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With Unemployment So Low Why are Wages Stagnant? 

Photo by Paul Sableman | CC BY 2.0

If the unemployment rate is so low why have wages for most Americans failed to go up very much recently?  The simple answer is for the very same reasons why economic inequality and social mobility in America has largely ground to a halt in the last 40 years–the decline and war on labor unions.

Last Friday the Labor Department announced that the unemployment rate dropped to 3.9%–the lowest rate since the 1990s.  Yet with this drop wages have yet to increase very much, especially since the Great Recession of 2008.  Why?  Venerable neo-liberal economists, such as the New York Times’ Paul Krugman, hypothesize that employers are reluctant to raise wages for fear they cannot cut them in the future.(insert hyperlink here)  Others contend that we have not fully recovered from the recession or that the actual labor force participation rates are still high, making wage increases sticky.  All of these explanations miss the point.  Employers are not raising wages because they do not have to.  The reason is that labor unions are so week now that they cannot do what they historically have done which is to pressure employers to increase wages.

Last week was May 1–May Day.  Yet people forget why we have unions. The last 150 years of American history is the battle of workers and unions against corporations. America in the late nineteenth and early twentieth century was the country of  trusts.  It was the emergence of the railroads, steel, big oil, and monopolies.  It was also the era of sweatshops, child labor, adulterated and unsafe foods, and the six day, 70 hour+ work weeks.  It was also the era of piecemeal below subsistence wages, poor working conditions and high injury rates, no health benefits, no retirement benefits, and no protections against discrimination and harassment.  It was the world of Upton Sinclair’s The Jungle. Unions were illegal, and workers who stood up for their rights were beat up by the Pinkertons–company hired security–or arrested by the newly created public police forces which were created to control and brake unions.

No one should wax romantically for this era if you care about workers and the people.  America economically may have grown exponentially, but it did so unevenly, producing massive fortunes for a few but significant economic inequalities for the rest.  The America of the early nineteenth century–the one that Alexis De Tocqueville so famously described in his Democracy in America as one characterized by a general equality of conditions–had vanished.  By the time the stock market crashed in 1929 the income and wealth gap in America had literally produced two Americas:  One was the country of F. Scott Fitzgerald’s The Great Gatsby, the other of the depression-era novel The Grapes of Wrath by John Steinbeck.

The 1935 National Labor Relations Act (NLRA) or the Wagner Act brought relative peace to the labor market in that it recognized the right of workers to collectively bargain.  The NLRA established a process for how to unionize, organize workers, hold elections, and bargain for benefits.  It was a victory for workers, but also for the American people and the economy.  The Wagner Act was part of the New Deal, it was one element in a package of legislation to restructure the economy and fix the market failures in the economy.

The NLRA had more than an economic purpose or impact.  Many of the economic problems in America are political.  They are produced by asymmetric political power between corporations, the rich, and rest of the people.  Unions at their best can be what Arthur Schlesinger, Jr., once called the countervailing power to help limit the power of businesses and corporations.  The Wagner Act thus reset the political equilibrium in American politics to help favor the people.

And it worked.  Labor density and unionization in America dramatically increased in the United States, peaking in 1954 with over 35% of the workforce collectively bargained.  But what did unions accomplish?  There is powerful evidence first that they brought tremendous economic benefits to American workers and the economy.  They produced the minimum wage, the eight hours, five day work week.  They improved workplace safety, gave us health insurance, retirements, and workers compensation.  They raised the standard of living of most Americans, often even those not in unions. They also helped bring more economic equality to the economy, significantly erasing the disparities of the Gilded and Robber Barron eras.  Unions grew and flourished  at a time of significant economic growth, and there is little hard data to show that they caused rises in unemployment.  America’s post WW II affluence is tied in with unions.

But in addition to the economic benefits that unions bring, there was a political aspect to them.  Unions were part of the Democratic New Deal coalition.  The strength of the Post World War II Democratic Party dominance was tied to unions.  Unions got out the vote and they did so to the advantage of Democrats.

But many employers, conservatives, and Republicans hate unions.  Even many workers, especially white collar professionals, share this animosity, thinking they are better off on their own. Almost from the day the NLRA was passed opponents sought ways to circumvent the law.  The found ways to fire striking workers and replace them.  They harassed and fired organizers, they found ways in court to delay or challenge elections.  They claimed unions hurt the economy or restricted individual freedom and passed right-to-work legislation.  Yet unions remained a potent force in American politics until President Reagan became president and signaled with the firing of the air traffic controllers in 1981 that it was okay to go to war against the unions.  Since then, one can  correlate the rising inequality that Thomas Piketty describes or the decreasing social mobility in America to the decreased power of unions.

As Barry Bluestone and Bennett Harrison tell in The Great U-Turn, the Reagan era war against unions was part of a strategy along with deregulation and tax cuts to restructure the economy.  It was also part of a political restructuring of American politics.  The strategy has largely worked.  Overall, less than 12% of all workers are now in unions in the United States, with only 7% of the private labor force collectively bargained.

The decline of the American income in the last 40 years goes part and parcel with the decline of unions. In the last thirty years the American economy has seen a dramatic increase in the gap between the rich and poor such that it now mirrors that of the 1920s.  According to the United States Census Bureau in 2010 the richest five percent of the population accounted for 21% of the income, with the top 20% receiving over 50% of the total income in the country.  This compares to the bottom quintile accounting for about 3% of the total income.

A second study by the Center on Budget and Policy Priorities in 2010, drawing upon Congressional Budget Office research, found that income gap between the top one-percent of the population and everyone else more than tripled since 1973.  After-tax income for the top one-percent increased by 281% between 1973 and 2007, while for middle class or middle quintile it increased by 25%, for the bottom quintile it was merely 16%.  Looking beyond income to wealth, the maldistribution has not been this bad since the 1920s.  According to the Institute for Policy Studies, in 2007 the top one-percent controls almost 34% of the wealth in the country, with half of the population possessing less than 3%.  Since the Great Recession, the numbers have accelerated.

Opposing unions and workers costs families money.  There is a significant difference in median family incomes in states that are right to work (RTW) versus those that are not.  Several years ago I did a study using a three years average median family income for 2009 to 2012.  I found that  RTW states have a median family income of $46,919, non RTW it is $53,418–a difference of $6,499 or 13.9% per year.  Testing for the statistical impact of RTW on median family incomes, the relationship is -0.4.  This means there is statistical evidence that RTW is associated with lower incomes.  RTW depresses wages.  If all of this does not demonstrate a war against unions it definitely does reveal an attack on workers.

Yet Americans have been convinced unions and workers’ rights are bad.  They resent successful unions that pay better wages than they receive instead of organizing to bring themselves up to that level.  We live in a culture that worships the Donald Trumps and MBA-led management teams, yet these are the people who brought us the economic crash of 2008, gross mismanagement of the economy, and the mass layoffs that frequently dot our workplaces.  For many middle class workers, the image of a surprise visit to your cubicle by a HR person with a box telling you that you are fired and have one hour to clear out your desk is all too real.  Yet despite this, Americans continue to believe that they are better off without unions and worker protections.

Fixing the NLRA is a must to yet again reset the economic and political imbalances in the law.  Some claim that unions are no longer relevant or that their corruption has led to their own demise.  There is no question that unions need to clean up their act and support meaningful government reform, but there is also evidence that many people do want to organize and want representation in a union.  If it were easier to organize, perhaps more people would have health care even without Obamacare, or maybe more people would have retirement pensions.

At the federal level, unions made fixing the Wagner Act a top priority in 2008 and 2009 with the Employee Free Choice Act.  The law would have streamlined organizing and holding elections.  While initially as candidate saying he would support such changes, President Obama never pushed the Act when the Democrats had control of Congress, and now the chances for its passage are dead.  Perhaps the most important structural reform of the economy Obama could have made, he simply ignored, costing lasting damage to workers and middle class America.  And how with the Supreme Court ready to take the final constitutional shot against public sector unions, the last organized force to represent workers will be gone.

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David Schultz is a professor of political science at Hamline University. He is the author of Presidential Swing States:  Why Only Ten Matter.

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