Productivity Sharing: There Ought to Be a Law

What if I told you that there is a way to increase wages and profits at the same time without any need to raise prices?  Most people would, I think, say that’s impossible because increased wages must always be paid for either by increasing prices or by reducing profits or both.  They’re wrong.  Most economists (including conservative ones) would say that not only is it possible, it should just naturally occur.  Economists can show with mathematical certainty that productivity growth makes it possible for both wages and profits to increase while prices remain stable. But just because it’s possible doesn’t mean it’s inevitable. Turns out, the connection between productivity and higher wages isn’t natural.

It did seem that way for a while.  Productivity and wages grew in tandem in the U.S. for the 30 years after World War II.  But for the past four decades, wage increases have not kept pace with productivity growth.

We’ve had plenty of growth in productivity across the U.S. economy (it’s doubled since 1973), but only piddling increases in real wages and family incomes.    That is the single biggest reason for the growth of income inequality in the U.S. since the 1970s – not the Reagan and Bush II tax cuts for the wealthy.  New York Times labor reporter Steven Greenhouse calculates that if productivity sharing had continued the way it was in the three decades preceding 1973, each full-time worker would now be earning some $20,000 a year more.  The median annual wage would be about $60,000 instead of $40,000.

We need a law requiring employers to share the fruits of productivity growth with their workers.  Put aside, for the moment, that there is probably no chance of passing such a law in the next four years or longer.  Debate over a proposed law would generate the broad public discussion of productivity growth and productivity sharing that we need to make clear the causes and consequences of our growing inequality of income and to help us figure out how to reverse it.

Productivity growth is one of only a handful of ways to increase a nation’s wealth.  Historically, the other most important way is plunder – raise an army and take wealth from somebody else.  As Adam Smith argued in 1776, productivity growth is the key to peace and prosperity because it is a way to increase “the wealth of nations” without going to war.  Capitalism, the factory system with its division of labor, the industrial revolution, and steadily increasing technological change continuously improve productivity, which simultaneously increases total wealth and reduces the need for human toil.  But productivity growth only produces widespread economic benefit if the wealth is shared, and if that ever occurred “naturally,” it was because workers’ organizations – labor unions and political parties – functioned as “forces of nature” once upon a time.

I have not given up on American unions figuring out a way to revive themselves and return to some semblance of their former power.  But even under the most optimistic scenario, the return of society-wide union power to the U.S. will take decades.  And without powerful unions, labor parties (or labor-influenced parties, as the Democrats once were) are impossible.  We need a shorter term alternative.  Here’s mine.

Pass an amendment to the Fair Labor Standards Act that requires employers to share productivity gains with their employees.  It should be modeled on the so-called Treaty of Detroit that for decades was a standard feature of United Auto Workers’ contracts with the auto companies – and came to be included in many other union contracts during the most prosperous decades in American history (the 1940s into the 1970s).   Such a law would require wage increases to match productivity increases, so a 2% increase in productivity would require the employer to increase real wages by at least 2%.   This will not require an increase in prices, and because labor is only a portion of total costs, there will typically be money left for profits to increase as well.  Since productivity can be measured in different ways, even in manufacturing and mining, the law should require employers to facilitate the election of a workers’ council, with a small budget to hire experts and with the power to negotiate how a company calculates productivity gains.

Figuring out the details and winning support for such a law would require more economic, legal, and political expertise than I can muster.  Workers and some unions might resist, because they think (mistakenly) that speed-up and brute force are the only or the primary means of achieving productivity growth.  Capitalists and their managers are probably not going to like it much either! But advocating for a specific form of legally required productivity sharing could bring some key points into public view.

  • Workers collectively make a very large contribution to productivity growth, and thus should share in its benefits.  Though “investment in new technology” also makes a substantial contribution, it is not as large as the roles played by workers’ tacit skills and on-the-job ingenuity as well as their technical education and formal on-the-job training.  (See Chapters 2 & 3 of Barry Bluestone and Bennett Harrison, Growing Prosperity.)
  • If workers do not get their share of the new wealth created by productivity growth, someone else gets it. This, in turn, contributes to levels of income inequality that will eventually mean there is insufficient consumer demand to keep the economy growing.  A good case can be made that “eventually” has already arrived.
  • Workers’ councils, even very narrowly defined as merely negotiating how productivity is measured in a single workplace, would increase workplace democracy and likely increase workers’ appetites for more.
  • And, oh, did I mention that real wage increases based on productivity growth do not require increased prices or the elimination of growth in company profits?  As such, they may be the one best way to both create and share prosperity – and maybe even peace.

 

Jack Metzgar, Chicago Working-Class Studies

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10 responses to “Productivity Sharing: There Ought to Be a Law

  1. Pingback: The Value of Admitting that Raising the Minimum Wage Could Cost Jobs | Working-Class Perspectives

  2. Pingback: Chronicles of Inequality [TOO MUCH, 6 May 2013} » The Greanville Post —Vol. VII- 2013 | The Greanville Post —Vol. VII- 2013

  3. I wonder why productivity gains should accrue to company employees and not, at least in part, to society as a whole. After all, it is not individual companies alone that make productivity gains possible. Technology and process innovation enable productivity growth, so do investments in infrastructure and a stable political system, all things that are financed by taxpayer money and nourished by society as a whole. So why should the fruits of these investments accrue to those who have work and not to society as a whole?

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  4. Great sentiment. Rising productivity leads either to rising real wages or greater income inequality – unfortunately, the US path has been to greater inequality.

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  5. Pingback: Is Education the Answer to Economic Inequality? | Working-Class Perspectives

  6. Thanks for that query, Rick. There’s lots of detailed issues like this that would have to be worked through with such a law. But I’d be inclined not to reduce wages if productivity actually decreased for a full year, but rather reduce the subsequent year’s increase to keep the average result even.

    Fred, postwar prosperity had many causes, and you cover a lot of them, and I think you’re also right about one of the key causes of why that prosperity started to disappear in the 1970s. But productivity sharing was most certainly the result not of the competitive situation in a devastated world, but of power relations between workers and employers because of the strength of unions then. Also, in your three-way contest, labor and consumers have some different interests, but they are also by and large the same people. Without rising real wages based on productivity growth, consumers will not have enough money in their pockets to buy all that the economy can produce, and this leads to low and stagnant economic growth. Sort of like now!

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  7. I know that you did not mention this, but I would assume that you would favor pay decreases should worker productivity fall below the baseline for the year.

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  8. Jack;
    I’ve annoyed you before with my speculation as to what happened in the 25 years after WW II. But perhaps your emphasis on productivity provides an avenue for supporting or undermining my speculation.
    As you know, I suspect that what really happened post WW II, was that the U.S. was a monopoly supplier for most of the world’s goods & services. That war had resulted in the destruction of most competitor nations’ productive capacity. Thus it was easy for American companies to take good care of their workers; We could simply pass through those high labor charges to the customer who, if they wanted the goods, had little choice but to pay whatever we chose to charge them.
    That situation began to change, as you note, in the 1970′s — I suspect because the Japanese, Germans, Italians, Brits, etc. began to get back on their feet and compete with us. We no longer could stick it to the customer, for the customer could now get a less abusive deal from these competing foreign suppliers.
    And productivity gains that we could pocket for ourselves pre-1970, now had to be passed along to the customers in the form of better products and lower prices: If we refused to, some foreign competitor would see their advantage in doing so and would take that customer away from us.
    What I’ve spun here is largely speculation — never tested and certainly not proven (not by me, at least). But if it was happening, wouldn’t it be manifest in lower prices and improving quality for goods? And doesn’t someone have archival price (& profits) data that we could plumb for such evidence? (I’m painfully aware that definitive quality trends are much harder to nail down.)
    I suspect that we have a three-way contest between capital, labor, and consumers. (I shall count government as a part of consumption.) And I would think the data would reveal who was winning and who was losing in that three-way grab-fest.

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    • I don’t think that it is competition with other countries that have lowered American wages. The wages of workers in other countries have not lost ground like in the US. In 1973, the American worker was the best paid in the world. Now, there are almost 20 countries with better paid workers, even though the American worker productivity continues to be the world’s highest. P. T. Batnum once said, “There’s a sucker born every minute.” The “sucker” is the American worker.

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  9. This is very similar to what my employer does. For us its Incentive Based Pay and the higher amount of production that we accomplish the more money we can receive as a bonus. This is a great alternative to raising the minimum wage as it reduces the amount of inflation while still giving employees the ability to make more money.

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