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BPEA Article

Declining worker power and American economic performance

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Editor's Note:

This paper is part of the Spring 2020 edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Professor of Economics Janice Eberly and Brookings Nonresident Senior Fellow and Harvard University Professor of Economics James Stock. Read summaries of all five papers from the journal here.

A decline in workers’ power, rather than an increase in corporations’ monopoly power, likely explains the co-existence of four significant trends in the U.S. economy since the early 1980s: a declining share of national income going to labor, increased market values of corporations, low average unemployment, and low inflation, says a paper to be discussed at the Brookings Papers on Economic Activity Conference March 19.

Increased monopoly power is commonly believed to explain the trends in labor income and corporate profits—but it is hard to reconcile with the substantial falls in average unemployment and inflation over the period, argue the authors, Anna Stansbury and Lawrence H. Summers of Harvard University.  A decline in worker power can explain all these trends, they argue.

“Declining unionization, increasingly demanding and empowered shareholders, decreasing real minimum wages, reduced worker protections, and the increases in outsourcing domestically and abroad have disempowered workers with profound consequences for the labor market and the broader economy,” the authors write in Declining Worker Power and American Economic Performance.

Declining unionization, increasingly demanding and empowered shareholders, decreasing real minimum wages, reduced worker protections, and the increases in outsourcing domestically and abroad have disempowered workers with profound consequences for the labor market and the broader economy.

If decreased worker power is a major cause of increasing inequality and lack of progress in labor income, then “it raises issues about the extent to which corporations should be run solely for the benefit of their shareholders” and “would suggest that policy should tip the balance more in the direction of supporting union organizing activities and empowering unions,” they write.

The authors make their case with three sets of empirical evidence.  First, they show that labor power has meaningfully eroded across a range of industries and firms. The most notable direct evidence of that is the decline in unionization, they say.  One-third of private-sector workers belonged to unions in the 1950s (the peak) compared with 6 percent today, and the wage premium paid to workers who do belong to unions has fallen, they write.

But even for non-union workers, evidence suggests that workers’ power to share in profits has declined.  Working at a large company or in a highly profitable industry used to be associated with a substantial wage premium, but this premium has declined significantly.  This may partly result from shareholder pressure to maximize profits through cost-cutting practices such as job outsourcing.  For instance, many security guards once paid relatively well by large companies now work for smaller subcontractor firms that pay less.  Other contributing factors may include increased import competition from low-wage countries, reduced inflation-adjusted minimum wages, and deregulation in industries such as transportation and telecommunications.

Declining labor rents

Second, the authors demonstrate that this reduction in labor power can explain both the decline in the labor share of income and the rise in corporate profitability, since if fewer profits are distributed to workers, more are left over for shareholders.  The authors’ estimates suggest that “the decline in worker power is big enough to explain the entire decline in the labor share of income in the United States over the past four decades.”  They show that the industries with the biggest declines in worker power saw the biggest declines in the share of income going to workers and the biggest increases in corporate profitability, suggesting that workers’ loss was, in large part, shareholders’ gain.

Third, the authors investigate the evidence on unemployment.  A decline in worker power would be expected to result in lower unemployment without generating inflation.  That is because a decline in workers’ ability to share in profits may increase firms’ incentive to hire, and a decline in the availability of high-wage jobs reduces unemployed workers’ incentive to hold out in the hope of getting one of these jobs.  The authors show that the decline in worker power is big enough to explain the decline in the average unemployment rate since the 1980s, and that industries with bigger falls in worker power had bigger falls in their unemployment rates.

The authors argue that the decline in worker power is a more compelling explanation for the changes in the U.S. economy over recent decades than increased monopoly power (the power of firms to control the supply of, and set prices for, goods or services) or increased monopsony power (the power to dominate demand for goods or services and, for instance, set workers’ pay).  Many economists find those explanations appealing because, if valid, they imply that both economic efficiency and equity could be increased by cracking down on monopoly and monopsony.

However, the authors point out that increased monopoly power would tend to cause both higher inflation than seen in recent years and, by encouraging firms to restrict output, increased unemployment than the historically low unemployment seen.  They also find little evidence of a rise in labor market concentration or increased difficulty in finding jobs, which could signify rising monopsony power.

“If seeking to reverse the decline in the share of income going to workers, a focus on reducing firms’ monopoly power or monopsony power is unlikely to be sufficient,” say Stansbury and Summers. “Rather, policy solutions should focus on the decline in worker power.”

David Skidmore authored the summary language for this paper. Becca Portman assisted with data visualization.

Citation

Stansbury, Anna and Lawrence Summers. 2020. “Declining worker power and American economic performance” BPEA Conference Draft, Spring.

Conflict of Interest Disclosure

Anna Stansbury is a doctoral candidate at Harvard University, a trustee of the Wilberforce Society, a UK-based student think-tank, and co-chair of Harvard Graduate Women in Economics; Lawrence Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University. Beyond these affiliations, the authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. The views expressed in this paper are those of the author, and do not necessarily reflect those of Harvard University.

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