Waiting for Labor's Day

The last year has been a big one for American labor unions. From Wisconsin to Alabama to the NBA, policy makers are re-examining their stances on collective bargaining. After running largely on an economic platform, Republicans took their success in the November 2010 elections as a cue to advance conservative economic policies. Many lawmakers began to characterize wages and benefits for public-sector workers as a drain on the economy. In particular, many state governments, struggling to make money in the wake of the recession, began to push new legislation to limit the power of labor unions.

This was especially evident in Senate Bill 5, a heavily-publicized Ohio state referendum. Supporters of the bill purported that it would save the state as much as $1.3 billion a year and limit the growth of government. But these “savings” would have come entirely at the expense of Ohio’s public workers, including its teachers, police officers, and firefighters. Specifically, it would have come from reduced pay increases for public workers, along with provisions requiring them to pay more for their health insurance and limiting their sick leave and vacation time.

Although the 599-page amended version of the bill permitted union negotiations for wages, hours, and working conditions, it also proposed the complete elimination of binding arbitration and the prohibition of any and all strikes by public employees. Without these tools at their disposal, unions would lose all power to negotiate with employers, and it would be easy for employers to establish standards and deny any requests from union members. This bill would have effectively been the end of collective bargaining for public workers in Ohio. For this reason, many media sources have simplified the bill by referring to it as “Ohio’s Senate Bill 5, a bill to limit collective bargaining rights for unions.”

The influence of the November 8 vote to repeal Senate Bill 5 extends beyond Ohio’s public workers. First, the repeal is a statement in support of all unions, not just unions in the public sector. The largest organization that campaigned for the bill’s repeal, “We are Ohio,” framed the campaign in terms of the bill’s benefits to all workers, in both the private and public sectors. The vote therefore is indicative of support for all unions. It is telling of a national trend not only because it gained national attention and support as the first state vote of its kind, but also because Ohio has long served as a barometer of national opinion. Only twice since 1896 — and not once in the past 50 years — has a president been elected without the support of Ohio. With this in mind, union leaders and political pundits insist that the defeat of Senate Bill 5 will have a ripple effect in other states across the country. But what exactly does the Ohio vote mean?

Labor unions serve two basic purposes. First, they engage in collective bargaining with employers over wages, benefits, and work conditions. And second, they advocate for their members if employers violate contract provisions. This second role can feasibly be fulfilled by law enforcement or the judiciary, albeit less effectively. It is the first function, the act of collective bargaining, that encapsulates the unique purpose of a labor union. When Ohioans voted to repeal S.B. 5, they expressed their support for the fundamental principle behind labor unions: workers’ ability to bargain collectively. In today’s economy, however, labor unions should be expanded, not simply tolerated.

The rights of workers to bargain collectively is extremely important at a time in which income inequality in the United States is the greatest it has been since the Great Depression. According to the Congressional Budget Office, between 1979 and 2007, incomes for the richest 1 percent of Americans tripled. In this same time period, the incomes of the middle fifth increased by a quarter and the incomes of the bottom fifth of Americans increased by just one-sixth. In the years immediately preceding the financial crisis, from 2005 to 2007, the top 20 percent of the population earned more after-tax income than the entire bottom 80 percent. These numbers by themselves largely discredit any trickle-down theory of economics.

This is problematic because income growth among the lower and middle classes creates a culture of spending that stimulates the economy. Workers outside of the upper classes generally spend a relatively high share of their income. When they spend their money on goods and services, the businesses they buy from profit. A strong middle class leads to more demand, which in turn leads to the expansion of industry. This expansion of industry creates jobs, creates goods, and creates more profit for business owners: the economy as a whole benefits.

At odds with this vision of a healthy economy, the American middle class is shrinking. In 2009, around 44 percent of American families lived in middle-income neighborhoods, down from around 65 percent in 1970. According to Harvard sociologist William Julius Wilson, growing inequality is producing a two-tiered society. On one side is the rich, and on the other is everyone else. The most nation’s most popular jobs are held by people that fall into this latter category. A retail salesperson, the nation’s most common job, makes on average just under $25,000 a year. To put this in perspective, the United States Department of Health and Human Services considers a family of four to be living in poverty if its yearly income is under $22,350. Some of the other most common jobs, such as customer service representative or office clerk, have average salaries of around $30,000. Quite frankly, the most popular jobs in America are under-paid. This mirrors the circumstances in which unions were first created. Early unions, largely composed of factory workers, were founded by people who perceived that they were underpaid and decided to do something about it.

The first unions in the United States essentially created the middle class in the 1930s, when they demanded higher wages and a greater share of the profit from industrial employers. The 1950s, when the proportion of unionized workers in the work force peaked at 35 percent, marked the halcyon days for America's middle class. Consumption skyrocketed and productivity boomed. What is more, the gap between the lowest and highest earners decreased as benefits of the prosperous economy became more broadly shared. By most measures, the economy was thriving.

From 1947 to 1977, in the period known as the “Great Prosperity,” the richest Americans took home a smaller share of the nation’s income as the economy expanded quickly and the median wage increased significantly. Consumption increased among the growing middle class, increasing demand, and in turn leading to the expansion of businesses and the creation of jobs. Union influence also significantly affects non-union workers; unions contribute to a moral economy that institutionalizes norms of fair pay for all.

As unions began to weaken in the 1970s, and at an increasing rate over the next three decades, government action favored deregulation and privatization. New policies allowed companies to bust unions and threaten employees who tried to organize. More recently, companies have closed many unionized operations and moved overseas, and many employers have grown more sophisticated in beating back unionization efforts. From the 1970s to the 1990s, the percent of American workers in a union fell steadily from nearly 30 percent to around 12 percent.

These decreases in union membership correspond with an increase in income inequality. From 1981 to the present, in the period referred to as the “Great Regression,” economic growth has slowed, and the median wage of American workers has become stagnant as the wealthiest Americans have become more wealthy and the rest been forced to tighten their belts.  For the past 70 years in the United States, when labor unions have been strong, the economy has been strong, and when labor unions have been on the decline, so has the economy.

Many who oppose strong labor unions insist that the competitiveness of American businesses depends on businesses’ resisting an increase in labor benefits. The problem with this argument is that it has been disproved by European social democracies such as France, Sweden, and Germany, which have all largely cooperated with laborers’ demands. Laborers in these countries have enjoyed steady increases in wages, particularly in Germany, where, adjusted for inflation, German workers’ pay has risen almost 30 percent since 1985. Compare this with the 6 percent increase in the average real hourly pay that American workers have seen since 1985. According to the CIA, with industry comprising nearly 28 percent of their GDPs, Sweden and Germany both have more industry than the United States, where industry accounts for 22 percent. This comparison does not prove a causal link between high wages and level of industrialization, but it certainly dispels any myth that only low wages can preserve industry. And if some argue that low wages are necessary for competitiveness in the US system alone, given that superior alternatives are available, such a system is surely undesirable.

A comparison with Germany additionally discredits the popular-yet-unfounded claim that a decline in organized labor necessarily follows from globalization and technological change. Over the past fifteen years, Germany has grown faster than the United States, and the gains have been more evenly distributed among income classes. The wealthiest 1 percent of German households today takes home about 11 percent of Germany’s income, a figure that has changed very little since 1970. What is more, although Germany has certainly been impacted by the global recession, its unemployment rate has nonetheless decreased since the start of the financial crisis in 2007.

Because Germany has been so stable for so long, the United States should strive to reproduce the German model of keeping manufacturing jobs in wealthy countries. Germany, the world’s largest exporter until 2009, has managed to bring their unemployment rate down to a 20-year low in the midst of a global recession. The country focuses on technical education, including technical institutions and apprenticeship programs, with the goal of specializing in high-end, complex manufactured products. In addition to requiring expertise that reduces the risk of outsourcing, such a system produces specialized products that can be sold at high prices. In return, manufacturers can afford to pay their laborers high wages, thus catering to the demands of empowered labor unions.

Ultimately, the United States should seek to emulate the drive for quality that Germany exhibits. Instead of finding ways to pay the working class as little as possible, the United States should seek to empower the average American. Considering that the German model has proven to be sustainable, Washington can stand to learn the benefits of fostering an environment in which labor unions can flourish. The demands of empowered labor unions are not simply compatible with a strong economy; they are essential to economic solidity.