Progressive Labor Standards

Dangerously high levels of market concentration demand a regulatory regime that holds large employers to higher standards.

By Nick Hanauer

Tagged DemocratsEconomicsInequalityLaborprogressivismThe New Deal

Out of the mass immiseration of the Great Depression and the shared sacrifice of World War II, a New Deal consensus arose that would lead America to three decades of unprecedentedly broad economic growth and prosperity. Social Security, the minimum wage, the 40-hour workweek, mandatory overtime pay, unemployment insurance, workers’ compensation, the right to organize and collectively bargain, the G.I. Bill, robust antitrust enforcement, a steeply progressive tax code, and many other progressive programs and standards helped build the largest and wealthiest middle class the world has ever known. It was a rare moment in human history, for never before had income and wealth inequality fallen so far so fast outside of the violent leveling of war, famine, disaster, or disease. This was a golden age of rising living standards and rising expectations, and it was a direct consequence of a political consensus that embraced shared prosperity as both the proximate and ultimate goal of economic policy.

My, how times have changed.

The Trickle Down era hasn’t gone nearly so well for most Americans. Since the collapse of the New Deal consensus sometime in the mid-1970s and the rise of the neoliberal consensus that replaced it, real wages have been flat, productivity growth has slowed, and economic inequality has soared to levels not seen since the Gilded Age. Fattened on tax cuts, stock buybacks, and financial deregulation, the rich are getting richer, while the once great American middle class is shrinking, both in size and in purchasing power. Economic mobility—the likelihood of a child attaining an income higher than their parents—is nearly half what it was in 1940. The American Dream is fading away.

Economic trends show a shift of $2 trillion a year from
the paychecks of the middle class to the bank accounts of corporations and the superrich.

Fortunately, rising from the ashes of the Great Recession and the grossly uneven recovery that has followed, a new “middle-out” economic and political consensus is finally beginning to emerge—at least within the mainstream of the Democratic Party. As more and more Democrats run and win on boldly progressive platforms that correctly place the American people back at that center of the American economy, the false doctrines of the neoliberal priesthood are losing their hold. But while the guiding principle of the middle-out agenda isn’t much different from what President Franklin D. Roosevelt articulated more than 80 years ago—“the best customer of American industry is the well-paid worker”—our economic reality has surely changed. Ours is not the old industrial economy of 1940, or even 1970, and thus the old progressive policies cannot suffice. This new economy requires new thinking that directly responds to the unique challenges of our time.

In “Shared Security, Shared Growth” [Issue #37], David Rolf and I addressed the changing nature of work by proposing a “Shared Security System” designed to fit the flexible employment patterns of the twenty-first century. As proposed, this system would consist of two parts: a “Shared Security Account” in which workers could accrue portable, prorated, and universal employment benefits, and a set of “Shared Security Standards” intended to complement and reinforce these benefit accounts. While the previous piece necessarily focused on introducing the novel idea of a Shared Security Account, I will use this space to advance my thinking on this second component, Shared Security Standards. Specifically, this will entail a discussion of why, given the historically high levels of market concentration in our current economy, dominant employers must be held to progressively higher labor standards than their smaller, more fragile, and weaker competitors. If we are to rebalance economic power between workers and employers, between small businesses and big businesses, and between economically divergent regions, truly progressive labor standards must be “progressive” in both senses of the word.

The principles animating progressive labor standards are simple: The companies with the greatest impact on our economy and on our communities must also be held to the highest standards. We must demand that our biggest employers are also our best, and that our largest companies lead by example. America is suffering from interconnected crises of rising market concentration and rising economic inequality. Progressive labor standards are a tool that directly addresses both.

The politics animating progressive labor standards are equally simple, because good policy is good politics. By harmonizing the interests of workers with the interests of small businesses and farmers, progressive labor standards enable Democrats to build a majoritarian coalition strong enough to combat the dangerously growing political power of our nation’s largest monopolists.

Listen to Nick Hanauer’s new podcast, “Pitchfork Economics,” for a discussion of this essay and more.
Wages, Inequality, and the Plight of Small Business

The collapse of real wage growth over the past 40 years has been well documented. From 1935 until 1973—the era of shared growth—the real income of the bottom 90 percent of Americans rose an average of 4.2 percent a year, substantially faster than incomes of the top 1 percent. But since 1973, the bottom 90 percent have actually seen their real incomes decline by about 0.2 percent a year, while the top 1 percent have seen their incomes soar. It was in this period that we saw the “Great Decoupling” between productivity and compensation. Through 1973, hourly compensation rose in near lockstep with net productivity; since 1973, real hourly compensation has barely budged at all as productivity has kept climbing. In fact, over the past four decades, nearly all of the benefits of economic growth have been captured by large corporations and their wealthy shareholders. After-tax corporate profits have doubled from about 5 percent of GDP to about 10 percent, while wages as a share of GDP have fallen by about the same amount. Meanwhile, the wealthiest 1 percent’s share of personal income has more than doubled, from about 9 percent in 1973 to about 22 percent today. Taken together, these two trends amount to a shift of more than $2 trillion a year from the paychecks of the middle class to the bank accounts of corporations and the superrich.

But rising inequality is more than just an affliction of the American household. It has become a dominant feature of the business landscape as well. The Walmart-ization of America (the explosion of national franchises and chains) and the existential threat posed by online retailers like Amazon have made it increasingly difficult for small local businesses to compete and survive—which helps explain why the startup rate has hit a 40-year low. It is a familiar neoliberal cliché to laud business startups as the source of the majority of new jobs, yet the Kauffman Foundation, citing its own research and drawing on U.S. Census data, concluded that the number of American companies less than a year old as a share of all businesses had declined by nearly 44 percent during the trickle-down era. And those declines swept across industries, including tech. Likewise, the Brookings Institution, also using census data, confirmed that the number of new businesses is down across the country, and that more businesses are dying than are being born.

Small businesses have long been the incubators of many of our most important innovations. Google didn’t revolutionize Internet search as a subsidiary of Microsoft; it was started as a research project by students at Stanford University. The personal computer industry wasn’t imagined in a laboratory at IBM; it was famously jumpstarted in Steve Jobs’s parents’ garage. The intermodal shipping container wasn’t invented by some multinational cargo line; it was the brainchild of an American trucker, Malcom McLean, who bought his first truck in 1935 before going on to transform global trade. Without a robust stream of new small businesses, innovation will slow, the economy will stagnate, and the next generation of business leaders will never arrive. In fact, America’s status as a global innovation leader is already slipping. The United States no longer even ranks among the top ten on Bloomberg’s 2018 Innovation Index: “I see no evidence to suggest that this trend will not continue,” warns Robert D. Atkinson, president of the Information Technology & Innovation Foundation.

Just as concerning is that the collapse in small business creation is resulting in a loss of economic diversity at the local level, leading to even higher levels of income and wealth inequality, not just between households or between businesses, but between regions. Indeed, it is our nation’s growing spatial inequality—the diverging economic trajectories of our prosperous tech hubs from nearly everywhere else—that poses the greatest threat to the economic, political, and social cohesion necessary to sustain American competitiveness and growth. For it is hard to imagine a democratic republic such as ours, which constitutionally overrepresents economically distressed rural and exurban voters, peaceably coexisting with an economy so steeply tilted toward the interests of urban elites.

Precipitously rising economic inequality—between households, between businesses, and between regions—is the defining issue of our time. And much of the blame can be laid at the feet of rising levels of market concentration.

Monopoly, Monopsony, and the Consequences of Market Power

It is no coincidence that market concentration and economic inequality have risen hand in hand. The more a company grows to dominate an industry or region, the greater its ability to dictate terms, both as a seller of goods and services, and just as importantly, as a buyer of labor and other inputs. For example, when a Walmart moves into a virgin territory, independent local retailers, lacking Walmart’s buying power and other economies of scale, find it impossible to compete on price. But the flipside to Walmart’s iconic “Always low prices” slogan is its well-earned reputation for “always low wages.” As its smaller local competitors struggle and close, Walmart becomes not just the dominant local retailer, but a dominant local employer as well. Lacking a competitive local market to bid for their labor (or a union to collectively bargain on their behalf), local retail workers now have little choice but to accept whatever wage Walmart is willing to pay. And as Walmart uses its growing market power to relentlessly constrain its own labor costs, it indirectly forces its remaining local competitors to do the same. That’s why, whenever Walmart enters a local market, local wages drop. According to a 2007 study by researchers at UC Berkeley, a single Walmart store opening in a county forces down retail wages countywide by as much as 0.9 percent, and by 1.5 percent for grocery store workers.

This is the corrosive market power of “monopsony”—monopoly’s lesser known but equally evil twin—in which a large proportion of a market is controlled by a single buyer. And it’s a power, unfortunately, that is not monopolized by Walmart alone. According to an April 2016 brief compiled by President Obama’s Council of Economic Advisers, market concentration, as measured by the revenue share of a segment’s top 50 companies, increased in nearly every industrial sector between 1997 and 2012. In food processing—the segment that dominates rural agricultural economies nationwide—market power is particularly closely held. A 2010 study by the nonpartisan Congressional Research Service found that the market concentration of the top four firms increased in eight of nine agricultural industries, from an average of 31.7 percent in 1992 to 48.7 percent in 2002. And aggregating numbers nationally actually understates the problem: In many parts of the country, local farmers must sell into a market almost entirely controlled by one or two large buyers.

But you don’t need to read wonky government reports to see the growing impact of market concentration on our daily lives. Just look at your own purchases. According to data compiled by the Open Markets Institute, 74 percent of e-books are sold by Amazon, 75 percent of candy is sold by Mars and Hershey, and 86 percent of basketball shoes are sold by Nike. Retail is particularly concentrated, with 69 percent of the office supply market controlled by Office Depot and Staples, 90 percent of the home improvement store business by Lowe’s and Home Depot, and an astounding 99 percent of the drug store market dominated by just CVS, Walgreens, and Rite Aid. And even where there’s a seeming abundance of consumer choice, it’s not always what it appears to be. Walk into a Lowe’s or Home Depot and you can choose from a variety of washers, dryers, and other major appliances from familiar brands like Whirlpool, Jenn-Air, Amana, Magic Chef, Admiral, and KitchenAid—all of which are, however, owned by Maytag. And whichever of the three drug store chains you shop at, you’ll find a plethora of brands of vitamin C on the shelves—all of it produced by a single Chinese vitamin cartel.

Want to get away from all this market concentration? Flip open your laptop (93 percent of which run on Intel microprocessors) and search for a flight using either Expedia (which owns Orbitz and Travelocity) or Priceline (which owns Kayak). Enjoy your pick of flights from American, Delta, United, or Southwest, which together control 80 percent of the domestic airline industry—unless you’re flying into one of the 40 percent of large U.S. airports where one airline controls the majority of the gates. But don’t worry, once you arrive, you can rent a car from your choice of Enterprise (Enterprise, Alamo, National), Hertz (Hertz, Dollar, Thrifty), or Avis (Avis, Budget).

You get the point.

These examples may only be the tip of the iceberg. Thanks to the growing prevalence of “horizontal shareholding” (in which a common set of investors hold substantial shares in corporations that otherwise appear to compete within a market), much of this growing concentration is even further hidden from view. For example, between 2013 and 2015, seven shareholders controlled 60 percent of United Airlines stock, while also owning large stakes in the airline’s rivals, including 23.3 percent of Southwest, 27.3 percent of JetBlue, and 27.5 percent of Delta. A recent study suggests that airline ticket prices are now 3 to 10 percent higher than they otherwise would be if not for this sort of horizontal shareholding. And the same unseen market power that results in higher prices for consumers also enables these “competitors” to collectively hold down wages for workers.

In recent decades, we’ve been taught to narrowly evaluate mergers and acquisitions from the perspective of their impact on consumers. “Will it raise or lower prices?” regulators ask. And if there’s even the flimsiest argument against the former, the deal is usually approved. But as costly or inconvenient as consolidation can be, the larger impact of rising market concentration has arguably been on economic inequality. Market power is a zero-sum game. As the balance of power shifts toward a handful of “category kings” and their shareholders, the relative power of consumers, workers, competitors, and even governments inevitably declines.

The most obvious impact can be seen in the labor market, where the rising power of large corporations is leaving workers with fewer potential employers to compete for their labor, and thus less leverage to negotiate wages. According to U.S. Census data, large companies (which the Small Business Administration defines as employing 500 or more workers) accounted for 52.5 percent of U.S. employment in 2015, up from 45.5 percent in 1988—data that actually understate the shift in employment share from small to large companies by failing to account for the millions of franchise workers subject to the employment practices of the franchisee’s corporate parent. And it’s a number that is even bigger in many rural areas. Our own preliminary analysis suggests that in many non-metro areas, more than 65 percent of workers are directly employed by large companies or franchises.

Take it from a successful capitalist: Employers don’t pay you what you’re worth. We pay you what you can negotiate. And the rising monopsony power of large employers is eroding the bargaining power of workers. No wonder wages remain flat even as the unemployment rate edges toward record lows.

Employers don’t pay what you’re worth; they pay what you can negotiate. And monopsony power is eroding worker bargaining power.

Furthermore, these large employers set the tone for the rest of the labor market. Their business practices, good or bad, define the terms of competition. If large companies pay low wages, all companies pay low wages; in fact, they must pay low wages in order to keep their costs and prices competitive. If large companies do not provide health care or sick leave or other benefits, then most small companies cannot provide these benefits either.

This race to the bottom doesn’t just apply to small businesses that compete with large corporations; it applies to businesses that sell to them as well, often on ruinously one-sided terms. Independent truckers often work long hours for the equivalent of poverty wages thanks to contracts that shift most of the costs, and all of the risks, onto the driver. Small chicken and pork farmers often have no choice but to accept abusive contracts from agribusiness monopsonists that offer little say over local farming practices, and an even smaller margin of profit. This shift in market power from local enterprises to large multinational corporations has, in fact, been particularly harmful to agricultural communities and small manufacturing towns that had relatively little economic diversity to begin with—because national chains and corporate giants don’t just displace local businesses, they extract local wealth. A number of studies find that independent local businesses return much more of their earnings to the local economy than do national chains—for example, 52 percent and 79 percent respectively for local retailers and restaurants in Salt Lake City, compared to just 14 percent and 30 percent respectively for local outlets of national chains. Locally owned businesses inherently recycle surplus value back through the localities where the value is created—supporting other local businesses, as well as local institutions and governments—whereas national chains naturally export value to distant shareholders. This globalization of local markets is effectively transforming much of the American heartland into economic colonies of far-off capitalists. No wonder “red state” America is so angry!

This wasn’t always the case, though. By the 1930s, more than half the states, and many cities, had passed anti-chain-store laws intended to protect small local businesses from being dominated by giant national competitors. They did this most commonly by adopting a progressive tax on chain stores based on their numbers of outposts. (In its early years, Walmart itself was protected by such laws in its hometown of Bentonville, Arkansas.) And throughout most of our history, federal antitrust regulators, charged with keeping market concentration below dangerous levels, aggressively used their powers to block mergers and break up monopolies—using market competition, not consumer prices, as their guidepost. Today, though, it isn’t our antitrust laws that have changed; rather, it’s the principles that guide their enforcement.

Our modern failure to use the government’s regulatory power to keep markets competitive—or to protect the right of workers to bargain collectively—isn’t just the result of bad economic ideology. It’s also the result of regulatory capture. As companies grow larger and more economically powerful, they grow more politically powerful too. Corporate donations pay for the operations of both political parties. Corporate lobbyists don’t just influence legislation, they write it. And local governments, faced with declining economic diversity, are forced to compete with each other in a race to the bottom for tax cuts and other costly incentives aimed at attracting or retaining large employers. Market power helps build the political power necessary to concentrate even more market power. And so on.

Rather than the virtuous cycle of innovation and demand that first built the American middle class, much of the country is now caught in a vicious circle of concentration, exploitation, and extraction. Truly progressive labor standards would provide a valuable new regulatory tool in our efforts to break this vicious circle.

Progressive Labor Standards

In “Shared Security, Shared Growth,” we proposed a set of universal, portable, and prorated benefits that would include a minimum of five days a year of paid sick leave, 15 days a year of paid vacation leave, a matching retirement contribution, and insurance premiums to cover health care, unemployment insurance, workers’ compensation, as well as paid maternity, paternity, family, and medical leave. Supporting these benefits, we also briefly outlined a set of Shared Security Standards that would include pay equity, secure scheduling, a $15 federal minimum wage, and an overtime threshold of $69,000 a year.

While Shared Security is intended to address the changing nature of work, it does not directly speak to its cause, which is at least partially driven by rising levels of market concentration. But by establishing the benefits and standards described earlier as the bare minimum to be required of all employers, and then scaling them upwards relative to the size and/or market impact of the employer, Progressive Labor Standards would be responsive to market power while helping to rebalance it. For example, a progressive minimum wage might range between a regionally adjusted $15 an hour to as high as $22 an hour—what the minimum wage would be had it continued to track productivity—based on a graduated scale according to employer size. Just like a progressive income tax employs multiple tax brackets to levy higher tax rates based on the size of one’s income, a progressive minimum wage might apply multiple “wage brackets” based on the size of a company’s workforce. For example, one might imagine a simple three-tiered system that required all employers with more than 5000 employees to adhere to the highest standard—$22 an hour—while employers with between 500 and 5,000 employees and those with fewer than 500 employees pay $17 and $15 per hour respectively. Under this system, a Walmart store would be required to pay a substantially higher minimum wage than its local competitors, thus exerting upward pressure on local wages, leveling the competitive playing field within the local retail sector, and recycling more of its earnings through the local economy. A similar graduated scale could be applied to most of the other core benefits and standards, with larger companies progressively providing more generous paid leave, retirement contributions, overtime policies, and health insurance coverage than their smaller competitors.

Progressively scaling labor standards relative to employer size would be the most straightforward method of implementation. But while employer size often correlates with market power, it doesn’t always—and even when it does, it doesn’t necessarily speak directly to the problem. In fact, it’s not corporate size that we mean to rein in, but the economic exploitation, concentration, and extraction that tends to come with it. Small employers can be as exploitive and extractive as big employers, even when lacking the advantages of market concentration—for example, operating a low-wage business in a community to which an absentee owner has no other connection. Thus, a more direct, if considerably more complicated, approach would be to progressively scale labor standards according to a weighted measure of an employer’s market impact:

Labor Exploitation. Because Progressive Labor Standards is primarily a tool for directly addressing the growing imbalance of power between workers and employers, companies would be subject to higher standards based on measures of worker exploitation, such as the ratio between average pay and median pay, the ratio of labor costs to profits, and the amount of taxpayer-funded anti-poverty subsidies (Earned Income Tax Credit, Medicaid, SNAP, housing assistance, etc.) consumed by its workers. Workforces that enjoy collective bargaining rights would be presumed to be less exploited, thus creating an incentive for companies to be friendlier to unionization.

Market Concentration. To help level the competitive playing field between businesses, employers that enjoy high levels of market concentration within an industry or region would be held to progressively higher labor standards according to their market share as both a seller and a buyer—regardless of whether there is evidence that they are directly abusing their market power. Throughout most of American history, until the regulatory regime was upended in the early 1980s, antitrust regulators relied on market share thresholds as direct measures of anticompetitive market power. A similar metric should apply to Progressive Labor Standards.

Geographic Extraction. As a tool for addressing growing levels of economic inequality between regions, employers would be subject to higher labor standards relative to a measure of how much they extract from local economies compared to their independent local competitors. Such measures might compare local taxes paid, local sourcing, and local jobs created to the profits exported to distant headquarters and shareholders. Progressive Labor Standards should incentivize good corporate citizenship over economic rent-seeking.

For example, under a market impact approach, Walmart stores everywhere would be subject to higher labor standards than their independently owned local competitors, due to the chain’s relatively high levels of labor exploitation, market concentration, and geographic extraction. But a Walmart store located in its hometown of Bentonville, Arkansas might be subject to lower standards than a Walmart in rural Iowa due to the former’s inherently lower levels of extraction (it is, after all, locally owned). Likewise, a locally owned McDonald’s franchise might be subject to lower labor standards than a nearby corporate-owned location (local owners would presumably recycle more value locally), yet be subject to higher standards than the independent burger joint across the street. And as market power shifts between employers, their labor standards would progressively shift with it, imposing a self-regulatory mechanism on market concentration.

While a market impact approach would be far more complicated to implement than the three-tiered employer-size model described above, it would be far more targeted—and in the age of big data, far from impossible. But regardless, both models are merely offered here as illustrations of how a system of progressive labor standards might work, rather than as detailed policy proposals.

One obvious objection to any system of progressive labor standards will be that it incentivizes market-distorting cheating, just as our current system of labor standards can reward firms for franchising, outsourcing, part-timing, contracting, job misclassification, and other strategies. My immediate response is that there will always be cheaters, and that if we can’t impose rules because some people might cheat, then we can have no rule of law at all. But that said, most of these manipulations can be dealt with through a simple “whichever-is-larger” rule. Just as Seattle’s multitiered employee-size phase-in of its $15 minimum wage classified individual franchises by the number of employees of the parent organization, Progressive Labor Standards would do the same. For example, an employee of a midsized contractor working the front desk at a large international hotel chain would be held to the labor standards of the hotel chain, whereas another employee of the same contractor working the desk of a small independent hotel across the street might be held to the labor standards of the contractor—in other words, whichever is larger. Whatever system of progressive labor standards is implemented, it is important that this “whichever is larger” principle is observed within both the letter and spirit of the law.

Building a Better America From the Middle Out

There are multiple arguments for holding large and dominant employers to higher labor standards, the most obvious being that this is where the money is. The largest and most dominant corporations have generally been the largest beneficiaries of our trillion-dollar-a-year transfer of wealth from wages to corporate profits, and as such, they are also the most capable of absorbing higher labor costs. Furthermore, having benefited the most from rising inequality, it is only fair that these employers bear a proportional share of the costs of addressing it. But perhaps most important, these large and dominant companies are the employers for which higher labor standards would have the most direct and proximate impact on the welfare of workers and communities. Large companies now account for more than 52 percent of all employment—and that share is rising. Add in the millions of workers employed at franchises of national chains, and this number is even higher. Imposing progressively higher labor standards on large employers would directly raise the wages and benefits of millions of Americans while applying upward pressure on the wages and benefits of millions more—money that would recirculate through local economies, local businesses, and local governments.

But Progressive Labor Standards wouldn’t just address the consequences of market concentration; they would help to reduce it. While in no way a replacement for robust antitrust enforcement, Progressive Labor Standards would provide a complimentary new tool for constraining monopoly and monopsony, and the dangerously rising levels of economic inequality that are tearing our nation apart. By evening the playing field between companies with market power and those without, Progressive Labor Standards would help to promote small business growth and formation, making our markets—and our entire national economy—more competitive, innovative, dynamic, and diverse. And by limiting the parasitic ability of labor market monopsonists to free-ride on the rest of the economy (paying poverty wages to their own employees while relying on living-wage employees of other companies as customers), Progressive Labor Standards would directly drive economic growth. To paraphrase FDR: When workers have more money, businesses have more customers and hire workers. Then as now, this fundamental principle of market capitalism remains true.

Nearly 80 years ago, our nation pulled itself out of the depths of the Great Depression and the vast human tragedy of World War II by embracing a New Deal consensus that relentlessly focused on building a large and vibrant middle class. We rebuilt America from the middle out, and the whole world prospered. But this consensus did much more than just build a prosperous America. It built a united one: a powerful coalition of farmers, working families, and small businesses all working together toward a common goal under a collective vision of a shared American dream.

This is the opportunity that a revitalized Democratic Party must seize—not just to build a new progressive consensus, but to build a new progressive coalition which is both pro-worker  pro-business and can lead a united America forward for decades to come. Unsustainably high levels of economic inequality—between households, between businesses, and between regions—are the defining issue of our time. And rising levels of market concentration are a driving force behind rising economic inequality. By putting Democrats squarely on the side of farmers, workers, and small businesses, and against the corrupting influence of concentrated market power, Progressive Labor Standards has the potential to spark the political realignment our suddenly fragile republic so desperately needs.

Read more about DemocratsEconomicsInequalityLaborprogressivismThe New Deal

Nick Hanauer is a Seattle-based entrepreneur and venture capitalist, and the founder of Civic Ventures, a public-policy incubator.

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