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A Turning Point in the US Labor Market?

Walmart made headlines recently by announcing it is raising its base wage rate to $9 per hour (going to $10 per hour in 2016). In response, Gary Silverman of The Financial Times suggests that “Walmart stirs hopes of a Fordist revival,” referring to Henry Ford’s famous implementation of a $5 day in 1914 – double the going rate at the time. Similarly, Paul Krugman, Princeton economist and New York Times columnist, argues that Walmart’s “wage hike seems to reflect the same forces that led to” rising real wages and declining inequality for nearly three decades after the Second World War.

While the comparison between Walmart and Ford is apt in some respects, unfortunately, the broader institutional context of today’s postindustrial, globalized, financialized economy is far different from that of the post-WWII years. As a result, the move by Wal-Mart is unlikely to signal a broad reversal of the current trajectory of the American labor market, which is characterized by stagnating wages and rising inequality.

Silverman is only cautiously optimistic, noting that Walmart employees still suffer from erratic scheduling and that a $9 per hour wage translates to just under $19,000 per year for a full-time worker.

Krugman is far more optimistic: “engineering a significant pay raise for tens of millions of Americans would almost surely be much easier than conventional wisdom suggests.” He argued that “the middle-class society we used to have didn’t evolve as a result of impersonal market forces — it was created by political action,” namely, government wage-setting during WWII and high levels of unionization (along with full employment due to the war), which served to change “pay norms.”

These political forces were critical, no doubt, but the generalization of the fordist high-wage model to the broader economy over two decades required a more intricate – and unique – set of institutions, as I show in a forthcoming chapter in the Sage Handbook of the Sociology of Work and Employment.

The Unique Institutional Context of the Golden Age of American Capitalism

First, the dominant logic of corporate organization in the fordist period was one of vertical integration, which provided a basis for internal training and promotion ladders, generating an employment structure heavy on mid-level jobs. Second, the core of the economy was an oligopolistic manufacturing sector with a high level of unionization. Third, in addition to facing little competition at home, there was almost no global competition in manufacturing – this is the period before the internationalization of production and head-to-head international competition between firms. Finally, under the international monetary regime operating at the time – the Bretton Woods system – there were strict controls on the international movement of capital, which allowed national policy autonomy and the establishment of a keynesian welfare state.

Even with powerful unions, a class compromise between capital and labor was by no means automatic – during the same period the UK had nearly identical structural conditions to the US yet failed to achieve a similar class compromise over wages. In fact, the UK had even higher union density than the US at the time, but the national British Trades Union Congress was unable to control its local unions, leading to unsanctioned workplace-level conflict.

It is easy to applaud Krugman’s comment that “extreme inequality and the falling fortunes of America’s workers are a choice, not a destiny imposed by the gods of the market.” But the good Professor Krugman shares more in common with his fellow economists than his roguish posturing suggests.

In one of the deepest ironies in the social sciences, by praying to the gods of the market, mainstream economists have mistaken a pantheon of pretenders for the real pantheon: the gods of capital. It is in this failure to see capitalism as a class system – the primary goal of which his profit, not efficiency – that Krugman shares much in common with his fellow economists.

From Fordism to Waltonsim

The golden era of American capitalism has been referred to as a fordist growth regime, due to its basis in a high-wage, mass production manufacturing economy. This regime established a virtuous circle of growth in which high wages provided the basis for strong macroeconomic growth.

As I have argued elsewhere, the fordist regime has indeed been replaced by a waltonist regime (pioneered by the Walton Family behind Walmart). The latter is characterized by vertically disintegrated firms and a core employment sector in retail sales, leisure and hospitality, resulting in an economy polarized into high-wage and low-wage jobs, with few mid-level jobs or internal promotion pathways. Additionally, it is characterized by intensified international competition and the domination of global finance.

Under these conditions, the establishment of a high-wage class compromise, like under fordism, would appear to be all but impossible. Why?

First things first. The new Walmart wage is far below what the fordist wage was. Ford implemented his five-dollar day in 1914. In 2014 dollars this amounts to $117 per day (Ford voluntarily reduced his workday to eight hours as part of this initiative), fully 32% higher than the $80 per day Walmart worker will make at $10/hour for an eight hour day.

More importantly, the great fordist class compromise between capital and labor was institutionalized with the Treaty of Detroit in 1950 between General Motors and the United Auto Workers. Under this collective bargaining agreement, unions traded labor peace for wages linked to productivity increases with automatic annual cost-of-living adjustments. The minimum wage in 1968, adjusted for inflation, would be nearly $11 per hour. Wage rates in the GM-UAW contract were likely double or triple that rate, including benefits.

Similar contracts were signed at Ford and Chrysler, with wage bargaining throughout the manufacturing sector based on the pattern set by the Big Three car companies. This, in turn, set a wage norm that was followed by large non-union companies as well – including the retail sales sector, led by companies such as Sears.

In this context of oligopolistic competition, strong unions and lack of international competition, wages had been effectively taken out of competition.

A New Class Compromise?

And today? If we include retail sales and leisure and hospitality as part of a single front-line services sector, it is the largest employment sector in the economy, covering 21% of the workforce versus 16% in government, 13% in professional and business services, 11% in heathcare and 11% in manufacturing.

Costco, a competitor of Walmart, shows that the largest employers in front-line services can afford to pay their workers living wages. In 2004, Costco paid its workers $17 an hour. But this strategy may be dependent on the progressive vision of its co-founder and recently retired CEO, James Sinegal. While its stock has performed very well during its three decades, it has been heavily criticized by Wall Street analysts for prioritizing customers and workers over shareholders. Costco’s strategy appears to be based on a willingness to reject the demands of Wall Street for higher profits. It is an open question whether this vision can survive the change of leadership and whether the company will become the target of a hostile takeover.

In any case, it’s likely that only a small fraction of employers in this sector have sufficiently high profit margins to afford such wages. As sociologists Misha Petrovic and Gary Hamilton have shown (in a chapter in historian Nelson Lichtenstein’s book), Walmart has been able to use its market power to dictate that suppliers commit to its own strategy of high volume, rapid-turnover, with low-margins.

The ten largest employers in the front-line services sector – Walmart, McDonalds, Target, Yum! Brands (owner of Taco Bell, KFC and Pizza Hut), etc. – employ 4.3 million people, just 14% of the 29.9 million workers in the sector. Underneath these firms are a vast number of suppliers, typically much smaller concerns, whose razor thin profit margins are the basis of the fatter margins enjoyed by the giants. With its market power and relentless squeezing of suppliers, Walmart created the conditions of profitably for Costco, namely, low profits and low wages within the global supply chain.

Although more research would need to be done, my guess is that the bulk of the remaining 76% of the front-line services sector consists of smaller, local establishments who also must play the low-margin game established by Walmart, yet don’t have the high volumes to aggregate their thin margins into large profits. While we don’t know their margins, it is likely that these smaller companies – who, again, compete according to conditions and norms established by Walmart – cannot afford to pay higher wages.

The most important lesson from the fordist period is that a high-wage economy requires an institutionalized class compromise, such as that realized with the Treaty of Detroit. There has, quite simply, never in the history of capitalism been a competitive dynamic of wage upgrading on this scale without a powerful union movement. In the absence of such – and in a context of a surplus population of under- and unemployed, which is a basic feature of global capitalism that Marx correctly predicted – competition drives wages down, not up.

Just days after Walmart’s announcement, McDonald’s made a similar minor concession – a raise to $10 per hour in 2016 – again in response to the concerted, union organized, nearly three-year long living wage campaign aimed at the fast food industry. To be sure, it is heartening to see these minor successes resulting from new forms of protest by union-led, community-based coalitions. Unfortunately, without a powerful labor movement, which is necessary to institutionalize a high wage compromise into union contracts – including annual cost of living adjustments – wage hikes by the highest profile employers will not be generalized throughout the broader front-line services sector

If there is any doubt where McDonald’s stands with regard to living wages, simply note that just a few weeks before it announced a slight wage raise, it sued the City of Seattle over its recently passed living wage law. And its wage raise applies only to 9,000 workers, excluding the 750,000 employees who work for franchisees.

History demonstrates that a powerful labor movement is a necessary factor for shared prosperity under capitalism. However, history also suggests that a strong union movement may be insufficient: the golden years of fordism also included other structural conditions that would seem to be necessary conditions, namely, a manufacturing-based economy with oligopolistic competition, vertically integrated corporations, extremely limited international competition, and a strong Keynesian welfare state.

Since progress impels us to look forward and not backward, it’s time to take seriously alternatives to capitalist finance and liberal labor markets. The most important fix within the current system would be to reform American labor law to make it easier for workers to organize unions, but this may not solve the deeper, structural problems of postfordist capitalism. Only more radical changes, such as a universal basic income, may be able to pave a path out of this mess.

Matt Vidal is senior lecturer in work and organizations, King’s College London, department of management. He can be followed on Twitter @ChukkerV.

This piece was first published at Work in Progress, a blog of the American Sociological Association.

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Matt Vidal is Senior Lecturer in Work and Organizations at King’s College London, Department of Management. He is editor-in-chief of Work in Progress, a public sociology blog of American Sociological Association, where this article first ran. You can follow Matt on Twitter @ChukkerV.

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