The Great Divergence and Organized Labor

Part VI

The Great Divergence coincided with a dramatic decline in the power of organized labor. Union

members now account for

1983. When you exclude public-employee unions (whose membership has been

membership has dropped to a mere 7.5 percent of the private-sector workforce. Did the decline

of labor create the income-inequality binge?

The chief purpose of a union is to maximize the income of its members. Since union workers

members usually earn more than nonunion workers, and since union members in higher-paying

occupations tend to exercise more clout than union members in lower-paying ones, you might

think higher union membership would

increase income inequality. That was, in fact, the

consensus among economists

Freeman demonstrated in a

disparities among members outweighed other factors, and therefore their net effect was to

before the Great Divergence. But the Harvard economist Richard1980 paper that at the national level, unions’ ability to reduce incomereduce

income inequality. That remains true, though perhaps not as true as it was 30 years ago, because

union membership has been declining more precipitously for workers at lower incomes.

Berkeley economist David Card calculated in a

among men explained about 15 percent to 20 percent of the Great Divergence among men.

(Among women—whose incomes, as noted in an earlier installment, were largely unaffected by

the Great Divergence—union membership remained relatively stable during the past three

decades.)2001 paper that the decline in union membership

Card’s estimate suggests. To consider how, let’s return to the “institutions and norms”

framework introduced by MIT’s Frank Levy and Peter Temin* and further elaborated by

Princeton’s Paul Krugman and Larry Bartels.

In their influential 2007 paper, “Inequality and Institutions in 20th Century America,” Levy and

Temin regard unions not merely as organizations that struck wage bargains for a specific number

of workers but rather as institutions that, prior to the Great Divergence, played a significant role

in the workings of government. “If our interpretation is correct,” they wrote, “no rebalancing of

the labor force can restore a more equal distribution of productivity gains without government

intervention and changes in private sector behavior.”

According to Levy and Temin, labor’s influential role in the egalitarian and booming post-World

War II economy was epitomized by a November 1945 summit convened in Detroit by President

Harry Truman. The war had ended a mere three months earlier, and Truman knew the labor

peace that had prevailed during the war was about to come to an abrupt end. To minimize the

inevitable disruptions, Truman promised labor continued government support. Truman even

coaxed Chamber of Commerce President Eric Johnson into making the following statement:

“Labor unions are woven into our economic pattern of American life, and collective bargaining

is part of the democratic process. I say recognize this fact not only with our lips but with our

hearts.”10

An eventual result of Truman’s 1945 summit was a five-year contract between United Auto

Workers President Walter Reuther and the big three automakers that included cost-of-living

adjustments, productivity-based wage increases, health insurance, and guaranteed-benefit

pensions.

which would be adopted by Big Steel and other industries, the

companies mimicked the Reuther pact. The federal government’s ongoing collaborative role in

the process was demonstrated in April 1962 when President John F. Kennedy, having talked the

United Steel Workers into accepting a moderate wage increase,

a price hike he deemed excessive (“a wholly unjustifiable and irresponsible defiance of the

public interest”), forcing the steel giant to back down. According to Levy and Temin, this display

of muscle “helps to explain why the reduced top tax rate” enacted two years later (it dropped to

70 percent) “produced no surge in either executive compensation or high incomes per se.” Fear

of attracting comparable attention from President Lyndon Johnson kept corporations from

showering the bosses with obscene pay hikes.

The Treaty of Detroit didn’t last. One reason was that, even as Truman was romancing Big

Labor, the Republican Party won majorities in the House and Senate and passed the

Act

Taft-Hartleyover Truman’s veto in 1947. Levy and Temin don’t dwell on this, but in his 1991 book

Which Side Are You On?: Trying To Be For Labor When It’s Flat On Its Back

Geoghegan, a Chicago-based labor lawyer, argues that Taft-Hartley was the principal cause of

the American labor movement’s eventual steep decline:

First, it ended organizing on the grand, 1930s scale. It outlawed mass picketing,

secondary strikes of neutral employers, sit downs: in short, everything [Congress of

Industrial Organizations founder John L.] Lewis did in the 1930s.

[…]

The second effect of Taft-Hartley was subtler and slower-working. It was to hold up

any

new organizing at all, even on a quiet, low-key scale. For example, Taft-Hartley ended

“

elections, and sometimes more hearings, before a union could be officially recognized.

It also allowed and even encouraged employers to threaten workers who want to

organize. Employers could hold “captive meetings,” bring workers into the office and

chew them out for thinking about the Union.

And Taft-Hartley led to the “union-busting” that started in the late 1960s and continues

today. It started when a new “profession” of labor consultants began to convince

employers that they could violate the [pro-labor 1935] Wagner Act, fire workers at will,nothing would happen. The

fire them deliberately for exercising their legal rights, and

Wagner Act had never had any real sanctions.

[…]

So why hadn’t employers been violating the Wagner Act all along? Well, at first, in the

1930s and 1940s, they tried, and they got riots in the streets: mass picketing, secondary

strikes, etc. But after Taft-Hartley, unions couldn’t retaliate like this, or they would end

up with penalty fines and jail sentences.

To summarize: Taft-Hartley halted labor’s growth and then, over many decades, enabled

management to roll back its previous gains. Big manufacturing’s desire to do so grew more

urgent in the 1970s as inflation spun out of control,

industries faced stiffer competition from abroad. Even before Ronald Reagan’s election, Levin

and Temin write, the Senate signaled the federal government was rapidly losing interest in

enforcing Truman’s 1945 pact when it killed off, by filibuster, a

easing union organizing in the South.

President Reagan’s 1981 decision to break the air-traffic controllers’ union and to slash top

income-tax rates killed off Truman’s 1945 pact entirely. Although Reagan was a onetime

president

Belt manufacturing jobs that the proportion of private-sector workers who belonged to unions

dropped to 16 percent in 1985, down from 23 percent as recently as 1979. Reagan’s hostility to

unions was further reflected in his choice of

Relations Board. Dotson had previously worked as a management-side labor adversary for

Wheeling-Pittsburgh Steel, and (presumably with both lips and heart) believed

bargaining

minimum wage

stuck at $3.35 an hour for close to a full decade. Similarly, President George W. Bush, another

two-term Republican, later let the minimum wage remain at $5.15 (to which it had risen during

the presidencies of his father and Bill Clinton) for two months shy of 10 years, by which time its

buying power had reached a

Academics may argue about the significance of any one of these decisions. Raising the minimum

wage, for instance, reduces income inequality to a degree that some experts judge

others judge

characterization) and Princeton’s Bartels (who leans toward the “substantial” one) agree is that

policies like setting the minimum wage don’t occur in a vacuum; they are linked to a host of

other government policies likely to have similar effects. Bartels emphasizes partisan differences

and Levy and Temain emphasize ideological ones that occur over time, but both constitute

changes in the way Washington governs. Levy and Temain concede that the ideological shift was

influenced by changing circumstance (inflation

manufacturers

embraced, and the increased income inequality that resulted, were not inevitable. The proof, they

argue, lies in the fact that other industrialized nations faced similar pressures but often embraced

different policies, resulting in far less income inequality.

Geoghegan’s latest book,

looking at Germany. German firms, Geoghegan writes,

don’t have the illusion that they can bust the unions, in the U.S. manner, as the prime way

of competing with China and other countries. It’s no accident that the social democracies,

Sweden, France, and Germany, which kept on paying high wages, now have more

industry than the U.S. or the UK. … [T]hat’s what the U.S. and the UK did: they smashed

the unions, in the belief that they had to compete on cost. The result? They quickly ended

up wrecking their industrial base.

Geoghegan’s book went to press too soon to report that Germany is now experiencing

that’s leaving the United States in the dust

the lesson

States to stimulate its economy (a conclusion that Krugman, his fellow

already labelled “foolish”

government policy in Germany is much more supportive of labor; for example, during the

recession it paid businesses to keep workers employed (something the United States was willing

to do only for state government workers). The idea that pro-labor policies can produce an

economy that’s both more egalitarian

Detroit—has, regrettably, become unfashionable.

10

“[U]nions are not the answer to increasing prosperity for Americans workers or the economy.”

*An earlier version of this installment misidentified MIT’s Peter Temin as “Peter Temlin.” The error resulted from a typo on the

cover of Levy and Temin’s paper as it appears on an MIT Web site.

11

unemployment—has lately been The traditional economic argument against raising the minimum wage—that it increases low-wagecalled into question.The Chamber’s current position on unions, laid out in a 2008 white paper, is … um … somewhat different: