Thursday, February 04, 2016
A new report from the Center for American Progress (CAP) by Richard Freeman, Eunice Han, Brendan V. Duke, and David Madland laments what they term the “hollowing out” of the middle class. The authors seek to make “America a middle-class country once again” by means of increasing union coverage.
Regarding the central assumption of the report, the claim that the middle class is getting hollowed out, is an exaggeration. As CAP admits, “about three-quarters of the reduction [in the middle class] resulted from a rising share of high-wage workers.” Between 1969 and 2007, the household income of the median adult rose by 52 percent. This increase was seen across the income distribution — even the income of those at the 25th percentile of the income distribution grew by 40 percent from 1969 to 2007.
The relevant issue is how well the middle class is doing overall. And the evidence overwhelmingly suggests that Americans are doing much better than they were in the past.
Manhattan Institute senior fellow Scott Winship has written in these pages that “the median adult in the larger ‘lower income’ group in 2007 was better off by 48 percent than the median lower-income adult in 1969, and the median of the hollowed-out ‘middle-income group’ was higher by 54 percent.”
The CAP report describes an increase in inequality, not a decline in well-being. While some measures of income inequality have increased, this is due to demographic trends. One reason for income inequality is the increasing number of earners per household in upper quintiles as women moved into the workforce in record numbers in the 1980s. Does CAP want women to go back to the kitchen?
Another demographic change is the shrinkage in household size at the bottom of the income scale. This is due to the increased longevity of today’s seniors and to the higher numbers of divorced people and single-parent households.
CAP proposes that the path to a stronger middle class is through unionization. The authors suggest that around 35 percent of the “disappearance” of middle-class workers is due to declining union coverage. Get more workers into unions, the logic goes, and wages will rise.
But this line of thinking makes the mistake of assuming that unionized workers are similar to those that do not belong to unions. Union members are not equally distributed across occupations, industries, and regions. They are highly concentrated in higher-paying government-sector jobs, including teachers and federal employees. Forty percent of union members are public-sector employees. In fact, the unionization rate among public-sector workers is 36 percent, while only 7 percent in the private sector.
Furthermore, unionized workers are more heavily concentrated in urban areas and the Northeast, where both the costs of labor and living are higher. Bureau of Labor Statistics (BLS) data show that 26 percent of New York workers belong to unions; only 3 percent of South Carolina workers are union. Yes, New Yorkers earn more, but a nationally averaged $100 bill buys $87 worth of goods in New York and $110 in South Carolina, according to the Bureau of Economic Analysis.
Unionized workers also tend to be older. BLS data show that 14 percent of workers who are aged between 45 and 64, a peak-earnings group, belong to unions. In contrast, 10 percent of workers aged 25 to 34, and 4 percent of those aged 16 to 24, have joined unions. Younger workers earn less. A 25-year-old who joins a union will not get a 55-year-old’s salary.
The report argues that “unions generally advocate for public policies that raise wages for low-income workers such as higher minimum wages.” But such policies are counterproductive. Recent data from Washington State to Washington, D.C. show that raising the minimum wage results in a loss of low-skill jobs. This is borne out by studies by many academic economists, including David Neumark, Ian Salas, and William Wascher, and Jeffrey Clemens and Michael Wither.
It is troubling that although unions routinely advocate minimum-wage hikes, they seek to carve out exemptions for themselves, so that their members do not have to get paid the higher minimum wage. This has occurred in Milwaukee, Seattle, San Jose, Oakland, and Chicago, among other cities. This enables them to organize large workplaces, such as hotels, by telling employers that if a union contract is signed, employers will not have to pay the high minimum wage.
Further, there are several examples of unions bargaining for unnaturally high wages and then driving unionized firms offshore. This is undoubtedly a reason for the decline in unionization over the past several decades.
Consider the case of Pillowtex, a textile firm in North Carolina. In 1999, after a long battle, the plant was unionized. In 2000 Pillowtex filed for bankruptcy, and the firm failed in 2003. Instead of getting a raise, Pillowtex workers ended up unemployed.
Volkswagen is another example. In 1987, the company closed what was then its only assembly plant in America. During its ten years of operation, workers went on strike several times, halting production lines and forcing the company to pay higher wages. Volkswagen moved its production to Mexico and Brazil to take advantage of lower wages. Last year, auto workers at the VW plant in Chattanooga, Tenn., voted against joining the United Auto Workers union.
Another likely reason for the decline in unionization is the shifting needs of workers who increasingly emphasize flexibility and mobility. Only 5 percent of young workers belong to unions. They are not attracted by failing pension plans, lack of merit bonuses, and structured hours. The outdated union model is antithetical to the entrepreneurial workplace that millennials desire.
With many union retirement plans slated to become insolvent long before millennials retire, unions are desperate to add more dues-paying young people to their membership rolls. But few clamor to sign up. Union dues add another 2 to 4 percent tax to each paycheck. Initiation fees add another $50 to $100.
The Center for American Progress report makes some dubious claims about the “decline” of the middle class, which its own text refutes. In addition, the argument that increasing union coverage is the pathway to higher wages does not stand up to scrutiny.
In fact, the middle class is getting “hollowed out” — but only because workers are getting richer. That’s progress. Moreover, unionization rates have declined over the past 20 years because people want to keep more of their own money rather than paying union dues. CAP is proposing a flawed solution for a problem that does not exist.
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