes Equitable Growth’s Academic Programs Director Korin Davis. “They range from how firms set wages and the power workers have in demanding fair pay, to the economic effects of antitrust enforcement and mergers.” Davis describes the 14 grants to academic researchers and the 13 grants to doctoral students here. Descriptions of the grants, as well as grantee biographies, can be found here. Equitable Growth’s 2019 Request for Proposals can be found here.

What do workers want? Specifically, what do they want from unions? With union membership having shrunk dramatically, research shows that large numbers of nonunion workers would vote for one if they could. Most will never get the chance under current U.S. laws and enforcement practices. But what if there were an opportunity to rewrite those laws and current practices? Equitable Growth grantee Alex Hertel-Fernandez, in a working paper with his colleagues William Kimball and Thomas Kochan, and in a column explaining the paper, describes the results of a survey of more than 4,000 workers that teases out what workers value most in unions.

Worker strikes for better wages and benefits may be coming back, and they need to if strong wage gains and a fair balance between workers and management are to be restored, writes Equitable Growth Director of Labor Market Policy and economist Kate Bahn in advance of Labor Day. The decline of union membership is a key factor in the stagnant wages of recent decades, and Bahn asserts that strikes are a necessary tool for combating increased monopsony—the ability of firms, rather than competitive forces, to set wages. She provides a brief history of strikes in the United States and points to research by Hertel-Fernandez showing that public attitudes toward strikes improve when people experience strikes in their state and have the opportunity to learn more about the issues workers seek to address.

Brad DeLong’s worthy reads, with content from Equitable Growth and elsewhere, are here in time for the Labor Day weekend.

Links from around the web

Taxing wealth is an idea that is gaining greater currency. As The Wall Street Journal reporter Richard Rubin notes, a number of policymakers and presidential candidates are supporting various ideas, and right-of-center think tanks are considering them as well. Equitable Growth is an excellent resource on the subject: This report on net worth taxes by Equitable Growth Director of Tax Policy and chief economist Greg Leiserson, along with Will McGrew and Raksha Kopparam, is especially useful. Rubin describes some key proposals and their potential economic and political benefits and pitfalls.

Employers in the gig economy have been accused of skirting U.S. labor laws by classifying their workers as independent contractors, but Vox’s Alexia Fernández Campbell reports on major legislation in California that would significantly limit that practice, and on matching federal legislation. She notes that companies such as Uber Technologies, Inc. and Lyft, Inc. are aggressively lobbying to defeat the bill in California and that it is becoming an issue in the 2020 presidential campaign.

“The rich can’t get richer forever, can they?” asks the title of a piece by Liaquat Ahamed in The New Yorker. His answer is, essentially, we’ll see. He describes the increasing economic inequality in the United States and elsewhere over the past few decades and summarizes books on the subject by Binyamin Appelbaum and Branko Milanovic. “The enormous influence of the Chicago School helps explain why research into inequality and income distribution was long sidelined in this country,” Ahamed writes. But Milanovic and other European economists—including Thomas Piketty, Equitable Growth Steering Committee member Emmanuel Saez, and Equitable Growth grantee Gabriel Zucman, to whom he refers as the French brigade—have “succeeded in focussing public attention on the issue of inequality.”

Earlier this year, Equitable Growth teamed with The Brookings Institution’s Hamilton Project on a project to help the nation prepare for the next recession. They produced a book, Recession Ready: Fiscal Policies to Stabilize the American Economy, that contains a number of concrete proposals for programs and policies to put in place now to help shorten and ameliorate the effects of the next recession. Now, some of these proposals form the basis for a plan announced recently by Sen. Michael Bennet (D-CO). Matthew Yglesias explains that plan for Vox.

As the baby-boom generation ages, the care needs of the nation’s elderly are growing, writes Eduardo Porter in The New York Times. Much of the burden is being taken up by their children, especially their daughters. In the absence of a national paid leave program, this burden is an important factor depressing the U.S. female labor participation rate, which, in 2017, ranked 30th among the 36 industrialized countries currently in the Organisation for Economic Co-operation and Development. “By knocking many women in their prime earning years from the work force, the growing strain from care is weighing down the American economy,” Porter writes.

Friday Figure

Figure is from Equitable Growth’s “What kind of labor organizations do U.S. workers want?” by Alex Hertel-Fernandez.

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Brad DeLong: Worthy reads on equitable growth, August 26–30, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:
 

  1. Read Alexander Hertel-Fernandez, William Kimball, and Thomas Kochan, “How U.S. Workers Think About Workplace Democracy: The Structure of Individual Worker Preferences for Labor Representation,” in which they write: “Although never as powerful as in other advanced democracies, unions remain incredibly important economic and political organizations in the United States. Yet we know little about the structure of workers’ preferences for labor unions or other alternative labor organizations. We report the results of a conjoint experiment fielded on a nationally representative sample of more than 4,000 employees. We explore how workers’ willingness to join and financially support labor organizations varies depending on the specific benefits and services offered by those organizations. While workers value some aspects of traditional American unions very highly, especially collective bargaining, they would be even more willing to join and support organizations currently unavailable under U.S. law and practice. We also identify important cleavages in worker support for labor organizations engaged in politics and strikes. Our results shed light on the politics of labor organization, as well as civic association and membership more broadly.”
  2. Read Raksha Kopparam, “The Federal Reserve’s new Distributional Financial Accounts provide telling data on growing U.S. wealth and income inequality,” in which she writes: “The Federal Reserve Board … Distributional Financial Accounts … provides quarterly estimates of wealth distribution in the country from 1989 to 2019. The new dataset was created by integrating the Federal Reserve Board’s Financial Accounts with the Survey of Consumer Finances. Together, they contain reliable measures of the distribution of household-sector assets and liabilities from 1989, which gives policymakers and economists alike new insight into how the distribution of wealth has changed since the 1990s.”
  3. Read Korin Davis, “Equitable Growth invests $1.064 million in advancing research on inequality and growth.”

 

Worthy reads not from Equitable Growth:

  1. We have a social insurance system in which employers play a large role as intermediaries between individual workers and the government. We have such a system in large part because right-wingers in the 1920s argued that you did not need government-provided social insurance because private employers could and would step up to the task in order to boost the morale of their workers. What Uber Technologies, Inc. and Lyft, Inc. are now complaining about was originally a piece of a movement to keep government small. Thus, there is a certain historical irony in their attempt to shed their part of the social welfare mission that their predecessor entrepreneurs of a century ago assured one and all that they were eager to embrace. Read Matthew Chapman, “Uber and Lyft put up $60 million for ballot fight to avoid paying their drivers as employees” in which he writes: “On Thursday, Bloomberg News reported that ride-sharing giants Uber and Lyft are prepared to spend $60 million in support of a potential California ballot question in 2020 that would prevent their workers from being classified as employees. The push comes as the California legislature advances AB 5, which would require any workers who perform functions that aren’t outside the course of their employer’s business to be classified as an employee—codifying a decision last year by the California Supreme Court. Uber and Lyft have kept their margins low by classifying their workers as self-employed contractors who just happen to use their app as a social network to find passengers. This means that they are not covered by a number of protections that employees receive, like the right to unionize or to receive overtime pay.”
  2. I believe all these effects are very real. It still amazes me that we are not seeing them in aggregate productivity growth numbers. Read Sean Gallagher, “The fourth Industrial Revolution emerges from AI and the Internet of Things,” in which he writes: “IoT has arrived on the factory floor with the force of Kool-Aid Man exploding through walls … Smart, cheap, sensor-laden devices paired with powerful analytics and algorithms have been changing the industrial world … Companies are seeing more precise, higher quality manufacturing with lowered operational costs; less downtime because of predictive maintenance and intelligence in the supply chain; and fewer injuries on factory floors because of more adaptable equipment. And outside of the factory, other industries could benefit from having a nervous system of sensors, analytics to process ‘lakes’ of data, and just-in-time responses to emergent issues—aviation, energy, logistics, and many other businesses that rely on reliable, predictable things could also get a boost. But the new way comes with significant challenges, not the least of which are the security and resilience of the networked nervous systems stitching all this new magic together … And then there’s always that whole ‘robots are stealing our jobs’ thing. (The truth is much more complicated).”
  3. Those who are already doing well in world labor markets are able to benefit—or at least to lose less—from disruption. It is those who are not doing so well who find their inferiority of position amplified by occupation. Read Per-Anders Edin, Tiernan Evans, Georg Graetz, Sofia Hernnäs, and Guy Michaels, “The individual consequences of occupational decline,” in which they write: “Outcomes for similar workers in similar occupations over 28 years … the consequences of large declines in occupational employment … [m]ean losses in earnings and employment for those initially working in occupations that later declined are relatively moderate, [but] low-earners lose significantly more.”
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The once and future role of strikes in ensuring U.S. worker power

Posted on by Maria Monroe

In the United States, Labor Day, which falls on the first Monday of September, is when we honor the history of the U.S. labor movement in striving for benefits and empowerment of workers across the economy. Strikes play an important role in empowering workers vis-à-vis their employers. By withdrawing their labor power, workers are able to balance the scales against the owners of capital, who rely on workers for production and providing services. Strikes have declined in frequency, popularity, and success over the past four decades, yet today, amid rising economic inequality, they are once again becoming an important tool in exercising worker power to ensure that the gains of profitability and economic growth can be broadly shared.

The history of strikes in the United States

Washington University in St. Louis sociologist Jake Rosenfeld examines the role of work stoppages in his recent book What Unions No Longer Do, and finds that strikes at large firms began declining in the mid-1970s, according to data from the U.S. Bureau of Labor Statistics’ Work Stoppages file. Rosenfeld then digs deeper to estimate the trends of strikes at firms both large and small by calculating a broader measure using data from the Federal Mediation and Conciliation Service from 1984 to 2002. He finds a peak in strikes in the late 1980s and then a stark decline after.

The decline of strikes is a result of a variety of factors. One is the increased use of replacement hires, especially after the PATCO strike of 1981, when President Ronald Reagan summarily fired 11,000 air traffic controllers who were striking for higher pay and a reduced work week. President Reagan quickly replaced those striking workers with 4,000 air traffic control supervisors and Army members, sending a powerful message to U.S. workers about the use of strikes in labor disputes.

But even before this historic turning point, the Taft-Hartley Act of 1947 limited the ability of workers to strike. This included restrictions on secondary boycotts and picketing, both of which make striking especially difficult in today’s increasingly fissured workplace, where you cannot strike against the corporation that is at least partly responsible for your workplace conditions but not technically your direct employer. For example, workers at the franchises of McDonald’s Corporation who attempt to unionize are not protected by the Fair Labor Standards Act when picketing against McDonald’s because they are, most commonly, the employees of a franchisor, rather than of the main corporation.

These factors, along with a general increasing business hostility toward unions and lack of enforcement of labor protections, have ultimately made strikes less effective as a tool for collective bargaining in the United States.

Increasing interest in unions among U.S. workers today

At the same time, there is an increasing consensus today that unions are a positive force for increasing worker power and balancing against economic inequality. In polling of support for unions and specific aspects of collective bargaining, Equitable Growth grantee Alex Hertel-Fernandez of Columbia University, along with William Kimball and Thomas Kochan of the Massachusetts Institute of Technology, find that support for unions has grown overall, with nearly half of U.S. workers in 2018 saying they would vote for a union if given the opportunity. This is a significant increase from one-third of workers supporting unionization in 1995. According to their research, workers primarily value unions’ role in collective bargaining and ensuring access to benefits such as healthcare, retirement, and unemployment insurance.

Strikes have historically been one of the strongest tools used by unions to ensure they have power to engage in collective bargaining. But striking was viewed as a negative attribute in the survey done by Hertel-Fernandez, Kimball, and Kochan. Yet, when they presented workers with the hypothetical choice of a union exercising strike power with other attributes of unions, such as collective bargaining, support increased.

But strikes, of course, do not take place in a bubble. The wider climate of worker bargaining power and institutions that support labor organizing plays a role in making this historically crucial tool effective again. So, too, does the power of employers to resist these organizing efforts when the labor market lacks competition that would increase worker bargaining power.

The role of monopsony power in the U.S. labor market

Monopsony power is a situation in the labor market where individual employers exercise effective control over wage setting rather than wages being set by competitive forces (akin to monopoly power, where a limited number of firms exercise pricing power over their customers.) In a new Equitable Growth working paper by Mark Paul of New College of Florida and Mark Stelzner of Connecticut College, the role of collective action in offsetting employer monopsony power is examined in the context of institutional support for labor. Paul and Stelzner construct an abstract model with the assumption of monopsonistic markets and follow the originator of monopsony theory Joan Robinson’s insight that unions can serve as a countervailing power against employer power.

Their model shows that institutional support for unions, such as legislation protecting the right to organize, is necessary for this dynamic process of balancing employers’ monopsony power. In an accompanying column, the two researchers write that they “find that a lack of institutional support will devastate unions’ ability to function as a balance to firms’ monopsony power, potentially with major consequences … In turn, labor market outcomes will be less socially efficient.”

In short, policies and enforcement that support collective action such as strikes not only creates benefits for workers directly but also addresses a larger problem of concentrated market power.

The return of strikes in the U.S. labor market

Within the past few years, strikes have been revived as a bargaining tool. “Red for Ed” became the name referring to teachers strikes that took place across traditionally conservative right-to-work states. Beginning with the closure of all schools in West Virginia in 2018 following 20,000 teachers across the state walking out, this movement spread to Oklahoma, Kentucky, Arizona, and Colorado, among other places. These strikes were led by rank-and-file union members, rather than by union leadership, rendering them illegal under the Taft-Hartley Act, which prohibits so-called wildcat strikes. These strikes led to significant gains for these public-sector workers through organizing against policymakers rather than direct management.

Before Red for Ed, the “Fight for Fifteen” movement starting in 2012 and “OUR Walmart” starting in 2010 exemplified labor organizing in new mediums by conducting worker-led actions against large corporations that directly employ or control the employment (as in the franchisor-franchisee model) of low-wage workers. The efforts of Fight for Fifteen directly impacted New York state’s minimum wage increase to $15 per hour and has paved the way for a national movement for a higher minimum wage. OUR Walmart led walkouts and Black Friday protests in the years leading up to Walmart’s decision to increase wages.

Many structural changes, such as the fissuring of the workplace, have reduced the ability of private-sector unions to make gains against employers, yet these strikes and labor actions represent an opportunity for growth. With the U.S. labor market increasingly dominated by the services sector, these strikes were conducted by workers whose jobs cannot move elsewhere and whose work we interact with in our daily lives. Ruth Milkman of the City University of New York describes these labor actions as similar to those that existed before the Fair Labor Standards Act of 1938 protected the right strike (before these rights were subsequently chipped away by the Taft-Hartley Act 20 years later) in order to unionize.

With popular and successful strikes in unexpected places, what will the role of strikes be in the future? Will workers continue recognize the strength of the strike and other labor actions, and will policymakers and enforcers make it a successful tool for increasing worker bargaining power? Research by Alex Hertel-Fernandez, Suresh Naidu, and Adam Reich of Columbia University looked at the response to strikes following the Red for Ed movement in conservative states and found that residents of areas affected by the teacher walkouts broadly supported the strikes, with 39 percent saying they strongly supported the walkouts and another 27 percent somewhat in support of the walkouts, including half of self-identified Republicans supporting the strikes.

What’s more, the three researchers found that families that learned about them from their teachers or directly from the union had even stronger support for the strikes, compared to those who learned about them from other sources, such as talk radio. First-hand knowledge of strikes increases support for them.

In addition to Hertel-Fernandez’s work showing broad support for unions generally and increasing support for bold labor actions, more policymakers and advocates are providing much-needed proposals on how to foster a robust U.S. labor market and strengthen institutions that would make collective action more successful. Emblematic of this is Harvard Law’s Labor and Worklife Program’s Clean Slate Project, led by Sharon Block and Ben Sachs of Harvard University, which gathers academic experts and labor organizers to develop strong proposals that would increase worker bargaining power. Multiple 2020 presidential campaigns have followed suit, with new proposals to boost unions.

Conclusion

Unions in the United States are at their lowest level of density since they became legal around 80 years ago, with 6.4 percent of private-sector workers in unions today. Yet there is increasing energy for bringing back this crucial force to balance the power of capital and ensure the fruits of economic growth are more broadly shared among everyone who creates it. Strikes are a compelling tool for dealing with rising U.S. income and wealth inequality—just as they were in an earlier era of economic inequality, when unions first gained their legal stature in the U.S. labor market.

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What kind of labor organizations do U.S. workers want?

Posted on by Maria Monroe
Thousands of union and non-union construction workers in New York City rallied by City Hall to urge passage of bill 1447 to improve safety, January 31, 2017.

Looking at trends in union membership over the past 30 years, you might assume that U.S. workers have soured on the labor movement. But given a politically hostile environment toward unions and an increasingly fissured workplace that has broken down traditional employment relationships and norms around workplace fairness, it’s not surprising that private-sector membership in unions steadily declined from nearly one-quarter of all workers in 1973 to barely 6 percent in 2018.

Yet when my colleagues William Kimball and Thomas Kochan at the Massachusetts Institute of Technology’s Sloan School of Management and their co-authors asked nonunion workers in 2017 what they think about unions, it turns out that nearly one-half of them—48 percent—would vote to form a union at their job if given the opportunity to do so. That figure was up from about one-third of respondents in surveys from 1977 and 1995.

Clearly, a large portion of the U.S. workforce wants some form of union representation on the job. But under current labor laws, which were written for a previous era of employment and industrial organization, and with variable enforcement practices based on political climate, it seems very unlikely that the vast majority of those workers will ever have the opportunity to vote for a union. The outdated legal structure governing U.S. labor unions is increasingly mismatched to our economy, with the result that workers wishing to exert their rights to organize face greater barriers, perhaps unmatched since the enactment of the National Labor Relations Act in 1935.

With the ability to form and maintain effective unions becoming more theory than reality for tens of millions of U.S. workers, labor policy experts, union leaders, and politicians (including some 2020 Democratic candidates) are proposing a complete overhaul of labor law. This raises an important question: If we were creating unions from scratch, what kind of system would workers want? What would they want unions to look like?

In ongoing research with my colleagues Kimball and Kochan, we are trying to answer that question. We have fielded surveys of U.S. workers to probe the features of hypothetical labor organizations that they find most appealing. Drawing on conjoint analysis, a survey method originally developed for marketing research, we presented more than 4,000 workers with pairs of labor organizations containing a variety of dues, features, benefits, and services. We then asked respondents to indicate their likelihood of joining each labor organization, as well as the maximum amount in dues they would be willing to pay.

Some of the features we tested in our surveys correspond to traditional union functions, such as collective bargaining and mandatory dues for all members. Other features are present in the U.S. labor movement but are not widespread—among them, systems of portable health insurance and retirement benefits that workers can take from job to job. And still other features we tested are not present in the United States, including union representation on corporate boards of directors (known as co-determination) or unions that collectively bargain on behalf of an entire industry or state rather than simply for workers at a single business (known as sectoral or regional bargaining).

In all, we varied nine different attributes of the labor organizations we presented to survey respondents. So, for example, one organization we presented to workers might have the following characteristics:

  • Be open to all current workers at the business or organization, regardless of job
  • Engage in collective bargaining on compensation, hours, and working conditions on behalf of all workers in the industry within a region
  • Provide health and retirement benefits
  • Have mandatory dues only for workers who receive benefits from the organization
  • Offer workers opportunities to work with management to recommend improvements in how workers carry out their responsibilities
  • Offer legal representation to workers with common nonworkplace legal problems
  • Represent workers in a joint committee with top management to decide how the organization should operate
  • Never use the threat of strikes
  • Campaign for pro-worker politicians

While the other organization would be described as follows:

  • Be limited to workers in a particular occupation at their workplace, but allow them to stay as members when they leave their job
  • Engage in collective bargaining only for dues-paying members at that workplace
  • Offer training to keep skills up to date
  • Have mandatory dues for all
  • Not get involved in how workers do their work
  • Offer legal representation only for workplace rights issues
  • Have a position on the board of directors
  • Include the threat of strikes in its arsenal
  • Advocate on behalf of worker-related public policies but not candidates

The number of respondents and the conjoint design of our survey enabled us to determine which specific qualities workers would value most (and least) in a union and how much they would be willing to pay in dues for such organizations.

The most striking finding from our research was just how consistent workers of different ages, with different skills, from different industries, and in different occupations were in their preference for a common set of labor organizations. Workers were most likely to say that they would join and pay dues to labor organizations that offered some form of collective bargaining and that offered them portable health insurance, retirement, and unemployment benefits across jobs, training for current and future positions, legal representation for common workplace and nonworkplace issues, and input into management decisions about how they did their jobs and how their company operates. The most potent of these were collective bargaining and providing health, retirement, and unemployment benefits. Collective bargaining was such a high priority that both the firm-based negotiations that occur under current U.S. law and sectoral bargaining, which does not, were among workers’ top five selections. (See Figure 1.)

Figure 1

Some of the attributes workers want are things that unions generally do now. Collective bargaining, for example, is obviously a mainstay of today’s unions. But while some unions manage health plans and retirement benefits across employers, such arrangements are not widespread. Moreover, unions do not currently have a role in administering jobless benefits (as is the case in some Western European countries). And formal participation in deciding how a company is managed is neither required nor protected by the National Labor Relations Act, limiting U.S. unions’ leverage in this area.

Policymakers wishing to modernize U.S. labor laws for the 21st century economy and workforce should ensure that unions can offer the benefits and services workers want and need. Compared to their counterparts in other rich democracies, U.S. labor unions are substantially constrained in what they can offer to workers—members and nonmembers alike. Our research suggests that labor law reforms can and should help unions give workers the representation they want in the workplace, both by specifically permitting unions to engage in certain activities and by opening the way to new kinds of representation. At a minimum, the U.S. Congress and the states should make it easier for workers to form and join unions. More ambitiously, Congress should amend the National Labor Relations Act to encourage the more expansive collective bargaining, social benefits provision, and input to management that workers indicate they find appealing.

The steep, long-term decline in union membership both reflects and contributes to the attenuation of worker bargaining power in the U.S. economy. It is without a doubt a factor in the rising income inequality since the 1980s. Many workers want to belong to a union, but for most of them, changes in the economy, the inadequacies of current labor laws, and the growing power of employers thwart that desire. Rewriting the law can play an important role in revitalizing U.S. workers’ ability to join and form unions. My colleagues and I will continue our research on what workers want in the unions of the future in the hope that we can not only learn more about what matters to workers but also ensure that policymakers have the evidence on which to base potential reforms.

—Alexander Hertel-Fernandez is an assistant professor of international and public affairs at Columbia University.

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Equitable Growth invests $1.064 million in advancing research on inequality and growth

Posted on by Maria Monroe

The Washington Center for Equitable Growth today announced a set of 14 research grants to scholars seeking evidence on key issues related to economic inequality and growth. The research, chosen in a competitive process with vetting by outside academics and approved by our Steering Committee, will be conducted by faculty members at leading U.S. colleges and universities.

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2019-grantee-announcement

Equitable Growth also announced 13 research grants to doctoral students, as well as two resident scholar positions to doctoral students. A total of $1.064 million in grants was awarded.

The topics of the funded research are central to addressing the challenges faced by U.S. workers and their families. They range from how firms set wages and the power workers have in demanding fair pay, to the economic effects of antitrust enforcement and mergers. This is our sixth class of grantees. Since our founding in 2013, we have funded nearly $5 million to nearly 200 scholars.

Equitable Growth supports research to better understand the channels through which inequality affects growth and to provide evidence for policies that can address inequality and ensure strong, stable, and broad-based economic growth. We’re dedicated to bridging the gap between academia and policy by making sure research is relevant to today’s policy debates, and by informing policymakers of cutting-edge research.

Equitable Growth funds research in four categories, which the organization explained in its recent Request for Proposals:

  • Human capital: How does economic inequality affect the development of human capital, and to what extent do aggregate trends in human capital explain inequality dynamics?
  • Macroeconomic policy: What are the implications of inequality for the long-term stability of our economy and its growth potential?
  • Market structure: Are markets becoming less competitive and, if so, why, and what are the implications for productivity, investment, labor markets, labor power, and economic growth?
  • Labor market: How does the labor market affect equitable growth? How do inequality and productivity affect the labor market?

Following are the researchers and the research Equitable Growth has awarded grants to this year.

Two projects were funded on the subject of schedule stability for workers, an area that is gaining increasing attention for its impact not only on the lives of workers and their families, but also on the well-being of the companies that rely on those workers. The work will build on existing research that Equitable Growth has funded in this area.

Duke University researcher Anna Gassman-Pines and Columbia University researcher Elizabeth Ananat will identify the consequences of scheduling regulation on workers with young children. Using daily diaries compiled by workers (a more accurate tool than survey questions), they will evaluate the impact of the Philadelphia Fair Workweek Standard, which was enacted in 2018 and will take effect in 2020.

Erin Kelly, Hazhir Rahmandad, and Alex Kowalski, all of the Massachusetts Institute of Technology, will collaborate with a warehousing firm to study the impacts on both workers and the firm of unpredictable scheduling. They will document the risks of certain schedules for workers’ health and well-being, as well as the relationships between schedules and worker turnover, absenteeism, and productivity. They will also develop an experiment that provides workers with greater control over their schedules and measure the effects on worker well-being and firm productivity.

Another two grants focus on minimum wages.

The University of Michigan’s Nirupama Rao and Max Risch will study how firms accommodate increases in the minimum wage, with a focus on changes in employment and income. They will examine which kinds of workers, if any, lose or gain employment following increases in the minimum wage and how the incomes of covered and uncovered workers, as well as those of firm owners, are affected.

Jennifer Romich, Scott Allard, Mark Long, and Heather Hill, all of the University of Washington, will develop a database by linking state administrative data that will enable researchers to analyze the impact of minimum wage increases and other policy changes in the state of Washington on household income and participation in government programs.

In addition to minimum wage laws, previous research tells us how important firms are in determining worker pay. A number of grants will explore the determinants of worker wages.

In a study of how firms set wages, David Weil of Brandeis University and Ellora Derenoncourt of Princeton University will examine the degree to which broad wage increases by large employers affect the wage-setting practices of smaller businesses. They will look at the impacts of such actions as minimum wage increases by Amazon.com Inc. and Walmart Inc. and an executive order issued by President Barack Obama that raised the minimum wage paid by federal contractors.

MIT’s Simon Jäger and Benjamin Schoefer of the University of California, Berkeley, will study the impact of shared corporate governance—workers participating in the management of the companies where they work. This is not so common in the United States but is the law in some other countries, including Germany. Their project will use reforms in the German law to analyze the effects of shared governance on such outcomes as wages, distribution of profits, and pay equity within firms.

David Berger of Duke University, Kyle Herkenhoff of the University of Minnesota, and Simon Mongey of the University of Chicago will use government data to help determine the extent to which corporate mergers might have a monopsonistic effect on competition in the U.S. labor market—that is, whether mergers have given firms, rather than markets, the power to set wage levels. They will look at the effects on compensation and numbers of jobs for low- and high-wage workers and more broadly at labor’s share of business income. They will also study long-term effects on earnings for those who lose their jobs in the wake of a merger.

Finally, MIT’s Nathan Wilmers will seek to improve understanding of job mobility by using data sources to distinguish between those who move to a new job within their current employer and those who take a job with a new employer. The project may help to explain whether or not increased within-organization job mobility is disproportionately benefiting high-income/high-skill workers and therefore contributing to inequality in the labor market.

In order to better understand obstacles to rejoining the labor market for formerly incarcerated individuals, as well as the benefits of job training programs, Peter Blair of Harvard University and Morris Kleiner of the University of Minnesota will examine how state laws governing the ability of ex-offenders to obtain an occupational license affect their employment prospects and wages over time. The researchers will create a publicly available database of statutory and administrative laws throughout the United States on the subject.

In addition to the need for higher wages and enhanced worker bargaining power, evidence points to the necessity of effective government programs that provide a strong safety net to support individuals and families in need and help unemployed workers while they seek new jobs. In order to provide evidence on what works, we have awarded a grant to Hilary Hoynes of the University of California, Berkeley to study the impact of different types of welfare reforms. She will examine the long-run results of a series of experiments with low-income workers and families conducted in the 1980s and 1990s by MRDC, a public policy research organization. The experiments included various forms of employment incentives and subsidies, job training and search assistance, time limits, and sanctions. Her research will analyze their effects on such outcomes as earnings and employment, marriage, mortality, and later participation in welfare programs by adults and, importantly, their children.

Equitable Growth is equally interested in how markets are functioning and the distribution of economic growth. Equitable Growth is therefore supporting research into markets and the returns of market gains.

Juan Carlos Suarez Serrato of Duke University, Mark Curtis of Wake Forest University, and Eric Ohrn of Grinnell College will explore the forces that determine whether business income goes to capital or to labor, and how that affects inequality. Building on previous research on the distribution of benefits from bonus depreciation, a business tax break that was significantly enhanced—temporarily—by the Tax Cuts and Jobs Act of 2017, they will address outcomes such as wage levels and jobs gained or lost for workers of various skill levels. Since this provision encourages mechanization, the research is also an opportunity to examine the impacts of technology on workers.

Constructing a comprehensive database of more than a century and a quarter of federal antitrust enforcement actions is the goal of University of Chicago colleagues Simcha Barkai (also affiliated with the London Business School) and Ezra Karger. They will link these data about Department of Justice and Federal Trade Commission actions against firms and individuals between 1890 and 2017 to other government data to measure the effect of antitrust enforcement on economic output.

Examining a more specific market, Randall Akee of the University of California, Los Angeles and Elton Mykerezi of the University of Minnesota will extend their prior work studying business dynamics on and near American Indian reservations. They will focus on how large casinos acting as anchor businesses affect the transportation, food services, retail operations, and lodging industries. The research will not only produce new data on American Indian reservations, which is severely lacking, but also shed light on what economic development policies might be successful in isolated rural areas.

Scott Kominers and Ravi Jagadeesan of Harvard University, Mohammad Akbarpour of Stanford University, and Piotr Dworczak of Northwestern University will carry out theoretical work on the design of markets for goods. Specifically, they will conduct three studies addressing various issues in the context of significant wealth inequality.

Equitable Growth is also awarding 13 research grants to doctoral students in order to build the pipeline of scholars doing research relevant to inequality and growth. Ph.D. students who will receive grants this year are:

Ratib Ali of Boston College, Peter Fugiel of the University of Chicago, Ingrid Haegele of UC Berkeley, Isaac Jabola-Carolus of The Graduate Center of the City University of New York, Maningbe Keita of Johns Hopkins University, Daniel Mangrum of Vanderbilt University, Jacob Orchard of the University of California, San Diego, Krista Ruffini of the UC Berkeley, Lauren Russell of Harvard University, Anna Stansbury (and co-investigator Gregor Schubert) of Harvard University, Conor Walsh of Yale University, Christian Wolf of Princeton University, and Samuel Young (and co-investigator Sean Wang) of MIT.

Two doctoral students will spend an academic year as resident scholars at Equitable Growth, where they will have an opportunity to pursue their research and gain experience in how research can inform the policy process. They are Angela Lee of Harvard University and Umberto Muratori of Georgetown University.

Equitable Growth’s academic program is a year-round process. Now that the 2019–20 grants have been announced, our staff and Steering Committee will get to work on the RFP for our next grant cycle. And going forward, we will publish new research from our grantees, make sure policymakers and the public see the results, and continue to build a bridge between those who make policy and those who can provide the evidence they need to do so in a way that supports an economy that works for all Americans.

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Weekend reading: “Corporate Responsibility” edition 

Posted on by David Evans

This is a post we publish each Friday with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week, and the second is relevant and interesting articles we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Wealth disparities between the rich and the poor in the United States have broadened over the past 30 years, according to the Federal Reserve Board’s Distributional Financial Accounts, released earlier this month. Raksha Kopparam analyzes the new data, which show that the bottom 50 percent of wealth owners in the United States are only now returning to the levels of wealth they had in 2000, and that their share of the nation’s wealth is glancingly small. At the other end of the spectrum, the top 1 percent have seen their wealth grow by 600 percent since 1989.

The domestic outsourcing of jobs in the United States is fast becoming a dominant explanation for the destruction of the social contract of work, a historic concept in which norms of fairness and solidarity between firms and their employees played a major role in wage setting and workplace standards for some U.S. workers—though of course many others such as African American workers were consistently more marginalized. Kate Bahn reviews relevant research literature from a wide array of sources, including Equitable Growth, and finds that the U.S. labor market is increasingly characterized by the fissured workplace, in which workers are employed at firms with core competencies and all other duties or certain functions in the production process are contracted out, and, not coincidentally, by monopsony, the ability of firms rather than markets to set wages. These trends, she notes, are at least partly responsible for stagnant wages and declining job quality.

The United States remains the only industrialized nation without a national paid leave program, despite evidence that these programs can benefit working parents and employers as well. In 2004, California became the first of what are now eight states, plus the District of Columbia, to establish a publicly funded program for family leave. Katherine Policelli and Alix Gould-Werth report this week on new research by Alexandra Stanczyk showing that California’s paid leave program helped new mothers avoid poverty. “The introduction of paid leave in California,” they write, “is tied to a 10.2 percent decrease in risk of new mothers dropping below the poverty threshold and disproportionately helps women with lower levels of education and who are unmarried.”

Brad DeLong has again passed along his worthy reads for the past week or so, with content from Equitable Growth and elsewhere.

Links from around the web

This week, the influential Business Roundtable, whose members are the chief executive officers of nearly 200 of the largest corporations in the United States, issued a statement declaring that maximizing profits for shareholders should no longer be the sole purpose of a company. The statement declares that the concerns of other stakeholders—workers, consumers, suppliers, and communities—also need to be corporate priorities. In a column published later in the week, Eric Posner, a professor at the University of Chicago Law School, expresses some skepticism. “While the statement is a welcome repudiation of a highly influential but spurious theory of corporate responsibility,” he writes, “this new philosophy will not likely change the way corporations behave. The only way to force corporations to act in the public interest is to subject them to legal regulation.” [atlantic]

“Most Americans say it’s not ideal for a child to be raised by two working parents,” writes The New York Times’ Claire Cain Miller. “Yet in two-thirds of American families, both parents work. This disconnect between ideals and reality helps explain why the United States has been so resistant to universal public child care. Even as child care is setting up to be an issue in the presidential campaign, a more basic question has recently resurfaced: whether mothers should work in the first place.” Miller adds: “…[I]n the United States, people have long had conflicted feelings about whether society and government should make it easier for mothers to work outside the home, and these are complicated by attitudes about race and poverty.” [nyt]

German Lopez was skeptical of unions. Then, the Vox senior correspondent joined one. He describes how he went, in a year and a half, from opposing the unionization of the Vox Media editorial staff to celebrating with his colleagues when the union signed a contract agreement with the company. He explains that he was not opposed to unions in general but thought Vox was a generous company, and that some workers would take advantage of union protections. But after he did the research, which he describes in this piece, he was sold, not only on the Vox union but on the deep importance of unions for all workers. “I had done a complete 180 on unions,” he writes. [vox]

“You have a better chance of achieving ‘the American dream’ in Canada than in America” may be a startling headline, but the data don’t lie, former Equitable Growth Steering Committee member Raj Chetty tells Ezra Klein in a one-on-one interview. Chetty discusses his recent research on families, neighborhoods, and mobility; on the significant return on public investments in children; on the impact of poverty on life expectancy; and on the “fading of the American dream,” the expectation that children will be better off than their parents. [vox] (See also Equitable Growth’s In Conversation with Raj Chetty.)

We tend to think of doctors as having very long, sometimes erratic hours, which can be another way of saying family-unfriendly hours. But Claire Cain Miller, in another interesting analysis, finds that things have changed. “Medicine has become something of a stealth family-friendly profession, at a time when other professions are growing more greedy about employees’ time,” she writes. “[M]edicine has changed in ways that offer doctors and other health care workers the option of more control over their hours, depending on the specialty and job they choose, while still practicing at the top of their training and being paid proportionately.” And Miller cites Claudia Goldin’s research showing female doctors are likelier than women with law degrees, business degrees or doctorates to have children. Other research shows they’re also much less likely to stop working when they do. [nyt]

Friday Figure

Figure is from Equitable Growth’s “The Federal Reserve’s new Distributional Financial Accounts provide telling data on growing U.S. wealth and income inequality,” by Raksha Kopparam.

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Brad DeLong: Worthy reads on equitable growth, August 16–23, 2019

Posted on by David Evans

Worthy reads from Equitable Growth:

  1. I am skeptical of claims of wage stagnation over the past 40 years in the United States. Our modern information and communications technologies are worth a good deal, as is pollution control. I think the argument is better made in the sense of Karl Polanyi: People thought that they would have a certain style of middle-class life, but stagnant paid wages and rising housing and other prices have led to grave disappointment. It is not the future that people in the past had ordered, and so many are very upset. Read Heather Boushey “In Conversation with Gabriel Zucman,” in which Zucman notes: “Even this mediocre growth performance is much more than what’s been experienced by most of the population. Almost 90 percent of the population has seen its income grow by less than that. And for half of the U.S. population—about 120 million adults today—there’s been zero growth in average pretax income since 1980. This means that in 1980, for the bottom 50 percent, average income before government intervention was $16,000 a year, adjusted for inflation. Today, it’s still $16,000 a year. That’s a generation-long stagnation in income for half of the population.”
  1. Kate Bahn thinks about the “fissured workplace” interacting in your daily life with people of other social classes as valued colleagues. This is, perhaps, a powerful glue holding the society together that we have, to a substantial extent, lost. Read Kate Bahn, “Domestic outsourcing of jobs leads to declining U.S. job quality and lower wages,” in which she writes: “One prototypical example is janitorial work, where most office cleaners today are employed by a janitorial services company that is contracted by the building owner where individual office places lease their space. These kinds of fissured employment patterns have led economists and other social science researchers to examine a variety of empirical research questions about what has caused domestic outsourcing, what the impacts have been and for whom, and what the future of the firm will be.”
  1. So far, it looks like a very good benefit-cost ratio for California’s paid leave program. Read Katherine Policelli and Alix Gould-Werth, “California Paid Family Leave reduces poverty,” in which they write: “Between 2004 and 2013, the California paid leave program increased household income levels and lowered poverty rates for mothers of 1-year-olds … an average $3,407 increase in income … Also … good news specific to the bottom end of the income distribution: The introduction of paid leave in California is tied to a 10.2 percent decrease in risk of new mothers dropping below the poverty threshold and disproportionately helps women with lower levels of education and who are unmarried.”

Worthy reads not from Equitable Growth:

  1. I am, usually, a strong advocate of “play your position.” And I try to practice what I preach. But this week I cannot. Here is President Donald Trump in the past explaining why Jay Powell was his choice to be chair of the Fed: “That is why we need strong, sound, and steady [pause] leadership at the United States Federal Reserve. I have nominated Jay to be our next Federal Chairman. [pause] And so important, because he will provide exactly that type of leadership. He’s strong. He’s committed. He’s smart. And, if he is confirmed by the Senate, Jay will put his considerable talents to work, leading our nation’s independent central bank. Jay has learned the respect and admiration of his colleagues for his hard work, expertise, and judgment. Based on his record, I am confident Jay has the wisdom and leadership to guide our economy through any challenges that our great economy may face.”
  1. And now here is President Trump, complaining because Jay Powell is following the monetary policy that Trump knew he would follow when he nominated him: “Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world. The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!.” Is Trump trying to convince his base that Jay Powell was somehow the choice of the dastardly Democrats rather than his own choice? Has Trump forgotten that Jay Powell was his choice and is doing what Trump chose him to do? I used to think that there was some method here. But now the signs of cognitive decline seem strong enough that I do not think it wise to make that assumption.
  1. Okay, back, finally, to playing my position. We now have, or ought to have, the information sources to create much more finely grained and much more accurate economic and social indicators. We should work hard to do so. Read Joseph Stiglitz, Martine Durand, and Jean-Paul Fitoussi, “Who Are You Going to Believe, Me or the Evidence of Your Own Eyes?,” in which they write: “We need to develop datasets and tools to examine the factors that determine what matters for people and the places in which they live. Having the right set of indicators, and anchoring them in policy, will help close the gap between experts and ordinary people that are at the root of today’s political crisis … The Stiglitz-Sen-Fitoussi Commission … final report was published in 2009 … The production of goods and services in the market economy—something which [Gross Domestic Product] does try to capture—is of course a major influence, but even in the limited domain of the market, GDP doesn’t reflect much that is important. The most used economic indicators concentrate on averages, and give little or no information on well-being at a more detailed level, for instance how income is distributed … Economic insecurity today is only one of the risks individuals face … The Group considered how to better measure the resources needed to ensure economic, environmental and social sustainability.”
  1. The very sharp Martin Wolf fears that attachment to Modern Monetary Theory may produce predictable distortions in politicians’ thoughts. Read his “States Create Useful Money, but Abuse It,” in which he writes: “What then are the problems with MMT? … Suppose holders of money fear that the government is prepared to spend on its high priority items, regardless of how overheated the economy might become … fear that the central bank has also become entirely subject to the government’s whims … They are then likely to dump money … The focus of MMT’s proponents on balance sheets and indifference to expectations that drive behaviour are huge errors … If politicians think they do not need to worry about the possibility of default, only about inflation, their tendency may be to assume output can be driven far higher, and unemployment far lower, than is possible without triggering an upsurge in inflation.”
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The Federal Reserve’s new Distributional Financial Accounts provide telling data on growing U.S. wealth and income inequality

Posted on by Maria Monroe

Wealth disparities between the rich and the poor in the United States have broadened over the past 30 years, according to a new dataset released earlier this month by researchers at the Federal Reserve Board. Their Distributional Financial Accounts is the new dataset that provides quarterly estimates of wealth distribution in the country from 1989 to 2019. 1 The new dataset was created by integrating the Federal Reserve Board’s Financial Accounts with the Survey of Consumer Finances. Together, they contain reliable measures of the distribution of household-sector assets and liabilities from 1989, which gives policymakers and economists alike new insight into how the distribution of wealth has changed since the 1990s.

The new Federal Reserve Board dataset confirms that wealth concentration has been growing, consistent with other data series such as the World Inequality Database assembled by academics worldwide. Indeed, the Fed’s new Distributional Financial Accounts open up new opportunities to study close to real-time changes in the U.S. wealth distribution. It provides the necessary data to study fluctuations in the wealth distribution over short time periods, while accounting for changes that occur between times of survey measurement for less frequently collected datasets.

The Distributional Financial Accounts show that the share of wealth among the top 1 percent of wealth owners in the United States was strongly pro-cyclical before, during, and after the dot-com era in the late-20th century and the Great Recession of 2007—2009. The new dataset shows that shares of wealth across the wealth distribution grew and fell in tandem with fluctuations in overall economic growth. The authors credit this rise in wealth concentration to an increased concentration of assets held, rather than decreased concentration in liabilities. (See Figure 1.)

Figure 1

Looking at the cumulative growth of wealth disaggregated by group, we see that the bottom 50 percent of wealth owners experienced no net wealth growth since 1989. At the other end of the spectrum, the top 1 percent have seen their wealth grow by almost 300 percent since 1989. 2 Although cumulative wealth growth was relatively similar among all wealth groups through the 1990s, the top 1 percent and bottom 50 percent diverged around 2000. (See Figure 2).

Figure 2

The Fed’s new Distributional Financial Accounts of U.S. wealth is highly informative when matched with the Distributional National Accounts dataset produced by Gabriel Zucman and Emmanuel Saez at the University of California, Berkeley. Both datasets distribute an aggregate metric from the Fed’s National Income and Product accounts to see where economic growth is concentrated in wealth and in income, respectively. Saez and Zucman find that when they disaggregate National Income, the richest 10 percent of income earners held 23 percent of all income earned in 2016. The Distributional Financial Accounts show that wealth is even more strongly concentrated, with 10 percent of the population holding 70 percent of all wealth in the United States in 2018. (See Figure 3.)

Figure 3

Comparing income inequality calculated by Zucman and Saez and wealth inequality according to the Fed’s new Distributional Financial Accounts indicates that wealth inequality is growing faster than income inequality in the United States: Income inequality is historically high, but wealth inequality is outpacing it. Alarmingly, the new Fed dataset also shows that a large portion of U.S. households have little to no wealth at all. One way this poses a threat is that at times of emergencies, households at the bottom are at risk of having no savings or disposable wealth to use. As wealth inequality grows, we see a heightened risk that more U.S. households could be left without emergency savings.

These new metrics help policymakers understand who benefits from U.S. economic growth. When most of U.S. Gross Domestic Product growth accrues overwhelming to wealthy income earners, as has been the case since the early 1980s, then low- and middle-income households suffer immensely in the event of a recession, as happened in 2008 amid the depths of the Great Recession. This kind of analysis can help policymakers figure out how to curb growing inequality by giving them accurate and timely information on the health of the U.S. economy up and down the income and wealth ladders. Understanding where wealth sits, who holds wealth, and how wealth relates to income helps economists and politicians see how the economy is functioning and provide meaningful policy solutions to growing inequality. (See Figure 4.)

Figure 4

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Research finds the domestic outsourcing of jobs leads to declining U.S. job quality and lower wages

Posted on by Maria Monroe

The domestic outsourcing of jobs in the United States is fast becoming a dominant explanation for the destruction of the social contract of work, a historic concept in which norms of fairness and solidarity between firms and their employees played a major role in wage setting and workplace standards for some U.S. workers—though of course many others such as African American workers were consistently more marginalized. The destruction of this social contract, detailed in Brandeis University economist David Weil’s book The Fissured Workplace, describes a labor market structure in which workers are employed at firms with core competencies and then those firms subcontract out all other duties or specific functions in the production process.

Within daily work activities, U.S. workers may directly interact with other workers across a variety of firms with different levels of job quality. One prototypical example is janitorial work, where most office cleaners today are employed by a janitorial services company that is contracted by the building owner where individual office places lease their space. These kinds of fissured employment patterns have led economists and other social science researchers to examine a variety of empirical research questions about what has caused domestic outsourcing, what the impacts have been and for whom, and what the future of the firm will be.

This body of research lays the groundwork for U.S. policymakers to understand the impact of this domestic outsourcing phenomenon and what sort of policy solutions can ensure that economic prosperity is broadly shared as workers and firms alike consider “the future of work” in the United States. A good place to start is a 2016 literature review published by the Center for Economic and Policy Research—written by Director of University of California, Berkeley’s Labor Center Low-Wage Work Program Annette Bernhardt, Cornell University’s Alice Hanson Cook and Rosemary Batt, Upjohn Institute Vice President and Director of Research Susan Houseman, and Center for Economic Policy Research Co-Director Eileen Appelbaum, titled “Domestic Outsourcing in the United States: A Research Agenda to Assess Trends and Effects on Job Quality.” In their report, they define relevant terms for domestic outsourcing and describe the evidence on what has caused changes to firms’ organizational strategies, as well as the impact on workers. They draw attention to the importance of differences in organizational strategies across firms and across industries and how these differences translate into job quality.

In their review of the literature, Bernhardt, Cook, Batt, Houseman, and Appelbaum examine the supply-side and demand-side reasons for the breakdown of this relationship: Technological advancement made it easier to control and monitor decentralized outsourcing, while changes to the regulatory environment increased incentives to outsource. An overarching theme of this research has been the growing divide between high-paying jobs with good benefits and low-paying contingent jobs with limited benefits and unpredictable schedules. Recent research by Arindrajit Dube at the University of Massachusetts Amherst and Ethan Kaplan at the University of Maryland finds that outsourcing in janitorial services and security services led to a wage penalty for low-wage service occupations. This is an important concern for workers and policymakers alike, as wage stagnation, earnings volatility, income inequality, and job polarization inhibit broadly shared economic growth.

Indeed, one of the implications of outsourcing is that equally skilled workers earn very different wages depending on the kind of firm in which they work. Recent research by Equitable Growth grantees Patrick Kline at the University of California, Berkeley, Neviana Petkova at the U.S. Department of the Treasury, Heidi Williams at the Massachusetts Institute of Technology, and Owen Zidar at Princeton University estimates the extent to which profits from patents are distributed both among firms and among their workers. Their research is among the first evidence to show that while firms do pass profits derived from patents onto workers through higher wages, these increased wages disproportionately go to the highest earners. One of the researchers, MIT’s Williams, notes:

There is growing empirical evidence that firms contribute substantially to wage inequality across identically skilled workers. Put simply, how much you earn seems to depend in part on the firm at which you work as opposed to depending solely on your own skills.

This fissuring of the U.S. workplace also reinforces another increasingly recognized explanation for wage stagnation and declining job quality: increasing market concentration and monopsony. In an Equitable Growth working paper, economist Ioana Marinescu and law professor Herbert Hovenkamp at the University of Pennsylvania detail how “some mergers may be unlawful because they injure competition in the labor market by enabling the post-merger firm anticompetitively to suppress wages or salaries.” As corporations have fissured and embraced outsourcing, companies themselves have become increasingly specialized. Elizabeth Handwerker at the U.S. Bureau of Labor Statistics and James Spletzer at the U.S. Census Bureau find that occupation concentration has increased, and this concentration is correlated with the growth in wage inequality between establishments. And another recent Equitable Growth Working Paper by Elena Prager at Northwestern University and Matt Schmitt at the University of California, Los Angeles finds that hospital consolidation is correlated with declining wages for skilled health workers.

Outsourcing as a management tool may also cause monopsony-like outcomes, with a lead firm effectively setting wages and labor practices among smaller firms, even in the absence of concentrated markets. This franchise model is examined by Equitable Growth grantee Brian Callaci at the University of Massachusetts Amherst. He demonstrates how franchisor-franchisee relationships echo these trends, with franchisors exercising control over franchisees, who are compelled to maintain low labor costs and high labor monitoring. Franchising as a business model is akin to the outcomes of domestic outsourcing and often gives excessive market power to franchisors, leading to inefficient outcomes for both franchisees and workers. Similarly, Equitable Growth grantee Nathan Wilmers at MIT’s Sloan School of Management finds that large corporate buyers are able to pressure their suppliers to maintain low wages among their workers along U.S. supply chains.

As domestic outsourcing has increased, there has also been a debate about the number of independent contractors who are working in nonstandard work arrangements that reflect not only declining job quality standards experienced by low-wage workers but also jobs not subject to labor regulation. The 2017 Contingent Worker Supplement to the Current Population Survey found that the proportion of workers who were independent contractors had actually declined over the prior decade. Yet Eileen Appelbaum and Hye Jin Rho at the Center for Economic Policy Research and their co-author Arne Kalleberg at the University of North Carolina, Chapel Hill describe the limitations of this data: It surveys workers on their prior week of employment and focuses on their main job, so intermittent or secondary contingent work income would not be captured. While the degree of nonstandard work seems lower than previously believed, research does suggest that many traditionally employed workers are taking on independent contractor work or gig-based work as secondary sources of income. Understanding this work arrangement still remains an important and open question.

The advent of online platform-based gig work also may play a unique role in the organization of firms. Antonio Aloisi at the European University Institute describes how platform-based employment may not be so much a technological disruption to the production of goods and services as it is a disruption to traditional business models parallel to other phenomena in domestic outsourcing.

As the consequences of outsourcing are investigated, research also sheds light on the internal organization and dynamics of firms that may reflect the impacts of domestic outsourcing and a different social contract of work. Research on the impact of firms on income inequality by Adam Cobb at the University of Texas at Austin’s McComb School of Business finds that internal firm policies such as hiring, promotion, and compensation policies have effects on the aggregate societal level. The creation of value within firms has shifted, as technological advances and market deregulation have reduced the costs of domestic outsourcing.

Forthcoming research by UMass Amherst’s Dube, an Equitable Growth Research Advisory Board member, will explore the role of firms in wage setting, seeking to better understand the implicit and explicit rules that govern pay setting within companies and explore how these policies interact with market forces to shape the earnings distribution. Along similar lines, Equitable Growth grantee David Pedulla of Stanford University will examine the role firms may play in contributing to the gender and racial pay gaps.

Then, there’s the latest research on the so-called skills gap. The literature on the changing nature of work has often blamed declining wages and job quality in the United States on skill-biased technical change, or the supposed existence of a skills gap. This argument remains popular in policymaking, but it overlooks how the change of employment relationships, alongside the decline of unions and stagnant minimum wages, have led to the unequal U.S. labor market outcomes in today’s workplaces. In a recent Equitable Growth working paper, David Howell of the New School and UNC-Chapel Hill’s Kalleberg find that skill-biased technical change has failed to explain differences in wages within occupations. Indeed, they find that understanding polarization and declining job quality in the United States requires an examination of broad labor market conditions and institutions.

Changes in bargaining power because of the rise of firms’ monopsony power and the decline of protective labor institutions have facilitated the restructuring of employment relationships and the organization of U.S. workplaces, which, in turn, has led to higher wage inequality and worse labor outcomes for workers. Restoring bargaining power and pro-labor policies may help push back against the detrimental effects of workplace fissuring in the U.S. economy.

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