To Reduce Economic Inequality, Protect Workers’ Rights

(Co-authored by Stewart Acuff, Organizing Director, AFL-CIO and
Sheldon Friedman, Research Coordinator, AFL-CIO Voice@Work Campaign)

Friday’s House Oversight and Government Reform Committee hearings shined a welcome spotlight on obscene pay for CEOs of corporations whose financial manipulations sowed the seeds of the mortgage crisis. In the process, Chairman Waxman’s hearings made an unstated but compelling case for protecting workers’ freedom to form unions and bargain collectively, starting with passage of the Employee Free Choice Act. Here’s why.

The CEO pay excesses documented by Waxman are bad enough, but are not even the tip of the iceberg of worsening economic inequality in America. Not only CEO pay, but also corporate profits and especially the share of income and wealth going to the very top of the nation’s economic pyramid, have been rising for more than a generation, with predictable and increasingly harmful consequences.

The story about CEO pay is well known, but bears repeating. According to the Institute for Policy Studies and United for a Fair Economy, in 2006 Corporate America’s CEOs were paid more than 364 times what the average worker was paid—in other words, they received for a single day what a worker needed an entire year to earn. By contrast, the ratio of CEO to worker pay was “only” 24 in 1965 and 35 in 1978. The highest-paid CEOs of large European corporations are paid only one third as much as their U.S. counterparts, even though the corporations they run have nearly fifty percent higher sales volume.

Corporate profits more than quadrupled over the last 35 years. The share of personal income received by the top one percent of households reached 21.8 percent in 2005 (latest figure), capping a 30-year rise from 8.9 percent in 1976.

Wealth ownership, of course, is even more concentrated. The richest one percent of Americans owns 34 percent of all private wealth—which is more than is owned by the bottom 90 percent. In 2004, median wealth of the richest one percent was 190 times the median wealth of all Americans—up from 130 times as much in 1983.

Why does high and rising economic inequality matter? For starters, bigger shares of income and wealth going to those at the top translate into smaller shares for everyone else. Those at the top of the economic pyramid have been soaking up so much of the gain from economic growth that the wages of America’s workers are lower today in real terms than in 1973, despite an increase in productivity of more than 80 percent over the last 35 years.

But there’s an even deeper problem. Extreme economic inequality sharpens perhaps the ultimate contradiction between capitalism and democracy. This can be seen in the corrosive influence of money in the nation’s politics, as corporations and the wealthy buy ever more influence with their increasing opulence. Meanwhile, political participation by the working class and especially by the poor, preoccupied with the challenges of their daily lives and cynical about politics, trends down. Worst of all is the starvation of the public sector that occurs as the fate of the rich increasingly becomes decoupled from the rest of us, enabling them to opt for private solutions behind the high walls of their gated communities—in education, health care, public safety, and more.

Extreme inequality also destabilizes the economy, rendering it more vulnerable to bursting financial bubbles and the painful unwinding of excessive debt—which accumulates as working families substitute heavily-promoted borrowing for the wage increases they are not getting. To add injury to insult, extreme inequality may even be bad for your health. There is growing evidence that more egalitarian countries fare better in terms of life expectancy and other public health outcomes—and there are cogent arguments for the link being causal, not spurious.

Why, then, has economic inequality been rising in the United States? There are of course multiple reasons, but this is where the connection between inequality and the nation’s dismal failure to protect workers’ rights, especially the freedom to form unions and bargain collectively, becomes apparent. It is no accident that economic inequality has been trending up in the United States for more than a generation, while workers’ rights, union density and collective bargaining coverage have, at the same time, been trending down.

Nor is it an accident that the United States ranks number one in economic inequality but dead last in collective bargaining coverage, when compared with other wealthy developed countries. A bar graph ranking wealthy countries by collective bargaining coverage shows a steady stair step up, while adjacent bars for various measures of economic inequality reveal a stair step down. Countries in which a higher proportion of workers enjoy the benefits of collective bargaining also tend to have a lower level of economic inequality.

Why is collective bargaining so effective at reducing extreme economic inequality? There are several reasons, but heading the list is greater bargaining power for workers in dealing with the corporations that employ them. During the quarter century after World War II when union density and collective bargaining coverage in the United States were far higher than today, wages rose in step with productivity, and the gains from economic growth were distributed proportionately across the income spectrum. Indeed, during this period those at the bottom of the economic ladder achieved a modest increase in their share of the pie.

This may seem like ancient history now that we are four decades into the immensely successful corporate assault on workers collective bargaining rights that began in the 1970s. But when workers have access to it, collective bargaining remains a potent force for their economic advancement—and reduced inequality—to this day. Collective bargaining lifts wages of all workers, but is especially effective in raising wages for low-wage workers—as economist John Schmitt, among others, has shown. Under the banner of equal pay for equal work, collective bargaining also attacks inequality by giving wages of women and workers of color an extra boost. Economists at the London School of Economics have found that collective bargaining even restrains CEO pay.

But these anti-inequality effects of collective bargaining are just the beginning. As the famous economist John Kenneth Galbraith wrote more than half a century ago, strong democratic independent trade unions are a vital source of countervailing power, without which unbridled corporate power would make capitalism unlivable. Social Security, civil rights, women’s rights, progressive taxation, high quality public education, and health care for all are but a small sample of the national policies that cannot be implemented or defended without a strong labor movement.

Easing the arduous path to collective bargaining for the millions of workers who want and need it will also help stabilize the economy, by restoring wage increases to their rightful place as the engine for balanced economic growth, instead of inherently unstable financial bubbles or the unsustainable build-up of consumer debt.

To rein in extreme economic inequality, therefore, it is imperative that workers’ freedom to form unions and bargain collectively be protected. The Employee Free Choice Act, when passed, will constitute a giant step in that direction. This vital legislation to protect workers’ rights is also needed to curb out-of-control economic inequality and ameliorate its many damaging consequences.