Income Inequality May Be The Result of Weakened Labor Unions


Main Street
By: Laura Kiesel
July 9, 2014

The topic of the growth in income inequality in our nation has become one of greater interest since a study came out in April that indicated that the U.S. functions more as an oligarchy than a democracy.

Everyone from President Obama to Pope Francis has had something to say about income inequality, with many economists and policy figureheads offering various theories as to why there has been a growing economic disparity between the classes in recent decades.

Some of the factors that have been highlighted as contributing to the widening income gap are the surge of women in the workplace and rising percentage of female-headed households (as women are often paid lower than their male counterparts), the education gap between lower and upper classes and the loss of manufacturing jobs.

However, a new study out of Ohio State University and due to be published in the August issue of American Sociological Review finds that a leading cause of growing income inequality in the U.S. is the steep decline in the strength and prominence of labor unions.

"The effect that unions used to have on protecting the incomes of middle class and working Americans has been underestimated," said David Jacobs, co-author of the study and professor of sociology at Ohio State University, said in a press release.

Jacobs's research also suggests that the decline in labor unions may actually trump most other factors often cited as contributing to the growth in income inequality, including the much-touted "education gap" argument.

Jacobs and sociology doctoral student Lindsey Myers relied on diverse sources of data for their research, including the Gini Index, a measure of income inequality that is calculated by the U.S. Census Bureau. They then used statistical modeling to analyze transitions in family income differences over 60 years. Jacobs and Myers controlled for 20 other factors that have also been attributed to growing income inequality and found they did not play as significant a role as the decimation of labor unions.

Though membership in labor unions began to decline somewhat as early as the 1950s, the study found that it was not until the Reagan administration that this decline accelerated dramatically. Namely, under his two-term presidency, Ronald Reagan implemented a number of anti-union policies. For instance, Reagan broke a strike by the Professional Air Traffic Controllers Organization, which ultimately resulted with the union being decertified.

"Unions were the most effective political advocates for workers and the poor before Regan when they had considerable political influence," says Jacobs. "Yet soon after Reagan took office unions had no discernable effects on political outcomes that helped families in the lower half of the income distribution."

After Reagan, the administrations of the next three subsequent presidencies--that of George H.W. Bush, Bill Clinton and George W. Bush--were also found to have enacted multiple policies and appointments that continued to weaken labor unions.

In particular, Democratic President Bill Clinton's signing of the North America Free Trade Agreement, more commonly known as NAFTA, also had a particularly profound negative impact on employment and labor unions in the U.S.

According to the Economic Policy Institute, the rise in the trade deficit with Mexico alone since the passage of NAFTA led to a loss of 682,900 U.S. jobs by 2010--many of which were manufacturing positions represented by labor unions. The Economic Policy Institute also claims that NAFTA undermined the bargaining power of union workers.

"NAFTA strengthened the ability of U.S. employers to force workers to accept lower wages and benefits," states an EPI blog post." "As soon as NAFTA became law, corporate managers began telling their workers that their companies intended to move to Mexico unless the workers lowered the cost of their labor."

Income inequality--which grew 11.2% between 1981 and 1992-- increased by roughly another 11% under the Clinton administration. Meanwhile, union membership comprised 25% of all political activity back in 1967, which dipped to 18% in 1990 and 11% in 2006.

"Research shows that when a labor union is present, difference in wages between the higher and lower income spectrum is reduced," says Jacobs.

In addition to the decline of labor unions, another factor that was found to play a prevalent role in increasing the income gap was "financialization." Financialization is the increase in the size and influence of a country's financial sector relative to its overall economy. In the U.S., the financial sector has grown from comprising 2.8% of GDP in 1950 to 7.9% of GDP in 2012.

Clinton also passed a number of laws under his presidency that advanced the size and strength of the finance sector while undermining the industry economy. These bills included the Interstate Banking Act of 1993, the Gramm-Leach-Bliley Act of 1999 and the 2000 Commodity Futures Modernization Act.

"Financialization meant that the incomes of the high earners grew rapidly...while union decline led to stagnating incomes for the less affluent," said Jacobs. "The end result was growing inequality."

Jacobs's models indicated that for every 10% increase in union membership, there would be a projected decline in income inequality between 2.5 and 3%.

"[Labor unions] were the best and strongest lobbyists for poor, working class and lower middle class groups both in fighting for more equal wages and in advocating for programs that assisted the poor," says Jacobs.

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This page contains a single entry by CFED published on July 10, 2014 2:42 PM.

American Students Aren't Great With Finance Or Managing Money was the previous entry in this blog.

Will continued economic inequality bring out the pitchforks? is the next entry in this blog.

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