The new American way—how changes in labour law are increasing inequality
DOI | http://doi.org/10.1111/irj.12177 |
Date | 01 May 2017 |
Author | Mark Stelzner |
Published date | 01 May 2017 |
The new American way—how changes in
labour law are increasing inequality
Mark Stelzner
ABSTRACT
How have changes in labour law affected income inequality in the United States over
the last half century? Curiously, even though employers have increased the degree to
which they break labour law, workers have decreased their utilisation of the National
Labor Relations Board (NLRB) and the strike. How do we understand the
unwillingness of labour to utilise the NLRB and the strike when under increasing
attack? To answer these interrelated questions, I analyse three central changes in
federal labour law and norms from the middle of the 20th century to present: the
usage of permanent replacement workers, adjudication of the main federal labour
law—the National Labor Relations Act—and change in administration of the
NLRB—the body charged with overseeing the National Labor Relations Act.
Income inequality in the United States has increased dramatically since the late 1970s.
The income share of the top 1.0 per cent of the population has grown from just under
9 per cent of all income in 1978 to over 22 per cent in 2012, and the income share of
the top 0.1 per cent, an even more elite group, has increased from 2.65 to 11.33 per
cent over this same period (Piketty and Saez, 2003). Indeed, income inequality has
increased so dramatically that the top 1.0 per cent absorbed nearly 60 per cent of
growth between 1977 and 2007 (Piketty, 2014). In this article, I seek to better
understand these astonishing trends by analysing how changes in federal labour laws
and norms since the middle of the 20th century have transformed power dynamics at
the firm and ultimately influenced the dramatic rise in income inequality highlighted
earlier. I look at the usage of permanent replacement workers, adjudication of the
main federal labour law—the National Labor Relations Act (NLRA)—and change
in administration of the National Labor Relations Board (NLRB)—the body charged
with overseeing the NLRA.
1 THE LITERATURE
The increase in income inequality highlighted earlier has been driven by a dramatic
increase in the remuneration of top management relative to the average worker.
For example, Piketty (2014) finds that 60 to 70 per cent of the top 0.1 per cent are
executives in the real sector (i.e. the non‐financial sector of the economy). Bakija,
Cole and Heim (2012) show that households headed by ‘executives’in the real sector
are associated with 44 per cent of the increase in the income share of the top 0.1 and
36 per cent of the increase in the income share of the top 1.0 per cent. Mishel and
❒Mark Stelzner, Connecticut College, New London, CT USA. Correspondence should be addressed to
Mark Stelzner, Connecticut College, New London, CT, USA; email: mstelzn2@conncoll.edu
Industrial Relations Journal 48:3, 231–255
ISSN 0019-8692
© 2017 Brian Towers (BRITOW) and John Wiley & Sons Ltd
Davis (2014) demonstrate that between 1978 and 2013, executive pay increased by
900 per cent relative to the pay of the average worker. And Song et al. (2015) show
that between 1978 and 2013, more than 40 per cent of the increase in income
inequality between individuals employed at large firms stems from intrafirm variation
in wage; remuneration for chief executive officers (CEOs) has increased dramatically
while wages in the middle and bottom of the firm’s income hierarchy have stagnated
or decreased.
1
There is a growing literature that shows that rents are central to understanding the
increase in executive pay. In economics, a rent is defined as pay not justified by
marginal productivity. A rent‐seeking strategy is a plan of action that pursues such
income. For example, stock buyback by a company is an example of a rent‐seeking
strategy. Lazonick (2014) shows that CEOs pursue buybacks because a substantial
portion of their pay is in stock options. Buybacks increase the short‐term value of a
company’s stock but at the expense of investment in research and development and
thus the long‐term interests of the company and society. Between 2003 and 2012,
449 companies in the S&P 500 index spent 54 per cent of profits, $2.4 trillion, to
buy back their own stock.
Another rent‐seeking strategy is to increase market share to decrease competition
in the industry.
2
Using Census Bureau data, Furman and Orszag (2015) show that
consolidation has increased in the non‐farm business sector between 1997 and 2007.
A Congressional Research Service (2010) study shows that market concentration
increased between 1972 and 2002 in the eight agricultural industries it monitors. Vogt
and Town (2006) find similar results in hospitals between 1990 and 2003, and Corbae
and D’erasmo (2011) show that there has been a marked increase in the concentration
of loan providers and demand deposit holdings in the United States between 1976 and
2010.
From a macro‐perspective, Bivens and Mishel (2013) show that, between 1978 and
2012, CEOs pay increased by 532 percentage points more than the value of S&P 500
companies. If CEOs were earning a wage that was commensurate with productivity,
their wage should only increase as they improve the value of their companies. Because
stock valuations can rise because of factors external to a CEO’s control, CEO pay
should rise more slowly than the valuation of the company if pay is solely driven by
1
Intrafirm refers to variation within the firm. Song et al.define large firms as those with 10,000 or more
employees. These firms employ around 30 per cent of the labour force in the United States. However, it
is not clear from their exposition if the same can be said for firms employing 5,000 or more or even 1,000
or more employees. If so, intrafirm dynamics would be even more important. It should be noted that Song
et al. (2015) argue that interfirm dynamics are more important for understanding the increase in income
inequality in the United States. Interfirm refers to differences between firms—as opposed to within a given
firm. However, even the data they present show that intrafirm dynamics are important. In addition to the
statistic highlighted previously, Song et al. show that, as one moves up the income ladder, intrafirm
differences in wages become more important for understanding changes in income growth. Furthermore,
the findings of Song et al. under‐represent the importance of intrafirm dynamics in several ways. For
example, decisions to outsource work are, at least at one point, an intrafirm decision. However, given the
construction of the data of Song et al., changes in the wage distribution due to outsourcing would likely
show up as interfirm wage variation. Also, the construction of their estimates downwardly bias the
importance of intrafirm variation in several ways. For example, the focus in most of their figures on the
top 1.0 per cent of individuals using an average of the natural log of individual’s incomes in that group
shifts emphasizes away from the spectacular growth of top incomes inside the top 1.0 per cent. Also, given
their construction, any real growth in income at the firm between 1978 and 2013 would show up as interfirm
variation.
2
The positive relationship among market concentration, market power and rents can be seen through
analysis of the Nash equilibrium of an Nidentical firm Cournot oligopoly.
232 Mark Stelzner
© 2017 Brian Towers (BRITOW) and John Wiley & Sons Ltd
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