Labor Day has come and gone. Kids are back to school, parents back to work and the summer is over. Yet on this ephemeral national holiday it is worth considering the origins of the day, the changing economic and political trends of labor in 2023, and the important implications for the American economy.
More than a decade before it was established as a federal holiday, New York became the first state to recognize the social and economic achievements of its workers in 1882, hosting the first Labor Day holiday and parade. Within two years, 23 additional states followed course and on June 28, 1894, President Grover Cleveland signed a law recognizing the first Monday in September as a national holiday.
In 1935, Congress passed the National Labor Relations Act, which established the legal foundations for union organizing, collective bargaining, and collective action (strikes). Over time, union activity came to focus on collective bargaining over wages, benefits, and working conditions and on negotiating disputes with management over violations of contract provisions.
With the primacy of shareholder capitalism and widespread adoption of the Milton Friedman approach to capitalism after 1970, union membership saw a steady decline in both numbers and approval. In 1983, more than 20% of American workers belonged to a union, but by 2022 it had fallen to just 10%. Similarly, as the Gallup chart below highlights, American’s approval of unions also experienced a sustained decline during that period.
Yet, on this Labor Day 2023, there are signs this multi-decade trajectory is changing. According to Gallup, approximately 67% of Americans approve of labor unions, representing the fifth consecutive year the reading has exceeded its long-term average of 62%.
Now, let’s consider a few of the recent high-profile labor disputes, above all in the transportation and logistics industry. UPS workers recently won new pay increases, a new day off (Martin Luther King Holiday) and air conditioning in their trucks. Unionized airline pilots, leveraging a severe airline pilot shortage, secured significant pay raises. Rail workers won paid sick leave for most of their workers. And just in the last week, unionized port workers on the West Coast won a new six-year agreement. Hollywood’s writers and actors strike is on-going, yet the public’s attitude has clearly shifted to support labor, as Gallup underscores.
Against this backdrop, the White House recently released a report finding that unions raise the wages of their members by 10-15% and improve benefits relative to nonunionized workforces. There are a range of factors likely driving the rising power of the worker. First, the effects of the pandemic on the American workforce, as employees moved and changed jobs with far greater velocity than employers expected. Second, the historically tight labor force which shifted leverage to the employee. Third, young workers support for a shift from shareholder to stakeholder capitalism, with greater emphasis on transparency of issues like wage gap, pay equity and the sustainability of the worker-employee relationship; Gen Z workers are choosing employers differently than their predecessors, putting pressure on companies to increase pay and benefits.
In the United States, attitudes have not favored equality of economic outcomes. However, equality of opportunity and the concept of a ‘living wage’ have enjoyed broad-based support. But, over the past half century stagnating living standards of average Americans and growing disparities between the few and the many have exacerbated socioeconomic divisions, contributing to the splintering of America’s political consensus.
Many factors, of course, have contributed to the sense that average living standards were not improving. Declining unionization and labor bargaining power was one. Globalization and the threat of jobs moving overseas was another. Rapid technological advances, which particularly hollowed out employment in formerly high-paying manufacturing jobs was another.
Consequently, from 1970-2010 labor’s share of national income (GDP) fell from 65% to less that 59%, a loss of approximately $2 trillion in annual worker income, or roughly $12,500 per worker per year. In relative terms, the forgone income was even greater. From 1970 to 2021, the share of household income received by the top 20% of American workers rose by ten percentage points from 43% to 53%, while the share accruing to the other four fifths of America workers fell.
Yet, as noted above, those dismal trends appear to be reversing. Over the past decade, the share of labor income in GDP has edged higher. Real median family income has been generally rising since 2015. While the technological forces disrupting the workplace have continued apace, the slowing pace of globalization and shortages in labor supply owing to changing labor force participation rates and demographics appear to be shifting the power balance back somewhat in labor’s favor.
Some might lament those outcomes, seeing them as precursors to inflation or a threat to profitability. Inflation, however, is not driven by the relative scarcity of the factors of production. Rather, it represents outcomes where demand exceeds available supply. Increased worker bargaining power is not, per se, inflationary. It may, however, squeeze corporate profit margins. After an era of above average profitability, reflecting to a significant extent labor’s low share of GDP, restoring greater balance in how the pie is distributed is probably a good thing. Moreover, if profits come under pressure, firms will be incentivized to spur innovation.
In sum, Labor Day 2023 has been worth celebrating. It is an apt holiday commemorating the contributions of ordinary Americans in building this great country. It also celebrates their rights to a decent wage and collective bargaining. And this year, as well, it marks the restoration of labor’s central role in the economy and the rewards it justly deserves.