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 is the author of a book about the 1959 steel strike called Striking Steel: Solidarity Remembered.
This piece was first published on the Working-Class Perspectives Blog of the Center for Working Class Studies at Youngstown Universities.