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More Evidence on Why Inequality Matters

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William SpriggsThe evidence has mounted, and is clearly accepted, that extreme income inequality has grown in the United States over the past 40 years—and by extreme income inequality, I mean a huge imbalance in income growth favoring the top 1% of the population. This is extreme because it is large enough and sufficiently imbalanced growth that it must force a rethinking of economic policies.

Too much of the debate has been taken up on wage disparities between high-tech workers and low-wage service workers, between those who program the robots and those displaced by them. All those debates are limited to understanding the stagnant income growth within those in the bottom 90% of the income distribution. In net terms, those workers have gained nothing.

Unfortunately, however, that framework continues to dominate the global consensus debating solutions to the rising inequality, whether it is from the International Monetary Fund or the Organization for Economic Cooperation and Development, pillars of the so-called troika of policy centers that define neoliberal consensus on best practices for national policy. And, the concerns about inequality echo through the World Bank and the World Economic Forum.

Recent research is pointing to a new direction of understanding why inequality hurts growth. It is based on micro-economic evidence of firm-level success and points to why policies aimed at reversing income inequality are in the interests of businesses at the firm level. By exploiting new big data, economists are modelling a different challenge that inequality creates.

Last year, Simon Gilchrist and Egon Zakrajšek looked at differences in pricing behavior of firms during the recovery from the 2008 recession and uncovered that firms live and die based on their customer base. Growth of the firm is reliant on growth of their customer base. Firms that face stagnant customer base growth and loss of customer base then live or die on the availability of credit and their liquidity. Those firms are fragile. A downturn like 2008 means they face the strongest headwinds, their customer base freezes or shrinks as their incomes fall and their lack of credit from the financial collapse can easily mean they fail, or struggle to hold on by raising prices to their remaining customers.

The macro-economic implications are clear. If the bottom 90% of the income distribution rises by only 0.7%, then there will be a lot of firms facing no growth in their customer base. Another new study this week confirms that. Xavier Jaravel shows that those with low incomes consistently buy the same products year to year. This follows basic economic rationality. Consumers with the same income, assuming fixed tastes and preferences, should be observed buying the same things over time. Having revealed their preferences for goods, if their incomes don’t change, their preferences should also be stable over time. In business terms, they do not present themselves as new customers. So, firms do not chase them. These same consumers, therefore, do not realize any gains from “competitive” markets, fighting through prices to win dominance over new products. Instead, the firms that serve the poor are the firms Gilchrest and Zakrejšek point out must survive on raising prices to hold onto their total revenue during tough times.

The rich, Jaravel found, on the other hand, face great competition for them among firms chasing expanding customer bases. In short, the rich are not poor people with more money. They do have different tastes; as economic theory suggests, rising incomes change people’s tastes and preferences. Economists, in fact, label some goods as inferior goods because as incomes rise, demand for them falls; the rich buy foie gras, not baloney, craft beers, not Bud Light. When firms chase those customers, they compete, and the benefit is falling prices for those goods.

So, there are two distortions that hurt growth when income grows so unequally. First, if income grows equally, then the 127 million American consumer units (households and families that buy things) all become potential new customers. Firms would then chase them, and the competitive dynamics of the market would create new opportunities to grow or create businesses. But, when only 1% have rising incomes, that is a growth of 1.2 million potential new customers. That is a vastly smaller set of opportunities for firms to grow.

Second, it is a limited set of tastes and preferences to go after; it is a market that lacks the scale for creating large numbers of jobs and production efficiencies that come from a mass market of 127 million new customers. This hurts productivity growth, as more jobs are created and aimed at smaller scale production.

So, rather than ask individual firms, “What would a $15-an-hour wage mean in paying their workers?” firms should be asked, “What would a 100-fold increase in their customer base mean?” Most firms are more concerned about the latter, without an understanding of ways to make that happen. But, if the economy is to grow, be dynamic and benefit workers and companies both, companies need to think about what policies make growth more equal.

This blog originally appeared in aflcio.org on May 20, 2016.  Reprinted with permission.

William E. Spriggs is the Chief Economist for AFL-CIO. His is also a Professor at Howard University. Follow Spriggs on Twitter: @WSpriggs.

 


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Unemployment Drops To Lowest Rate Since April Of 2008

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Bryce CovertThe economy added 173,000 jobs in August while the unemployment rate fell to 5.1 percent, according to the latest data from the Bureau of Labor Statistics. Analysts had expected 220,000 jobs to be added. That’s the lowest unemployment rate since March of 2008.

August jobs reports are frequently unreliable, however, and tend to get revised upward in later reports. The initial report tends to get an extra 90,000 jobs on average in later months, more than double the jobs added from revisions in other months. And revisions for June and July added an additional 44,000 jobs compared to what was originally reported.

August job growth was led by 56,000 in health care, 33,000 in professional and business services, 26,000 in food and drink services, and 19,000 in finance.

Wages rose by 8 cents in August following a 6-cent rise in July, but have risen just 2.2 percent over the last year, in line with record low rates.

This blog originally appeared at ThinkProgress.org on September 4th, 2015. Reprinted with permission.

About the Author: Bryce Covert is the Economic Policy Editor for ThinkProgress. She was previously editor of the Roosevelt Institute’s Next New Deal blog and a senior communications officer. She is also a contributor for The Nation and was previously a contributor for ForbesWoman. Her writing has appeared on The New York Times, The New York Daily News, The Nation, The Atlantic, The American Prospect, and others. She is also a board member of WAM!NYC, the New York Chapter of Women, Action & the Media.


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Unemployment: Why Won’t Congress Talk About It!?

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Change to WinAn interesting look at the unemployment rate. “What is currently a temporary long-term unemployment problem runs the risk of morphing into a permanent and costly increase in the unemployment rate” unless Congress takes action to create jobs. 

Why the Unemployment Rate Is So High – New York Times

Unemployment claims have increased slightly. “The Labor Department says applications rose 4,000 to a seasonally adjusted 371,000, the most in five weeks.”

Unemployment claims rise slightly in latest week – USA Today

“We need to avoid a lost generation of young people who will be playing economic catch-up their whole lives. We cannot stop pressing our leaders to help struggling poor and middle-class Americans.”

Crowdsourcing our economic recovery – CNN 

Even though the economy is improving, we need to do more to ensure the long term unemployed get back on their feet. Long term unemployment makes it harder and harder to provide for one’s family, and causes dramatic increases in mental illness. It’s time Washington gets busy putting people back to work. 

Long-Term Unemployed Winning Jobs Or Giving Up? – Huffington Post

This article was originally posted by ChangeToWin on January 11, 2013. Reprinted with Permission.

About the Author: Change to Win is an organization created by over 5.5 million workers – if corporations can join together to hire an army of lobbyists, working and middle class Americans must also band together and restore balance by making sure we have a strong voice and a seat at the table again.

(Colleen Gartner is an intern at Workplace Fairness.)


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How “Right to Work Shirk” Laws Kill Jobs – and Hurt All of Us

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Michigan’s recent battle makes this a good time to explain the union movement’s important role in our economy’s overall health. We’re about to explain why today’s war on unions is bad for all of us, no matter what we do for a living, and we’ll do it in four steps.

But first a word about language: “Right to work” is a misnomer for laws which let employees enjoy the benefits of union membership – at least for a little while, until they’re stripped away – without joining or contributing.

So we’ll call them “right to shirk” laws instead. And we’ll call the people who back these laws Shirkers.

And while we’re at it, let’s stop calling the states that have adopted this legislation “right to work.” They don’t give people any new rights. They take rights away, by making it illegal for employees to organize and negotiate together. They even take away employers†rights – to sign a certain kind of contract.

So let’s give the other states a name instead: In a nod to the Jim Crow origin of these laws, let’s call the ones which don’t have these laws “free states.”

Free Ride

Right to Shirk laws allow freeloaders to profit from the efforts of others – without contributing to the effort, and in a way that harms the common good. The billionaires and corporations behind these laws wouldn’t deliberately do anything like that, would they? Why, that would be like letting people make billions from the works of government – things like roads, the Internet and publicly-educated customers – without paying their fair share of taxes.

Oh, wait.

Right to Shirk laws are job-killers. Here are four steps to understanding why:

1. Think nationally, not just locally.

Advocates say these laws create jobs. They don’t. Their “evidence” is based on studies which show modest job growth in Right to Shirk states when compared to free states.  But all that proves is that places that are politically hostile to organized labor also offer other types of corporate favoritism.

It also suggests that Right to Shirk states can steal jobs from free states — as long as the jobs last, anyway.

The Shirker movement was started in the late 1940s by a handful of Southern politicians who were in the palm of big textile mills. They were able to draw textile jobs away from free Northern cities like my hometown of Utica, NY – until those jobs left this country altogether.  That’s not “creating” jobs — that’s killing good jobs and replacing them with ones that don’t pay enough.

The concept of “solidarity” has been tarred with McCarthyite smears. But “solidarity” is just another way of saying “We’re all in this together.”  The Right to Shirk crowd wants to stop that kind of thinking so it can pit state against state and employee against employee, shredding our social fabric for personal gain.

It’s no accident that the Shirker movement was started by the reactionary white politicians of the Jim Crow South. Back then they were still pining for the days when they could offer some folks the “right to work” … for nothing.

2. We’re fighting over a shrinking pie instead of making the pie bigger.

Things are bad. We need millions of jobs – and the jobs we do have don’t pay enough.

The graphic which Business Insider likes to call “the scariest chart ever” shows how far we are from creating the number of jobs needed to make this country’s economy grow and thrive again.  Job growth like that we’ve seen recently is always welcome, but it’s not nearly enough to get us out of this ditch. How do we get moving again?

To answer that question we need to know what’s worked in the past.

3. The real “job creators” are people with jobs – good jobs.

How did this nation finally escape the after-effects of the Great Depression and begin its greatest decades of economic growth? Government spending  – on roads, bridges, schools, and other vitally needed services – played a key part.

Unions were a crucial part of this process, too. By fighting for higher wages and better benefits, unions ensure that working people have the means to purchase consumer items, housing, and other goods and services.  Companies have to hire more people to keep up with demand – and the good jobs keep coming.

That’s why the Republican Party platform of 1956 boasted that “unions have grown in strength and responsibility, and have increased their membership by 2 millions” during Dwight D. Eisenhower’s first term. Back then Republicans understood that a growing middle class was good for the entire economy.  That party platform also said that “America does not prosper unless all Americans prosper.” Their rule: No shirkers.

But then in those days our economy wasn’t dominated by Wall Street megabanks – institutions that don’t build or sell anything. And politicians weren’t completely in bankers’ pockets back then, because the public wouldn’t have tolerated it.

We shouldn’t tolerate it now.

4. When you kill unions, that reduces consumer income – which kills jobs.

The Shirker assault on unions has taken its toll. Only 25 states remain free to unionize, and union membership has fallen dramatically:

 

Their logic would suggest that the plunge in union membership we’ve seen since 1960 must have led to a rise in good jobs.  Did it? Let’s take a look at manufacturing:

That’s my freehand drawing (and therefore not exact) of the trend line in union membership, superimposed by the number of manufacturing jobs in the United States.  Manufacturing jobs kept on increasing for more than twenty years, even as union membership increased. These jobs experienced periods of decline and stagnation as union membership fell, even before the devastating impact of NAFTA.

Consumer demand is vital to growth. That demand is tied to consumers’ income, and to their belief that life in the future will be as good or better than it is today.  Those are the two things we need to reinforce, and unions are crucial to that effort.

We need to get our economy growing again. Until then most Americans, unionized or not, will continue to struggle with stagnating wages and an ongoing economic drag that can feel a lot like a recession.  As Paul Krugman likes to say (he said it in our radio interview), This isn’t rocket science. We know how to do this.

Destroying unions is just another way for the Shirkers to make sure that we never do.

This post was originally posted on Our Future on December 13, 2012. Reprinted with Permission.

About the Author: Richard Eskow is a well-known blogger and writer, a former Wall Street executive, an experienced consultant, and a former musician.  He has experience in health insurance and economics, occupational health, benefits, risk management, finance, and information technology.  He has a somewhat unique perspective on the current financial crisis, since he worked for AIG for a number of years (although not in its infamous Financial Products division). Richard has consulting experience in the US and over 20 countries. Past clients include USAID, the World Bank, the State Department, the Harvard School of International Public Health, the Government of Hungary, as well as corporations and investors. He has experience in financial and data analysis, systems design, operations, and management.


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Women Haven’t Gained A Larger Share Of Corporate Board Seats In Seven Years

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In addition to grappling with a persistent pay gap, working women also have to deal with extreme difficulty ascending to powerful corporate positions, according to a report by the research organization Catalyst. As Bryce Covert explained at The Nation:

Women held just over 14 percent of executive officer positions at Fortune 500 companies this year and 16.6 percent of board seats at the same. Adding insult to injury, an even smaller percent of those female executive officers are counted among the highest earners—less than 8 percent of the top earner positions were held by women. Meanwhile, a full quarter of these companies simply had no women executive officers at all and one-tenth had no women directors on their boards. […]

Did this year represent a step forward? Not even close. Women’s share of these positions went up by a mere half of a percentage point or less last year. Even worse, 2012 was the seventh consecutive year in which we haven’t seen any growth in board seats and the third year of stagnation in the C-suite.

Overall, more than one-third of companies have no women on their board of directors. But economic evidence shows that keeping women out of the board room is a mistake. According to work by the Credit Suisse Research Institute, “companies with at least one woman on the board would have outperformed in terms of share price performance, those with no women on the board over the course of the past six years.”

This post was originally posted on Think Progress on December 11, 2012. Reprinted with Permission.

About the Author:  Pat Garofalo is the Economic Policy Editor for ThinkProgress.org at the Center for American Progress Action Fund. Pat’s work has also appeared in The Nation, U.S. News & World Report, The Guardian, the Washington Examiner, and In These Times. He has been a guest on MSNBC and Al-Jazeera television, as well as many radio shows. Pat graduated from Brandeis University, where he was the editor-in-chief of The Brandeis Hoot, Brandeis’ community newspaper, and worked for the International Center for Ethics, Justice, and Public Life.


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