Clip from http://www.pbs.org/newshour/bb/business/jan-june12/jobseekers_04-06.html
Wages in America and around the world are not simply the natural working of the market's “invisible hand”. There are numerous factors of consciously made decisions by governments and corporate leaders that negatively impact wages, decisions which skew labor conditions and suppress the functioning of the “free market”.
The most obvious disparity between labor and capital is the relative freedom that capital enjoys compared to labor. Capital investments may be made and withdrawn at lightening speed around the world with ease, and with no regard for the consequences. On the other hand, labor is relatively stationary. Individual workers are shackled down by prohibitive immigration regulations and costs, as well as by familial and community obligations. Capital obtains a huge benefit by playing the arbitrage between labor pools; it enjoys what is effectively a monopoly on mobility. In a free market why should money be more free than people?
Additionally, unregulated wild and rapid speculation creates financial bubbles that can destabilize the economy and disproportionately harm the working class, who ultimately are asked to pay for the mistakes of the rich:1
As capital owners and financial markets accumulate greater girth and a dominating influence, their search for higher returns becomes increasingly purified in purpose – detached from social concerns and abstracted from practical realities of commerce. In this atmosphere, investors develop rising expectations of what their invested savings ought to earn and the rising prices in financial markets gradually diverge from the underlying economic reality. Since returns on capital are rising faster than the productive output that must pay them, the process imposes greater and greater burdens on commerce and societies – debt obligations that cannot possibly be fulfilled by the future and, sooner or later, must be liquidated, written off or forgiven. (One World, Ready or Not: The Manic Logic of Global Capitalism by William Grieder, p. 227, italics added)
The negative consequences of “capital flight” around the world is abundantly documented.2
Corporations can also harness restrictive immigration regulations imposed on “guest workers” to strip employees of basic rights with no legal protection, forcing them into a state of virtual slavery, like what happened in the Northern Mariana Islands in the 1990s.3 The rallying cry of freedom is often made to justify America's military adventures abroad, but what usually results is a very selective view of freedom indeed. On September 19, 2003 Paul Bremer, head of the Coalition Provisional Authority in Iraq, announced its rules on the structure of the new economy. It called for:
...the full privatization of public enterprises, full ownership rights by foreign firms of Iraqi businesses, full repatriation of foreign profits...the opening of Iraq's banks to foreign control, national treatment for foreign companies and...the elimination of nearly all trade barriers...The labor market, on the other hand was to be strictly regulated. Strikes were effectively forbidden in key sectors and the right to unionize restricted. (A Brief History of Neoliberalism by David Harvey, p. 6)
Likewise in America, an aggressive pro-business lobby routinely pursues a legislative agenda that includes curtailing union activity and restricting voter access, in hopes of shaving a few points off poll results that are less favorable to regulations on business. To the modern corporate profiteer, free markets mean absolute freedom for businesses and financial markets but not for labor markets. This is a lopsided arrangement that overwhelmingly favors monied interests.
When Adam Smith published Wealth of Nations, in 1776, and described the “invisible hand” of the free market system, modern capitalism did not exist. Most producers in America were independent farmers or artisans, and the use of wage labor was negligible. People could sustain themselves with some land, which was abundant. Businesses were often home-based and operated by families. After the colonies won their independence most Americans were opposed to industrialization because of the squalor and degrading servitude it produced back in England among its working class. After having won their independence the last thing most Americans wished to do was to surrender their freedom to a factory employer, only to endure a grueling schedule indoors performing monotonous chores in dangerous conditions. But a great deal of effort by the captains of industry was devoted to promoting factory work in America as humane and dignified, an uplifting and moralizing enterprise to rival their counterparts in England, which would actually improve the lives of citizens and increase their freedom, not diminish it.4 Eventually our nation's leaders acquiesced to industrial expansion as it became apparent that greater production capacity would help make America self-sufficient, and therefore more secure.
But the promise of expanding freedom and dignified labor soon began to evaporate.
Certainly enterprise played a role organizing the workplace, offering jobs, and paying wages, but it was labor that made things and in so doing fulfilled human needs. This dynamic could only suffer as industry grew and came to employ hundreds rather than dozens of workers. At the same time, when craftsmen entered the mass production factory they forfeited their individuality as well as the creativity of self-directed work; their new jobs called on their muscle and brains but less often their skill or judgement. “The image of the artisan seemed to dissolve before their eyes,” writes Alan Dawley, “and in its place they saw an image of the industrial worker taking shape.” (There is Power in a Union by P. Dray, pg. 63-64)
Many of the dehumanizing aspects of industrialization witnessed across the ocean began to creep into factories here too, as workers were made to labor excessive hours in unsanitary and dangerous conditions. The uplifting, edifying virtues that were supposed to imbue industrial labor gave way to the dreary demands of capital.
As the population increased and land became less plentiful, fewer people (by no fault of their own) were able to draw a living from it. Labor increasingly became a commodity as factory wage earners comprised a greater portion of the working population. Workers' independence diminished as their ability to obtain wages commensurate with their contribution was undercut. Wages could be determined by the market demand for employment without regard to profits or the health of the company. Ultimately this arrangement depends on the concept of property rights, where the owner of capital has discretion to pay as little as the market will allow while reaping as much profit as possible. Wages can be completely divorced from the actual value of work. Under this arrangement labor is not a partner of economic enterprise with rights, it is a commodity to be traded like any other product. This arrangement is fundamentally unfair and unethical, not least of which because it pretends that human needs can be eliminated from economics. But people are not products; It seems self-evident to say, people are the building block of society.
Suppose that you and I are partners who own a farm. If I raise 12 chickens and you raise 12 chickens, then as a partner each of us can bargain for an equal share of the profits: fifty-fifty. Or if I raise 12 chickens and you raise 24 chickens, you can bargain for a fair share of the profits: 2/3. As a partner our respective shares depend on a relationship of respect and trust, and if necessary, an ability to make a reasoned appeal based on facts. Our shares do not depend on the arbitrary exercise of one's will. However, the owners of capital do not pay wages based on an equitable share of added value; they pay wages based on the going market rate. If the economy is bad and unemployment is high then wages will decline.
Unfortunately this situation can create a perverse incentive for business leaders to foster a bad labor market. Owners of capital routinely behave consciously and intentionally such that labor markets suffer; such a scheme cannot reasonably be characterized as the working of Adam Smith's “invisible hand.” They take deliberate risks and make willful decisions based on short-term goals that negatively impact the interests of working people. Corporations are able to behave this way because labor is not an equal bargaining partner; the labor market is not an open and free exchange as some people imagine it to be, where employee and employer willingly agree on a contract that benefits both parties fairly. For example, many of the layoffs that plagued the 90s (and continue to the present) were unnecessary and preventable.5 Government policy can also play a major role in determining economic outcomes.
Beginning with President Reagan (and continuing with every president since) the U.S. has largely failed to enforce its antitrust laws6, leading to consolidation and monopolization across multiple industries. You may remember learning about those evil railroad monopolies in your high school civics class. Well, it's happening all over again to disastrous effect.7 This development, coupled with financial deregulation, accelerated corporate mergers as firms became better positioned to leverage capital like never before to buy out competitors. The consequences for labor was not good. The mergerfest resulted in redundant production capacity that offered a perverse incentive to close factories. Shareholders cheered as entire towns virtually shut down. The rising expectations on returns, noted earlier by William Greider, continued to gain momentum. During this time the stock option also became popular; CEOs began to be paid with stock options in addition to their salaries. This created another perverse incentive that was harmful to workers. Stock options ensure that CEO interests are aligned with shareholder interests, and not aligned with those of labor. As CEOs slashed more jobs, the more shareholders celebrated rising stock prices. When Robert Allen slashed 40,000 jobs at AT&T in 1996 he instantly gained a $5 million bonus from Wall Street. Some CEOs even dared to flaunt their job-cutting prowess, wearing it like a badge of honor. This brand of calloused zero-sum profiteering became known as “In-Your-Face Capitalism”.8
In 1980 the average CEO pay in America equaled 42 times the pay of the average worker. In 2000 CEOs made 535 times the average worker. By 2010, however, that multiple had settled to 342. In 2010 the AFL-CIO examined the salaries of 299 firms and found that executive pay increased 23% compared to 2009, during a time when most people were feeling pinched. Those 299 CEOs received a combined compensation of $3.4 billion, enough to support 102,325 workers at the median wage.9 These insanely huge salaries begs the question, do CEOs really deserve so much recompense? Can one honestly contend that a CEO adds as much value to a company as 342 full-time employees? Actually, as we will soon find out, CEO pay is not based on his or her contribution to value at all.
CEO pay is usually determined by a board of directors, and the board of directors is elected by shareholders. And shareholders are largely comprised of institutional investors, not by small individual investors. Institutional investors have somewhat different aims than those of individuals.
Over the past three decades boards of directors have become more homogenous...with more of the same people sitting on boards of different companies. Institutional investors are now the primary electors and appointers of boards of directors, and these investors are themselves wealthy. They are more likely to support high compensation packages for executives and less likely to take an interest in compensation for the average worker. But there is even more to it than just that as well.Executive compensation is also a form of protection against takeovers. In effect, executives are paid in part simply not to destroy the company, i.e. they are paid not to undermine the interests of the shareholders by engineering undervalued corporate takeovers and things of that nature. In addition, executives have significant control over share price by the manner in which they report information. So executives are paid highly in part in order to provide a disincentive to underreport information leading to lower stock prices, which makes takeovers easier and less costly....in the 1980s and 1990s continuing deregulation of industries as well as other factors made the environment ripe for takeovers. As a result the institutional shareholders appointed executive compensation boards who worked in their interest to highly compensate executives as a means of defense against hostile and undervalued takeovers. As institutional shareholders became more powerful, it led to an arms race, in which the threat of takeovers grew and the defense against them grew as well.Giving executives extremely high pay and golden parachutes (extremely rich termination packages) was seen as a form of insurance against hostile and undervalued takeovers. The decline of unions also paved the way in this regard as well, because union contracts also [serve] as a protection against hostile takeovers, but as unions declined this opened the door for more takeovers, leading to the further pumping up of executive compensation. So in this sense, executive compensation has very little to do with reward for performance. It is simply a form of insurance, the price which got even higher with deregulation and deunionization.(from “How Reagan Sowed the Seeds of America's Demise, by R. G. Price, at http://www.rationalrevolution .net/articles/recession_cause.htm)
In a truly equitable system where contracts were agreed upon by partners with equal bargaining power, CEO pay would never climb so high. In an equitable system the ones who create the most value for the company would be entitled to the lion's share of the pay as well. But, as R.G. Price explains, CEO incomes “are a product of capital control, not of their contribution to value creation...a product of position, not production.” In other words, heads of corporations feel entitled to pay that they have not earned themselves. Price continues:
...if a farmer has a family farm that produces 100 eggs, 10 gallons of milk, 20 lbs of meat, and 50 lbs of vegetable a day, then that family is producing that amount of value each day regardless of anything else. That is clearly value created by them and no one else. If everyone else in the world decided to stop working and the economy totally crashed and no one bought anything from anyone else, that family would still be producing that value and would still benefit from it. This isn't the case with investment income however. With investment income, none of the value is produced by the investor, and all of the income is dependent upon collective value creation and social systems.If an investor invests $1,000 in a business on a condition of a 10% annual dividend...and then all the workers decide to quit, then no value will be created. The company will fail, the investor will lose his investment and will get no income from it.
Another rule that negatively impacts labor markets: corporations do not pay taxes on overseas profits, but may be deferred until they are repatriated, if ever. They can also deduct expenses incurred from the transfer of operations abroad. Taxing overseas profits in the year they are earned would raise the cost of shifting production overseas, reducing the incentive for doing so. Of course land and wages are cheaper overseas (!) where labor laws are weak or nonexistent, and where human rights are not a priority. All the more reason to demand human rights standards from all our foreign trading partners. Long forgotten are the arguments that industrial expansion would make America self-sufficient and secure. Long forgotten are those old arguments that industrialization would expand freedom and prosperity, that the rising tide would lift all boats. The data are clear, the rich have reaped most of the gains of the recent so-called recovery. Only the richest boats have risen while nearly everyone else has either sank or remained flat. The overwhelming majority of gains have come from capital investments, which (remember) involve the transfer of wealth from working people to investors. The graph below helps to explain how the transfer has occurred10 (click on image to enlarge). In the U.S. productivity has risen consistently following the Great Depression. Yet since the 70s wages have stagnated; working people have not reaped the benefits of the richest country in the world.
Recent research (called efficiency wage theory) suggests that wages paid slightly above market rates actually pays for itself with increased production.11 Henry Ford understood this when he offered his employees $5 a day, nearly twice the going rate. He wanted his employees to also be customers. The move eliminated constant turnover, reduced training costs, increased productivity, and proved to be profitable as well.
But besides the obvious benefit of higher wages to the individual and employer alike, more equitable pay helps the greater economy too. More people with more money leads to a growing middle class with increasing buying power. And all that buying power keeps money flowing and the economy growing. Rich people cannot spend their money fast enough to keep the economy moving; most of their money remains hidden away in stocks that earn dividends and accounts that earn interest. But they are inefficient at spending all that money where it can actually help the economy grow. For instance, one billionaire can only consume so much caviar. But a thousand millionaires can consume a thousand times as much caviar. We can project our example onto the middle class too. A thousand middle class persons can dine out a thousand times as frequently as a single millionaire can. And the more money that people spend, the greater the economy benefits. Rich people tend to save their money, poor people tend to spend it. This is why the present economic recovery is so sluggish: most of the recent gains have come from the stock market which went to the richest Americans who are the least likely ones to spend it.
One last subsidy for the rich is that several U.S. military campaigns have been fought in order to protect the assets of U.S. corporations doing business abroad.12 The U.S. military protects corporate assets all over the world, yet it often recruits soldiers from the poorest segment of society who risk their lives and die defending them. I don't know of any CEO who died defending his own company on foreign land, though perhaps a handful might exist. The point is, however, that the poor must come to the aid of the rich again. Only a big government can guarantee an adequate military response to diverse threats around the world, and serve as a deterrent to potential threats. Besides the commitment soldiers make to protect assets abroad, an increasing portion of the tax burden to pay for security is falling on the working class; corporations lobby relentlessly to lower their tax burden, and many pay no federal taxes at all!13
To add insult to injury, late last year President Obama announced an agreement to deploy 2,500 Marines in 2012, along with ships and aircraft, to a base in Darwin, Australia, in order to begin a shift in focus away from Afghanistan and toward growing concerns with China. The NY Times reported, “The countries along the South China Sea have been especially eager for the United States to increase its presence in the region as a check on China’s ambitions.”14 Apparently China has claimed access to heavy metals in the region, but so do several other countries. Anyhow, the troubling part is that American citizens are losing jobs here in the U.S. because corporations are shipping them to China, while military operations are beefing up in the Pacific Rim now because China might pose a future threat. Then who are the Chinese? Are they friend or foe? The American taxpayer loses twice, the corporations win double, again.
To wrap all this up into a convenient summary this much is clear: monopolies, immigration restrictions, CEO pay, stock options, preferential tax policies, union regulation and military budgets, etc., all translate into a tax on working people to subsidize the incomes and lifestyles of the rich. Contrary to the PBS interview where workers are said to feel entitled to more dignified work, it is the corporate class who feels entitled to excessive dividends at the expense of working people. Job seekers know that the economy is rigged against them, and they are tired of enduring harder, longer hours for less money.
Notes and References:
1 The financial crisis of 2008, and the subsequent bailouts, is only the most recent example of this. "...there is no greater killer of jobs than elite financial fraud. Such fraud epidemics can hyper-inflate bubbles (as they did in the U.S. and several European nations) and cause severe financial crises and recessions. The resulting Great Recession has cost over 10 million Americans their existing or future jobs in this crisis. It has cost over another 15 million people their existing or future jobs in Europe. The JOBS Act is so fraud friendly that it will harm capital formation and produce additional job losses." (William K. Black, "The Only Winning Move is Not to Play -- The Insanity of the Regulatory Race to the Bottom" at https://www.commondreams.org/view/2012/04/22-4 )
2 To see how capital flight created economic disasters in Asia and Mexico see Globalization and Its Discontents by J. Stiglitz, pg 94-100; and One World Ready or Not: The Manic Logic of Global Capitalism by W. Greider, chapters 11 & 12.
3 The Wrecking Crew by Thomas Frank, chapter 9.
4 There is Power in a Union by Philip Dray, chapters 1 & 2.
5 The Disposable American: Layoffs and Their Consequences by Louis Uchitelle.
6 The AT&T and Microsoft cases are two rare exceptions. Since the 70s antitrust cases have generally been decided based on what is good for the consumer (i.e. that which produces lower prices) which may or may not include other adverse consequences. I would argue that it does. Part of the problem with U.S. antitrust law is that it does not prohibit all monopolies which may occur, only those where a firm conspired to form a monopoly through certain unaccepted practices, like price fixing, bid rigging, or market allocation agreements, etc. But since it is clear that monopolies harm economic activity, the methods by which one is obtained matters very little from an economic standpoint... In other words, regardless of guilt the economic effect is exactly the same. The “neoliberal” free market ideology promoted by the Chicago School economists (a.k.a. the “Washington consensus”) facilitates the emergence of monopolies by legal means. But regardless of how monopolies form they still harm the economy all the same.
The central criticism of neoliberal ideology is that it demands blind faith in the unrestrained whims of the market, it reqires acceptance of its outcomes. But there is no reason to believe that the course of nature is necessarily benevolent. While the drive for freedom is universal among humans, so is the drive to seek shelter from catastrophe, whether it is from markets or natural disasters. Past and recent events have demonstrated that unregulated markets create havoc across governments and communities; they create national and personal disasters. For a fine critique of free market fundamentalism see One Market Under God by Thomas Frank.
7 Cornered: The New Monopoly Capitalism and the Economics of Destruction by Barry Lynn.
8 Newsweek, “The Hit Men” by Allen Sloan, Feb 26, 1996.
9 CNNmoney April 20,2011 by Jennifer Liberto at http://money.cnn.com/2011/04/19/news/economy/ceo_pay/index.htm, see also http://archive.aflcio.org/corporatewatch/paywatch/
10 Image is from A Brief History of Neoliberalism by David Harvey, p. 25 For a more complete discussion on rising productivity, including how education and education costs factor in, please read "How Reagan Sowed the Seeds of America's Demise" by R.G. Price at http://www.rationalrevolution.net/articles/recession_cause.htm
11 The Enthusiastic Employee: How Companies Profit by Giving Workers What They Want by David Sirota, Chapter 4: Compensation
12 Overthrow: America's Century of Regime Change from Hawaii to Iraq by Stephen Kinzer
13 Thirty Fortune 500 companies paid no federal taxes for three years, from 2008 to 2010. From Citizens for Tax Justice, "Representation Without Taxation", January 2012 http://www.ctj.org/pdf/USP-RepTax-Report.pdf
14 Jackie Calmes, “Obama's Trip Emphasizes Role of Pacific Rim,” New York Times; Nov 18, 2011