Capitalists of the World Aren’t Uniting Against Workers

Behold a right-left mind-meld on the economy. For decades, the thinking goes, corporations have captured a larger share of national income at workers’ expense. Sen. Elizabeth Warren (D‑Massachusetts) says this is because “American workers don’t have enough power.” On the populist right, meanwhile, this lamentable trend has happened as companies have “fattened profit margins by outsourcing their workforces.”

It’s a tidy narrative but mostly wrong.

There is no standard measure of the “labor share” — worker compensation as a fraction of gross domestic product — and commonly cited figures are inaccurate. They often omit important sources of employee compensation or distort “corporate” income by failing to account for asset depreciation or by including income from noncorporate or foreign sources. When economists correct these errors, the purported labor-share decline becomes more modest or reverts to historical norms.

Just as important, a rising share of corporate income benefits the 62 percent of American workers who own equities, padding their 401(k)s, IRAs, pension funds and education and health savings plans. With “Trump accounts” for millions of children now coming online, that figure should soon increase, further undermining the zero-sum characterization of a declining labor share as “capitalists” taking from “workers.”

Finally, inasmuch as the decline remains concerning, government policy shoulders much of the blame. In a paper published last month, economists Byunghee Choi and Choongryul Yang find that 45 percent of the declining labor share between the late 1990s and 2019 owed to a reduction in U.S. companies’ hiring and firing. This “rise of inaction” was driven by the increasing costs that firms incurred for worker-related regulatory compliance and employer-provided health insurance.

Consider the latter dynamic. As Elizabeth J. Fowler and Michael F. Cannon recently observed in The Post, exempting employer-sponsored insurance from payroll and income taxes ensures that most workers get their coverage through their employers. That provision, they add, “encourages more comprehensive plans than many workers might otherwise choose, which reduces price sensitivity.” Per-worker insurance costs thus keep climbing. Regulatory mandates in the Affordable Care Act can add to the price tag by eliminating the lowest-cost policies and requiring remaining ones to cover workers’ adult-age children.

Both regulatory and health care costs are typically incurred when a company hires — or, in the case of labor regulation, fires — an employee. When the burdens rise, employers have a greater financial incentive to avoid changing headcounts. The result is less hiring and firing, less labor reallocation across firms, weaker competition for workers, lower wages and ultimately a lower labor share. Choi and Yang estimate that health care alone accounted for about a third of the increase in labor frictions over roughly 20 years.

That is consistent with other research. Economist Niklas Engbom examined 23 OECD economies between 1991 and 2015 and found that nations with more dynamic labor markets enjoyed faster wage growth. Policies that raised hiring costs — business regulations, labor taxes, employment-protection laws — also reduced labor-market fluidity. Research from Columbia University has found similar effects, which recent events bear out: Immediately after the pandemic, the United States — Engbom’s base case for a “typical high-fluidity country” — experienced lower unemployment and faster wage growth than Europe, where governments discouraged employers from changing headcounts.

Policy can create similar costs and sclerosis for workers. Employer-sponsored health care reduces voluntary job turnover because quitting creates burdens for workers and their families, a phenomenon economists call “job lock.” Other tax-advantaged benefits tied to employment — for retirement, dependent care or transit — do the same.

Occupational licensing can likewise discourage incumbent workers from changing professions or locations, as well as block those who lack the requisite credentials. Decades-old criminal records can bar workers from licensed trades or keep them from applying for new jobs to avoid scrutiny of their past mistakes. These and other barriers suppress the job-switching through which American workers have historically accumulated skills, built bargaining power and negotiated higher wages.

Pace populist critics, then, it isn’t greedy corporations that are to blame. It’s mainly government policy, which has discouraged American employers from adjusting their headcounts and American workers from quitting for greener pastures. The resulting stagnation has meant lower wage growth and a lower share of the economic pie going to workers. With today’s U.S. labor market having been stuck in a “low-hire, low-fire” environment for a year, there’s little reason to think this will change anytime soon.

Yet for those truly concerned about the labor share, there are obvious solutions. Fix the policies that make it harder for American workers to move, switch, quit and bargain. Ensure that workers aren’t increasingly costly to employers. That might include eliminating the health care tax exclusion, consolidating workers’ tax-advantaged benefits into a single, portable savings account or letting onerous new rules for overtime and tips expire in 2028. Among the states, it could mean allowing licensed workers to operate across state lines.

Intentional or not, the government has waged a multidecade war on U.S. labor dynamism. The results are clear. What isn’t is whether anyone, on the left or right, is willing to take on the policies that got us here.