Tuesday, December 7, 2010

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
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

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
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
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
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
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
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
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.

“[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.

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:

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