Eileen Appelbaum
School of Management and Labor Relations, Rutgers University
Advisory Board, Center for Economic and Policy Research
Stagnant wages, debt and unsustainable growth
The global economic crisis had its roots in the unsustainable build-up of debt in the U.S. – a build-up that had three sources: A growing trade deficit, deregulation of financial markets, and stagnant or falling real wages for most workers. The trade deficit rose to almost 6% of GDP in 2006 and dramatically increased U.S. cumulative indebtedness to the rest of the world, especially China and other export surplus countries. In financial markets, a huge increase in leverage, risky loans and mortgage-backed debt led to bubbles in the stock and housing markets. Stagnant wages, combined with easy access to mortgage and consumer loans, resulted in the rapid rise of household debt.
Much has been written about measures to restore greater balance to world trade and to regulate financial markets. Far less attention has been paid to measures to support income growth for workers, an issue that extends beyond the U.S. The low-wage share of employment has risen to unacceptably high levels in many countries. Exceptions are those countries where the minimum wage is high and employment regulations are enforced (e.g., France) or where union density remains high and there is a continuing commitment to modernization and skill upgrading (e.g., Denmark). In many countries, the decline in union density, low or no national minimum wage standard, unequal treatment of part-time or casual (largely female) workers, unequal access to work-family supports, lax enforcement of labor laws and employment regulations, and the successful efforts of employers to escape the constraints of established labor market institutions all contribute to wage stagnation and a large underclass of people living in poverty despite being employed. These developments have been exacerbated by hedge funds and private equity firms that load companies with debt and then rely on the ‘discipline’ of high interest payments to pressure them to strip assets, reduce wages and benefits, and downsize employment in order to raise margins – either to increase share prices (hedge funds) or to sell operating business and distribute gains to investors (private equity).
Economic recovery and growth beyond the current period of substantial fiscal stimulus and large-scale deficit spending by governments will require an increase in household consumption. Sustained recovery and growth require that this be based on rising real earnings, and not on rising debt.
Employment relations and workplace policies
Transforming the U.S. and other high-income economies to once again work for everyone requires significant workplace changes in order to create jobs that fully utilize workers’ knowledge and skills; to drive innovation, productivity, and profits; and to ensure that workers share equitably in the prosperity generated.
Adopt modern workplace policies Achieving and sustaining high levels of performance requires practices that leverage employees’ knowledge and ability to create value and that are implemented in concert with new capital or technological investments. High performance work practices (HPWP) (1) foster development of human capital, resulting in increased employee skills and improved customization of services; (2) engage employees in problem solving and performance improvement; and (3) build organizational social capital to facilitate knowledge sharing and the coordination of work. Research in settings ranging from public schools to airlines has demonstrated the advantages to firms – in terms of improved efficiency, quality and financial performance – of work practices that encourage the simultaneous development of human capital and social capital. Workers benefit from improvements in skills and social capital, and more than 70 percent prefer these work systems over either traditional union or non-union systems. Unions are important – the combination of formal and informal mechanisms for employee voice improves the productivity effects of HPWP. For workers, the combination of union representations with HPWP tends to be associated with higher wages, some of which are achieved through mutual gain sharing or similar compensation practices.
Establish and improve minimum employment standards Governments, including the U.S., should establish a national minimum wage at two-thirds the median wage, indexed to some combination of inflation and productivity growth, to eliminate the scourge of working poverty. No one who works full time should live in poverty. But workers need more than a living wage. Too many workers, men as well as women, are still forced to choose between supporting their families and caring for them. Countries with policies that support working families too often exclude casual employees or those on part-time or short-hour schedules from these benefits. Everyone in the labor force should be guaranteed a minimum number of employer-paid sick days and paid vacation days. Employees should have the right to greater control over their work schedules so they are not penalized for care giving responsibilities. Employers should be encouraged to offer reduced hours in full-time jobs. Finally, employees need tax-financed family and medical leave insurance programs, similar to unemployment insurance, that ensure job-protected and affordable family and medical leave for all workers.
Enforce labor and employment laws Governments need to strengthen and modernize enforcement of the regulations governing employment relations both by strengthening traditional enforcement measures and by leveraging the expertise and resources of labor unions and community groups to monitor compliance. Growth of supply chains, subcontracting, and employment of immigrants combined with lax enforcement has degraded wages and working conditions of many workers.
Reform labor law Fixing or strengthening labor law is necessary to building the labor management partnerships and high performance work practices described above. Moreover, unions have historically been the strongest and most consistent institutions for achieving improvements in worker wages and for reducing income inequality within and across industries and occupations. The decline in union density in many countries makes it clear: Labor laws need to be fixed to support workers’ fundamental rights. Restoring workers’ ability to organize and bargain collectively is the first step in getting wages and productivity moving in tandem again. The reform of labor law should encourage workplace innovation and transform labor-management relations in ways that contribute to economic recovery and shared prosperity. Most importantly it should restore or enhance workers’ rights to join a union and gain access to collective bargaining.
Conclusion
The transformations in labor policy and workplace practices needed to support economic recovery and sustainable growth are achievable. As argued above, what is required is a three-part strategy: (1) adoption of labor management and workplace innovations that create good jobs and the high productivity that will sustain them: (2) strengthening, updating and enforcement of labor and employment policies and minimum employment standards appropriate to today’s workforce; and (3) improvements in labor law that create a platform for labor to negotiate workplace practices that enhance productivity and wage growth in line with improvements in productivity.