Reposted with permission of the Institute for New Economic Thinking; ineteconomics.org,
How the dream of a middle class existence collapsed, first for Blacks, then for more and more white American workers and what the Biden administration could do to retrieve the situation.
With President-elect Joe Biden transitioning to the White House, Americans need clarity on a policy agenda that can make good on his “Build Back Better” campaign slogan. We take BBB to mean creating possibilities for upward socioeconomic mobility for as many Americans as possible, as quickly as possible. The policy agenda must focus on ways to create tens of millions of new employment opportunities that can substantially lift the living standards of working-class households while dramatically increasing investment in the productive capabilities of the future labor force.
We also understand the “back” in BBB to refer to rebuilding the broad American middle class that existed in the United States entering the 1980s but that has persistently eroded since then. The past four decades have been marked by an increasing concentration of income and wealth among the richest households and downward socioeconomic mobilityfor a large portion of the American working class, especially for those who hold no more than a high-school diploma. “Build back” means restoring the government and business investments in the productive capabilities of the U.S. labor force that created a growing middle class in the three decades after World War II—as we document in our series of INET working papers on U.S. African American employment history, including our latest contribution, “Employment Mobility and the Belated Emergence of the Black Middle Class.”
Government has a major role to play in the BBB agenda. Many progressives have argued for low-cost or free public higher education and the reduction or cancellation of student debt. The fact is that, prior to the 1980s and beginning with the subsidies provided by the GI Bill in the decade after World War II, the U.S. system of public higher education, based on the land-grant colleges, was either low cost or tuition-free. Moreover, with their wages supported by labor unions, growing numbers of blue-collar families had incomes that helped their children go to college, enabling upward intergenerational socioeconomic mobility to white-collar employment requiring a higher education. We now have to “build back” because from the 1980s, just as the digital revolution called for increased investment in the capabilities of people for the “knowledge economy,” state-level governments in the United States permitted tuition costs of public higher education to soar, while the federal government imposed high-interest rates on student loans, with no possibility of a clean slate through bankruptcy.
The United States still has a world-class system of higher education, attracting prepared and motivated people from around the world. Government policy at the federal, state, and municipal levels must make this higher-education system much more accessible and affordable to Americans than is currently the case.
But BBB cannot rely on government investment alone. The business sector provides over 80% of employment in the U.S. economy, and we rely upon major business corporations to provide productivity-enhancing careers to tens of millions of people. BBB will only be possible if U.S. business corporations, and especially the biggest employers, are induced to collaborate seriously with government by allocating their vast resources to investments in productive jobs and productive people to fill them.
Among the nation’s six million firms, there are about 2,200 companies with 5,000 or more employees in the United States. With an average of about 21,000 employees, these large companies provide jobs to about 35% of the U.S. business-sector labor force, pay them some 40% of the sector’s wages, and account for an estimated 46% of sales. BBB will only work if these large companies allocate their profits to increase the remuneration of their employees, provide them with stable employment through which they can become more productive over time, and, in particular augment corporate investments in the productive capabilities required to generate the innovative goods and services on which our future prosperity depends.
Unfortunately, most of the largest companies that dominate the U.S. economy have not been allocating their profits in ways that can support a BBB agenda. To the contrary, since the 1980s they have been using their profits to make the rich richer while avoiding taxes, depressing wages, rendering employment unstable, and neglecting opportunities to invest in innovation. Specifically, rather than reward workers and invest for the future, major U.S. corporations have been using their profits, and even taking on debt, to put money in the pockets of shareholders. The 216 companies in the S&P 500 Index that were publicly listed from 1981 through 2019 devoted 50% of their net income to cash dividends in both 1981-83 and 2017-2019 but increased stock buybacks from only 4% of net income in the early years to 62% in the recent years. In the decade 2010-2019, companies in the S&P 500 Index paid out $5.3 trillion in buybacks—54% of their profits—and $3.8 trillion in dividends—an additional 39% of profits.
Rather than do buybacks, whose purpose is generally to manipulate stock prices, these companies could have been persistently allocating the majority of their profits to rewarding their employees and investing in their capabilities to generate innovative products. BBB needs government-business collaboration to invest in the U.S. labor force through a combination of education and employment. Expanding access to public higher education is the easy part. It will be far more difficult to recreate a system of business-sector employment that will support widespread upward socioeconomic mobility.
Yet, U.S. business corporations have made this critical contribution in the past. From the 1940s to the 1980s, large U.S. business corporations provided both blue-collar and white-collar employees a career with one company(CWOC), which included corporate-funded healthcare and a defined-benefit pension. In the case of blue-collar workers, CWOC was maintained through union representation that ensured employment security by enforcing the principle of seniority—that is, first hired, last fired. At the white-collar level, which increasingly required at least a college education for entry, the companies would train employees, engage them in on-the-job collective learning processes, and then make every effort to retain their productive capabilities in career-long employment.
In many of the leading U.S. companies, the availability of these good middle-class jobs grew during this period. From 1954 to 1979, for example, General Motors increased employment of full-time union workers in the United States from 367,500 to 468,000, as its worldwide employment of all types of personnel grew from 576,500 to 833,000. As their main representative in collective bargaining, the United Auto Workers secured for its members increases in wages and benefits, including cost of living allowances. As a result of these corporate employment policies, wage growth tracked productivity growth in the U.S. economy as a whole from the late 1940s to the mid-1970s. Under these social conditions, even those members of the U.S. labor force with no more than a high-school education could aspire to and attain a middle-class living standard.
In terms of upward socioeconomic mobility, however, there was a big problem with this “Old Economy” business model: it was overwhelmingly a white man’s world. Prior to the Civil Rights Act of 1964, many companies had explicit “marriage bars” that required that women leave employment when they ceased to be single. The admissions policies of colleges and universities reinforced such discrimination. It was not until 1963, for example, that Harvard Business School admitted the first women into its MBA program—eight of them, hyper-carefully selected, in a class that included 676 men. And when these women graduated in 1965, the corporate employment offers they received were underwhelming.
At the other extreme of corporate employment were African Americans, who, in the immediate post-World War II decades, tended to be stuck in the lowest-paid unskilled jobs in mass-production industries. Blacks had initially begun to fill these types of jobs during World War I, at the beginning of the half-century-long Great Migration from the Southern cotton economy to the Northern/Midwestern industrial economy. A major magnet was the booming automobile industry, centered in Detroit. Even though Black employment was mainly confined to the dirtiest and most dangerous foundry jobs at the auto companies, the wages that African Americans received were a big step up from the meager incomes that they had been earning as sharecroppers in the South.
During World War II, under the scrutiny of the Roosevelt administration’s Fair Employment Practices Committee, Blacks made progress in accessing superior blue-collar jobs as part of the mobilization effort, often taking the places of whites who joined the armed forces. With demobilization, however, the upward mobility of blue-collar Blacks, as well as women, hit a roadblock as returning white males reclaimed the best manufacturing jobs.
Yet, by the 1960s, it was much more the case that the male offspring of white blue-collar households were attaining the higher educations required to enter white-collar employment, making space for Blacks to gain greater access to the better-paid semiskilled and skilled blue-collar jobs. During the 1960s and into the 1970s, moreover, there was strong demand for mass-production workers while the proportion of the U.S. labor force that was foreign born, and could compete for these jobs, was at a record low. It was in this context that the civil-rights movement was able to support the upward mobility of blue-collar Blacks, with Title VII of the Civil Rights Act of 1964 providing a formal mandate for this progress under the Equal Employment Opportunity Commission, set up in 1965.
In our latest INET working paper, we document the employment gains that Blacks made in the 1960s and 1970s, with a specific focus on upward mobility within the blue-collar job hierarchy at the leading mass-production companies. Observing the trajectory of upward socioeconomic mobility of white Americans in the post-World War II decades, it was reasonable to expect that in the last decades of the 20th century Black households would also, in turn, experience upward intergenerational mobility. But as we now know—and as we document in detail in two forthcoming INET working papers—from the 1980s, in the United States, blue-collar employment increasingly provided a precarious pinnacle for a downwardly mobile population rather than a platform for a more secure and rewarding future.
In particular, we analyze three transformations in employment relations—which we call rationalization, marketization, and globalization—that unfolded from the 1980s, with each change eroding channels of individual and intergenerational employment mobility that had provided pathways to the “American dream.” Rationalization entailed permanent plant closings, often in the face of superior manufacturing capabilities, emanating especially from Japan. Marketization meant the end of the CWOC employment norm as, for white-collar employees, “New Economy” companies valued a highly educated, younger labor force with open-system capabilities over career employees with decades of corporation-specific experience. Marketization also increasingly involved outsourcing manufacturing activities to lower-wage firms. Globalization saw U.S. companies access a worldwide labor force of highly educated personnel, while offshoring their outsourced production jobs to emerging economies in which labor costs were low but where broad-based K-12 educational investments in the labor force had been made.
Over the decades, these changes in employment relations have had a devastating impact on American blue-collar workers, whatever their race or ethnicity. But as these transformations gained force in the 1980s, it was Blacks who were most vulnerable, in large part because of their dependence on employment as blue-collar workers in mass-production industries in which job losses were most prevalent and in which they tended to be “last hired, first fired.” For the “American dream” to remain intact in the 1980s and beyond, U.S. government agencies and major business corporations needed to collaborate to “build better” through a commitment to supporting upward mobility, based on affordable higher education and a new employment system of lifelong learning.
Instead, when work disappeared, to echo William Julius Wilson, what Blacks found awaiting them were dead-end, low-paid service sector jobs, while the expansion of the War on Drugs helped to enable the descent from mass production to mass incarceration. The downward mobility of blue-collar Blacks from the 1980s, with declining life expectancy toward the end of the decade, would increasingly become the fate of blue-collar whites, as government and business failed them too. But compared to the heroin and crack epidemics of the earlier decades, during which Blacks were stigmatized and disproportionately jailed as the most visible participants in the distribution and consumption of illicit drugs, the subsequent opioid crisis and the resulting surge in “deaths of despair,” afflicting mainly whites, has been met with a far more empathic response from law enforcement.
The shared fate of downward socioeconomic mobility of large portions of the white and Black populations would feed into a racial divide with dire political as well as economic consequences. Add to that the devastation of the pandemic, and, beginning on January 20, 2021, it makes the Build Back Better agenda a daunting, if also an essential, project.
Structuring BBB’s policy agenda requires a hard and honest look at why it is now necessary to dig so deep just to build back, before we can begin to contemplate “better.” Our research suggests that the answer is straightforward. In the 1980s, as the previous era of upward socioeconomic mobility shifted into reverse, U.S. business corporations, on which so much of our productive and remunerative employment depends, succumbed to the destructive ideology that a company should be run to “maximize shareholder value”—in effect, a business strategy to concentrate America’s income and wealth in the hands of the rich.
As we have already indicated, many of the most successful corporations began to direct almost all their profits, and often more, to shareholders. As, through U.S. immigration policy and foreign direct investment, U.S. corporations gained access to a global labor force for the knowledge economy, executives who controlled resource allocation in the leading corporations lost interest in the fate of the American working class. Not surprisingly, the politicians whom the corporate executives lavishly funded slavishly adopted the same point of view.
What is to be done? As one of us has long argued, the most direct instrument for reallocating the nation’s economic resources to create employment opportunity for Americans is to stanch the flow of corporate cash to shareholders. Profitable corporations should continue to pay reasonable dividends to shareholders, but they should end the trillions of dollars in stock buybacks done as open-market repurchases. In mobilizing corporate resources to support its BBB agenda, the Biden administration can start with an easy, but impactful, first step: ban buybacks. William Lazonick
- Professor of Economics, University of Massachusetts Lowell
- President, The Academic-Industry Research Network
- Research Associate, Academic-Industry Research Network