Many believe some version of the following regarding income inequality:

The current income distribution is the free market outcome; we can’t regulate ourselves out of income inequality…it is a natural outcome of our global economy.

The statement is untrue.  It is better worded as follows,

“The current income distribution is a consequence of our government labor policies.   Based on current policy, it is the outcome we have created (perhaps inadvertently, but we still did it).  If we’d like to change it, we can.”

How can we better frame the issue of income distribution?

Income can go to two main places:  a) Capital (rich people/businesses)  or c) Labor (us).  We control which of those parties has the upper hand to “negotiate” for their share of national income.

A) Capital:  These are people who earn their income through owning things, such as land (to rent), or stock (to appreciate), or banks (in effect they rent money), or factory equipment (to make things), etc.  Capital does not work; it enables others to work/produce and so capital earns its income by “renting” its capital to others.

Capital has the upper hand right now.  The rich and business owners are raking in all the gains in national income.  If we change their bargaining power, they will capture less.

b) Labor:  This is people who earn a salary by working.  This is us.  We are fairing poorly currently in bargaining for any share of the productivity gains that we are producing.  The gains are all getting captured by capital.  Labor increases productivity; capital is capturing the gains.

There are some who would point out that without capital/business there would be no labor gains for us to think about capturing (this is the whole “the rich are the job creators” argument).  This is not true.  Without consumers/labor (with money) to buy/demand products, capital would be useless.  Job creation is an ecosystem, it takes both capital and labor to succeed.

Here are some factors that have created our current income distribution, which we can reverse if we so choose.

1. Decline in Labor Unions:

We are all in labor unions, whether we know it or not.

When a union bargains a benefit, we all get it as companies will offer it to everyone so that the non-union workers are not tempted to join the union.

Unions create collective bargaining power for labor in which even non-union members benefit.  Without unions, labor is weakened as a whole.

2. Enforcement of the FLSA:

In the US, we generally work many more hours per year than the rest of the world.  The FLSA created the 40 hour work week.  By being lax on enforcing the definition of an “exempt” worker, the 40 hour work week has been effectively abolished for all but a few employee groups.

The law already exists, simply reclassify workers as non-exempt (based on an alternate legal interpretation of the classification) and labor gets a bargaining chip (overtime hours).  As exempt workers, we do not have a basis on which to start the conversation (except complaints about work/life balance).

3. Enforcement of anti-trust law:

Many industries in the US (cable, wireless, media, etc.) are oligopolies…in which a few large firms (e.g. AT&T, Verizon) dominate the industry.

As such, they are near monopoly buyers of labor, and so they do not have to pay out as much to employees in salary.

Here is an example.  If you work in cellular, you work for AT&T or Verizon mainly.  There are only two buyers of your services; you can’t really continue to leave one company for another if your current salary doesn’t suit you.  There are only two places to go, and  you can’t move across the country if needed, because the same two companies exist wherever you go.  In the past, this wasn’t true.  It was easier for labor to say “I’ll just go work for someone else”.  We COULD go work for someone else; now we can’t as easily.

Anti-trust law already exists.  The legal interpretation of it changed such that companies were allowed to get larger and capture larger market shares.  If we go back to the old interpretation, then labor gains bargaining power as very large companies lose their “monopoly buyer of labor” market position.

4. Retirement investment in stocks:

When we put our savings in stocks (generally for the purpose of retirement savings); we drive up the price of stocks (which are owned by capital).  The reason is that we input additional dollars which chase a finite supply of stock shares.  We drive up the price of stocks….which gives money to capital (not labor).

Returns to capital would be lessened if we invested less in stocks and preferred (voted) instead to take a government pension.

5.  Privatization:

Government workers have lots of rights (largely due to government unions).  When anything is privatized, those rights go away and capital captures the gains.

As an example, you privatize a utility company in a particular city, those people lose their government benefits and jobs.  The company will be reformed as private (generally with a government granted monopoly) with lower wages, benefits, and job guarantees to employees and higher prices to the public.  The excess profit from the company will leave the city as it is distributed to company leadership and shareholders (capital).  Labor loses.

Those who say “that isn’t what happens…the free market is always more efficient than government run services”; that simply isn’t true in all cases (though it is true in some).

6.  Unemployment:

High unemployment means labor has little bargaining power as employees cannot leave for other companies.  In this case Capital gains the upper hand as it can capture labor’s increased productivity for itself instead of paying some of it out in higher wages.

Unemployment itself is a choice of the government (i.e. our choice as voters) as the government could always act as an employer of last resort to keep the labor markets fully functioning (just as the Fed acts as a lender of last resort to keep the finance industry functioning).

We could have a Fed for the labor market if we so chose.  This would give labor a lot more bargaining power (the government role as employer of last resort would provide a wage floor that private industry would have to meet or beat to attract workers).

7.  Minimum wage:

Increases in the minimum wage push up the wage floor which indirectly pushes up wages for all workers.

The wage floor is our choice.  In the absence of a floor, companies will pay whatever they want…which they are currently doing:   Wal-Mart has food drives to help feed its own employees.

8. Tax law:

Warren Buffet has pointed out that he pays a lower tax rate than this secretary, because of capital gains tax rates and loopholes/deductions for the rich.  Increase the capital  gains tax rate (to more than the marginal income tax rate); close the loopholes.  They favor the rich and the rich (capital) don’t need any help right now.  They are doing fine.

9.  Free trade:

Free trade agreements put our labor in competition against labor of other countries.  NAFTA gutted the domestic textile industry (which I watched happen living in S. Carolina).

T-shirts and other textiles are now dirt cheap (for which I am appreciative, since I don’t work in the textile industry); however, I am under no illusion that these agreements are only of benefit.

There are plenty of good arguments to be made about free trade (I can make them; they are of benefit sometimes); however, at this time labor is losing and we need to shift the balance of power back to regular people…not pit us against third world workers.  This is one avenue if we choose to exercise it.

10.  Corporate law and personhood:

Corporate personhood gives corporations rights they should not have.  Corporations are not people.

Corporate law could be changed to pay out a mandated percentage of profits to workers (if a company benefits, shouldn’t the employees?), or make CEO salary related to avg employee salary (so that executives can’t be paid in excess while workers are laid off).  Even something as simple as mandating employee representation on the board of directors would be helpful to labor’s bargaining position.

11. Campaign finance:

Limit the rich’s ability to influence election through campaign finance.  Last I checked, there are lots of lobbyists for the rich…not so many protecting labor’s interests.  Get big money out of politics and it will give labor a leg up.  We need it!

12. Finance industry oversight:

If, after the mortgage meltdown, we had put all the titans of the finance industry in jail, that would limit the hubris of Capital…and thus limit their ability to capture the gains of the economy (which is happening now).

Why didn’t anyone go to jail?  Poor enforcement of current law.  We don’t even need new laws.  We just need to enforce the laws we already have.  During the S&L crisis and Enron people went to jail.  Now the laws are not being enforced because of undue influence by Capital.

13. Copyright law:

Copyrights are government granted monopolies over a certain time frame.  They are a form of Capital, which funnels profits/income to the holder of the copyright.

Without the copyright protection, more producers would be able to enter the market, which would benefit Labor (both from a cost of goods standpoint and from the standpoint of more employers in the market).

We could weaken the time frames over which copyrights are granted (less time is better for Labor) and/or we could lessen the circumstances under which we grant copyrights (Apple tried to copyright rounded corners on phones and swiping to unlock.  Really?  I guess they are at liberty to try; however, the circumstances of copyright should allow for broader market participation and less special status).

14.  Social Safety Net:

Every time the safety net (unemployment insurance, medicare, medicaid, EIC, SNAP, Social Security, FMLA, etc.) is diminished, it makes it harder for the poor to move up the economic ladder, and thus depresses the income potential of the low income earners (which indirectly affects all of us).  Strengthen the safety net and labor has more of a leg to stand on….otherwise more gain goes to Capital.

You can see that there is a literal war on the bargaining power of labor, and labor is losing (largely without realizing it is happening).

It takes both capital and labor to succeed and right now the power is out of balance.  We need the pendulum to swing back in the direction of labor.  Perhaps in 50 years we can argue why capital needs more bargaining power (hopefully).

One can see that all these laws are creating the conditions of our current inequality.  We can change them; we created them in the first place.  It is silly to say “this is the free market outcome”.  The current income inequality is a choice.  We did it; we can un-do it.

It is fair to ask the question “If we decrease income inequality, what will that mean for me?”.  Most would see an improvement; some would not.  Income inequality creates lots of relatively cheap goods/services for the rich.  The cost of the items on the low end would likely increase if we paid many of the employees that produce those items more.  Lots of poor would benefit; a few rich would not be as well off.  That is OUR choice to make (or at least should be).

This entry was posted on Tuesday, January 13th, 2015 at 1:49 pm and is filed under Inside My Head, Thoughts on Work. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.