HELP for America’s struggling middle class?

Published on Incomes and Inequality

Last month, Tom Harkin, one of the Democrat giants of the Senate and Chair of the Health, Education, Labor and Pensions (HELP) Committee, convened the first of several meetings to examine why the American Dream appears to be ever harder to reach, even for those who – in Clinton’s words – ‘work hard and play by the rules’. The full footage and transcripts can be read here.

I suspect Sen. Harkin had hoped for a more focused discussion than he got about how to address the crisis of America’s so-called middle class – the stagnating median wages, rising income inequality and declining standards of living that are attracting more and more mainstream attention in US politics.

But the Hearing was dominated by a spat between Republican and Democrat committee members about a recent complaint filed by the National Labor Relations Board against Boeing. THE NLRB believe that Boeing’s decision to move much of their business to a non-unionised production line in South Carolina was driven by a desire to hit back against their unionized workers in Washington State. It is illegal in the US to retaliate against striking workers, but there is ambiguity in the law about whether firms can move to different, non-unionised states to avoid engaging with worker rights.

The ruling on this specific case is likely to take place this month. The outcome will be significant, all the more so in the wake of other attacks on organized labor this year. From the new Republican governor of Wisconsin’s determination tooutlaw collective bargaining, to Ohio’s bill to ban public worker strikes, the growing weakness of America’s employment protection framework has never been more apparent.

In 1973, 34 per cent of American men and 16 per cent of women in the private sector were union members – today just 8 per cent of men and 6 per cent of women are. This decline can be explained by many factors: a crumbling manufacturing sector, union failures to adapt to the rapid growth of low-pay service sectors, and a succession of federal governments whose pro-business stance helped to make organizing more difficult. Political stalemates about reforming and modernizing labour law have repeatedly compounded these factors.

This matters. Bruce Western and Jake Rosenfeld have recently shown that the decline of organized labour explains between a fifth and a third of the growth in inequality over the last generation. That’s an effect comparable to the growing stratification of wages by education described by David Autor. Western and Rosenfeld argue that unions helped to institutionalize norms of equity, which had significant positive knock-on effects for non-union workers too.

Although Sen. Harkin was clearly frustrated by his Committee members who constantly brought the conversation back to the Boeing case, the issues it represents are a crucial part of understanding the middle class crisis he is interested in. A recent paper – Stagnating Wages, published by the Employment Policy Research Network – argues that the breakdown of America’s ‘Social Contract’ lies at the heart of the declining living standards of average families today.

Of course, trade and technology have both played a role in ‘hollowing out’ the labour market and reducing the number of jobs at the lower middle part of the distribution. But the Sloan paper points to two further causes of stagnating wages:

• Changes in labour market institutions: as well as the decline in unionization, government support for worker organizing has waned. Never indexed, the value of the federal minimum wage has steadily eroded, to the point that it was worth less in real terms in 2008 than it was in 1955. Violations of wage and hours laws have effectively lowered the wages of affected workers by 15 per cent.

• Changes in finances, corporate structures and management practices: the increasing focus on maximizing shareholder value took profits away from workers and put pressure on firms to reduce labour costs. Outsourcing and specialization have made it harder to enforce norms about wages and assign accountability for any violations of the law.

These issues are not in any way unique to America. British unions have not fully recovered after the decimation of organised labour during the 1980s, and membership now stands at just 16 per cent of private sector workers. The confident above-inflation increases of the National Minimum Wage between 2003 and 2006 have disappeared, as the early consensus between business and union partners dissipated with the onset of the recession. Many of the shifts in corporate structures and management practices described in this paper can be seen in the UK too.

So, given the stagnation in British median wages since 2003, what is the appropriate policy response to the issues raised here? With hindsight, the Labour government tended to be overly optimistic about what government could do to address inequalities, and overly pessimistic about what role business should play in maintaining the British social contract. If the HELP Committee debate tells us anything, it is that governments and businesses are both part of the problem, and part of the solution to the crisis of the middle class.

Any systematic strategy to raise living standards for the ‘squeezed middle’ needs to put the re-coupling of pay and productivity front and centre. While tax credits and benefits may help to mitigate the effects of stagnating wages and rising living costs, they do not prevent these effects in the first place. ‘Predistribution’ – employer practices and government policies that improve market wages – must be given equal weight to redistribution in future debates about protecting and supporting low income households.

This will not be easy to achieve. It will require a measure of political and economic consensus that is not currently present. And it will require a broader public shift in norms about wage inequality and the role of government and business in stimulating greater fairness in pre-tax earnings in the first place. The true challenge for 21st century politicians on both sides of the Atlantic is to find a more sustainable and equitable way of balancing the flexibility of the labour market with economic security for low and modest earning households. The HELP hearing underlines just how far we have to go.