The Great Divergence coincided with a dramatic decline in the power of organized labor. Union members now account for about 12 percent of the workforce, down from about 20 percent in 1983. When you exclude public-employee unions (whose membership has been growing), union 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 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 before the Great Divergence. But the Harvard economist Richard Freeman demonstrated in a 1980 paper that at the national level, unions' ability to reduce income disparities among members outweighed other factors, and therefore their net effect was to reduce 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 2001 paper that the decline in union membership 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.)
It's possible, however, that labor's decline had a larger impact on the Great Divergence than 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, before 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."
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. Daniel Bell (then a writer for Fortune magazine) named the agreement, versions of which would be adopted by Big Steel and other industries, the Treaty of Detroit. Even non-union 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, publicly attacked U.S. Steel over 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-Hartley Act over 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,Thomas 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 "card checks." … Taft-Hartley required hearings, campaign periods, secret-ballot 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, fire them deliberately for exercising their legal rights, and nothing would happen. The 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 slowed and then 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, productivity fell, and the steel and auto 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 pro-labor reform bill aimed at 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 union president, he showed little concern when the 1982 recession rapidly eliminated so many Rust 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 Donald Dotson to chair the National Labor Relations Board. Dotson had previously worked as a management-side labor adversary for Wheeling-Pittsburgh Steel, and (presumably with both lips and heart) believed collective bargaining led to "the destruction of individual freedom." Under Reagan's two terms, the federal minimum wage, which previously had been adjusted upward every year or two, would remain 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 51-year low. 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 negligible and others judge substantial. Where Levy and Temin (who lean toward the "negligible" 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 Temin emphasize ideological ones that occur over time, but both constitute changes in the way Washington governs. Levy and Temin concede that the ideological shift was influenced by changing circumstance (inflation did rise; productivity did fall; Rust Belt manufacturers did face increased foreign competition). But they argue that the policies 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, Were You Born On The Wrong Continent?, makes this point largely by 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 a recovery that's leaving the United States in the dust. New York Times columnist David Brooks takes away the lesson that the Germans succeeded by spending less government money than the United States to stimulate its economy (a conclusion that Krugman, his fellow Times columnist, had already labeled "foolish"). Brooks mentions only in passing (and somewhat elliptically) that 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 and more robust—as occurred under the Treaty of Detroit—has, regrettably, become unfashionable.
Correction, Sept. 13, 2010: An earlier version of this column 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. (Return to the corrected sentence.)