What I Do
IBEW keeps San Francisco's cable cars running.
Welcome to the AFL-CIO -- the House of Labor in the U.S. And a special welcome to John Martin from the OECD and Charlie Heeter, my friend and counterpart from BIAC.
And thank you, John, for your excellent presentation of Divided We Stand. The OECD has made an important contribution to understanding the causes of growing inequality in OECD countries and the policies we need to restore more equitable and sustainable growth.
I want to commend the OECD – with whom I have often disagreed on matters of economic policy – for your focus on economic inequality beginning with Growing Unequal? in 2008 and continuing with Divided We Stand.
I also want to compliment the OECD for the cover of this report. You know the message of the Occupy Movement – "the 99% and the 1% -- has resonance when it appears to influence the design of OECD publications!
But I suspect that if John were to make this presentation a block away on McPherson Square to Occupy DC, we would not likely find the activists there demanding more training to deal with "skill-biased technical change."
The Occupy Movement is focused more on a fundamental imbalance of economic and political power to explain rising inequality. I think they have a point.
Moreover, I think the OECD would do well to incorporate the Occupy Movement's intuition concerning economic and political power into your future work on inequality and the policies needed to address it.
Divided We Stand seems to focus primarily on the distribution of wages as the principal driver of income inequality. You do not seem to view the more fundamental fall in share of wages in national income as a major cause of rising inequality.
I think both the fall in wage shares and the rise in wage inequality are important causes of rising income inequality --- and both have important implications for policy.
The International Labour Organization (ILO) reports that since the early 1990s, wage shares have fallen in three quarters of the 69 countries they studied. And, since 1975, they find wage shares in advanced countries have fallen by an average of nine percentage points of GDP.
Obviously, with this much income accruing mostly to our wealthiest families, falling wage shares would appear to be an enormous force driving income inequality. Economists estimate that the top one percent of American families claimed 58 cents of every dollar of increased income since 1979. Of course, increasing wage inequality also contributed to this rise in inequality.
If we were to explore both falling wage shares and growing wage inequality as causes of increasing income inequality we would be forced to notice the importance of the dramatic shift in bargaining power between workers and their employers since the 1970s and the effect of economic policy changes causing that shift.
When the ILO explored the causes of declining wage shares they found that "financialization" and "globalization" both played important roles in weakening the bargaining power of workers, along with declining union strength and weakening labor market protections.
From my experience as a trade union leader in the U.S., I am convinced of the importance of both financialization and globalization in weakening the bargaining power of workers. I am therefore skeptical of your finding that globalization is not a cause of growing inequality.
More generally, I think the OECD's work on inequality would be strengthened by a more explicit treatment of power and the policies that have diminished the bargaining power of workers.
In his editorial to Divided We Stand, OECD Secretary-General Angel Gurria wisely observed, "The social compact is starting to unravel in many countries." This is certainly true in the U.S.
The "social compact" in the U.S. and other countries required that real wages rise along with productivity. And, from 1946-1973, as productivity growth doubled, so did the real value of the median wage.
As a result, the wage share was a constant 70 percent of national income, family incomes doubled, and inequality was reduced as lower incomes grew slightly faster than higher incomes.
However, since the mid-1970s, productivity continued to increase, real wages stagnated, the wage share began to fall, and inequality exploded.
In my view, understanding the causes of growing inequality requires understanding both falling wage shares and the increasing inequality of wages.
In Divided We Stand, the OECD clearly recognizes that government tax and benefit policies have reduced market inequality, but that the effect of these government policies has been greatly reduced as taxes have become less progressive and social protection has eroded.
The OECD study also recognizes that, although there is much scope for bolstering social protection and increasing taxes on our wealthiest families, redistributive policies alone cannot compensate entirely for market inequality.
While I agree with these judgments, I think there is much more that can be done to use government to both bolster social protection and to require our wealthiest citizens to bear their share of the burden of restoring fiscal balance.
In an important new study, Thomas Piketty and others find that radical tax reductions in the U.S., U.K. and other countries contributed little to economic growth, but greatly aggravated the growth of pre-tax incomes of our wealthiest families. Apparently the 1% benefited enormously at the expense of the 99%. They calculate that top marginal tax rates could be raised as high as 80 percent without slowing economic growth.
The fundamental problem, however, remains to restore the "social compact" by rebuilding the relationship between productivity and wages, stabilizing wage shares, and reducing the growing inequality of wages.
To stabilize wage shares and reduce the inequality of wages both require rebalancing the bargaining power of workers and their employers.
I strongly agree with the OECD finding that the weakening of labor market institutions has contributed significantly to growing inequality. This suggests that the OECD should shift its structural policy recommendations to strengthen -- not weaken -- labor market institutions, by establishing meaningful minimum wages and expanding collective bargaining.
Angel Gurria is right to insist that "there is nothing inevitable about high and growing inequalities." And the OECD is right to argue that we must understand the causes of growing inequality to formulate the policies necessary to produce more just and sustainable growth as we emerge from the Great Recession.
To do so, however, requires that learn from the crisis and change the way we think about the economy and economic policy.
While we welcome Divided We Stand, we view the work it involves as the beginning of the inquiry into the causes of growing global inequality, and not the end. We cannot reduce inequality by returning to the policies that produced inequality in the first place.
Economic inequality in the U.S. is now the highest of any advanced country in the OECD, and is higher today than any time since the "Roaring Twenties." Prior to the recent crisis, the top one percent of families in the U.S. received over 20 percent of all income, more than twice the share they received in 1975.
As President Obama noted in a recent speech, "inequality is the defining issue of our time." And as the OECD recognizes, growing economic inequality is a long-standing global phenomenon that carries the most serious economic, social and political implications.
I am hopeful that the OECD and the ILO – working in consultation with business and labor -- can help guide governments towards a better understanding of growing inequality and the policies we need to build a stronger and more just and sustainable global economy.
 ILO. World of Work Report: Making Markets Work for Jobs. (Geneva, 2011). This is based on OECD data and confirms an earlier OECD Economic Outlook report finding a similar fall in wage shares.
 Raghu ram Rajan. Fault Lines: How Hidden Fractures Still Threaten the World Economy. (Princeton University Press, 2010)
 Thomas Piketty, Emmanuel Saez, Sefanie Stantcheva, "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," NBER Working Paper (November 2011). [
4] Piketty, Thomas and Emmanuel Saez, "Income Inequality in the United States 1913-2010, Quarterly Journal of Economics (2003). In 2007 the top one percent received 23 percent of all income with an average family income of $1.4 million. Declining stock values during the crisis brought the share of the top one percent down to 17 percent in 2009 with the average falling to $957,000. But unless there is a dramatic shift in policy, the share of the top one percent is likely to return along with rising stock prices in 2010.
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