Income Inequality part 3 - The Wage Gap

               The wage gap – probably the single biggest issue in any discussion of income inequality.  And it’s not really one issue.  It’s multifaceted – gender gap, racial gap, minimum wage disparity, differences in cost of living.  There are any number of charts and data that can show these issues in various degrees.  Having said that, I think you will have a hard time arguing that we don’t have a wage problem in America.

               To start, take a look at this article from the Economic Policy Institute.  There are a few charts in the article that I find quite telling.  Start with Figure 2 on the growth of productivity and wages.  Somewhere around 1970 wages stopped growing at the same rate as productivity.  Over the last 40+ years Americans are producing more, but not really seeing wages go up as a result.  The Atlantic has this thoughtful piece to help explain why in an interview with Harvard Business School professor Jan Rivkin.  Rivkin identifies 3 major causes of the wage gap – technology and globalization, decreased investment in the commons, and the erosion of collective bargaining power. 

               Technology and globalization are both essentially focused on the same thing – cutting labor costs (or how much we have to pay our employees).  Companies routinely talk about “leveraging technology to improve profitability.”  This all sounds good because companies are really good at implying that everyone will get to share in the greater profits.  Figures 3 and 7 from EPI show the real winners – CEO’s and other executives.  This use of technology is a subtle force behind the increasing wage gap.  Employees don’t really have much ability to resist technological advances lest they look like a Luddite.  At the same time, the increased profits largely go to the people at the top.

               While technology is quiet in its influence on the wage gap, globalization is not.  Quite simply, globalization allows companies to access cheaper labor markets overseas without massive import taxes.  I am old enough to remember when NAFTA was passed.  While I certainly did not grasp the implications at the time, it’s easy to see now why Ralph Nader claimed it would be a bad deal for the American workforce.  Companies, especially Ford and GM, moved plants to Mexico almost en masse.  Now they could pay workers significantly less and not have to deal with the UAW.    In addition, they gained an additional leveraging tool to use in the next bruising fight with the UAW – take our deal or we move to Mexico.  Not exactly a win for the American worker, but a huge win for the C-suite at the top.  Globalization also allows companies to put the technically official headquarters in the most tax friendly little country without actually having to move operations anywhere.  So they get the benefits of access to the skilled U.S. labor force, but don’t have to pay the same taxes here because the company is actually located in Ireland or __________ (insert business tax friendly country here).  Don’t believe me… Medtronic, a company with operations in Indiana, did just that.  In fact, all Medtronic did was change their address.  As the article points out, none of the executives actually moved out of their offices in Minnesota.  It’s a process called inversion and governments are starting to become aware of the problem, although legislative efforts to fix it have yet to achieve much.  Without making any real changes to how the company operates, Medtronic changed their tax rate from 35% to 12.5%.  Sorry folks, but any time a company can drop their tax rate by more than 20% without making any meaningful change to how the company operates is just plain wrong.

               Rivkin’s second point is one I think many Millennials are actually quite aware of, even if we don’t put it in the same terms as Rivkin.  Millennials have been blamed for the death of Applebee’s, TGI Friday’s, BW3, and other casual dining restaurants.  As Business Insider points out, some of this is due to our move toward fast-casual places like Panera and Chipotle along with a desire to do more cooking at home.  The article isn’t wrong, but it’s missing one a key factor – investing in the local community.  It’s no wonder BI misses this point because most of the business world has stopped investing in the commons.  The business world has really moved towards this idea that shareholder equity is king and everything must be subordinate to the goal of increasing shareholder equity.  Millennials don’t care about shareholder equity because we don’t have money to invest in the market.  What we do have are friends who work at the local coffeehouse down the street, or started their own brewery/gastropub/restaurant or run the local car lot, etc.  We love our friends, so we spend our sit-down restaurant money at their place.  We buy our car from the local dealership where our buddy works.  Spending at the local places means we aren’t going to Applebee’s.  Supporting the local microbrewery means we aren’t buying Budweiser.  Millennials (at least the ones I know) are relational and communal.  We work to help those we know or those in our local community succeed.  When Renee and I go out to eat at Casa’s; Mad Anthony’s; Don Hall’s; or Spyro’s, the profits stay in Fort Wayne.  When I go eat at Applebee’s the profits are going to someone I don’t know living who knows where.  Watch the ads this November and you’ll see ads for Small Business Saturday.  SBS hasn’t been a major event all that long; it was started by American Express in 2010.  However, SBS taps into this idea that we have to invest back into our local communities.  We have to put our hard earned money into the people and businesses working hard to make our communities better.  Millennials understand this.  It’s time corporate America figured it out as well.

               While companies may not understand the need to invest in the common good anymore, you would think they would understand the importance of investing in their employees.  Sadly that is not the case as the collective bargaining rights of American workers are under attack.  Many states have passed “Right to Work” laws.  These laws prohibit union security agreements.  These agreements exist to require employees in a union shop to join the union and pay applicable membership fees.  Proponents argue that employees should not be forced to pay for union representation if they don’t want to.  The problem is that even employees who don’t pay membership fees still have access to the benefits negotiated by the union.  Obviously, opponents of “right to work” argue that allowing employees access to union negotiated benefits without requiring some form of payment is inherently unfair.  The real purpose behind the law is to squeeze the life out of unions.  When the union can no longer require payment from employees, it is cut off from the funds necessary to keep it functioning.  Unions are a vital part of a healthy economy.  They help protect workers and ensure fair pay.  I know there are people that argue the unions were given too much power and drove companies into bankruptcy (think UAW) or that unions protect bad employees (teachers’ unions in New York) and that may be true to some extent.  The problem is that the pendulum has swung too far the other way and unions are steadily having their power erode.

               The erosion of union power does nothing buy help boost the bottom line for the C-suite.  When workers can’t negotiate a fair contract; more money can go to the executives.  Here’s the problem, and it links back to Rivkin’s second point.  When workers aren’t paid fairly, they have very little money in spend beyond the essentials.  So money isn’t circulated as much as before; it’s being hoarded.  There are several economic models that show the power of money being circulated from the employer who pays the employee who spends it at the local store where that store owner uses it to buy a house and on it goes.  When the employer keeps the money it doesn’t get spent and the store owner ends up not buying a house.  Unions should be allowed to flourish and thrive because they are a necessary part of a free market flow.  If the employers pay well and treat employees fairly maybe there is no need for a union.  But when employers don’t pay well and/or treat workers poorly, unions become a very important tool to restore balance.  I’ve heard many people state that the solution to a poor-paying job is just to go find another one.  Such a statement is willfully blind to the other realities of job employment beyond the hourly wage rate – availability of other jobs, need to keep insurance, ability to move, etc.