With the unemployment rate at a historic low of 3.6 percent, American workers have enjoyed a rare moment of increased bargaining power. Employers in many sectors are confronting a truly tight labor market for the first time in decades and face the threat of workers leaving for greener pastures. Service-sector workers have received wage increases that they have never previously experienced, raising expectations for more. In the leisure and hospitality sector, worker compensation grew at an annual clip of 9.1 percent between June 2021 and June 2022. Fast-food employers have begun offering minimum hourly wages of $15 an hour—more than twice the federal minimum wage, and a previously fiercely resisted demand of the Fight for $15 campaign that began a decade ago.
After forty years of deflationary, wage-suppressing neoliberal policies, just a few months of inflation was all it took to cause some influential economists and policymakers to abandon their brief commitment to boosting worker power. We would be foolish to follow their lead. Instead, we should be focused on consolidating and institutionalizing the fragile gains workers have made during the pandemic.
A generation of employers conditioned by deflationary policy had become accustomed to a ready supply of cheap and always-available labor. Tight labor markets produce very different dynamics. Higher labor costs can lead to more innovation and productivity growth: employers need to run their operations more efficiently and invest in both training and labor-saving capital equipment. Rising wages also help shift workers from low-productivity employers who depend on cheap labor to high-productivity employers who have more robust sources of competitive advantage. Most important, full employment increases the bargaining power of workers. Employers must compete to recruit, retain, and motivate workers. That competition bids up wages, increases job security, and mitigates the ultimate power of bosses: the threat of termination.
The recent union election wins at Starbucks and Amazon are likely due in part to these conditions. Workers have been emboldened to take on the challenge of organizing new unions at large multinational employers—something virtually unheard of in recent decades in the United States. As a management-side labor lawyer recently put it, “I’ve been doing this for 40 years and this is unlike anything I’ve seen in my career.”
The backdrop to these labor market conditions is the expansionary fiscal and monetary policy pursued by Congress, the White House, and the Federal Reserve in the wake of the COVID-19 recession. Congress passed the $2.2 trillion CARES Act in 2020 and followed up with the $1.9 trillion American Rescue Plan in 2021, which included extended unemployment benefits, cash payments to all Americans, and an expanded Child Tax Credit for families with children. Combined with the Federal Reserve’s accommodation of fiscal policy with its commitment to what Chair Jerome Powell called “maximum employment,” these policies proved that the painfully slow recoveries from recent recessions were the result of policy choices, not deep economic causes. The question facing those who want to continue to foster worker power is this: how do we make the federal government’s embrace of these policies the norm, rather than an exception allowed only because of a global pandemic?
With the Federal Reserve Board’s decision yesterday to raise the federal funds rate by 0.75 percent, the fourth rate increase this year, workers’ recent gains are under threat. Raising interest rates slows business investment, which raises the unemployment rate. Higher unemployment reduces workers’ ability to demand higher wages, which lowers the demand for goods and relieves pressure on prices, while also directly reducing costs of production.
However, tight labor markets are simply not the cause of the current surge in inflation. Wage increases, while high by recent standards, are actually lagging behind price inflation, meaning that wages are dampening, not fueling, inflation. The actual drivers of inflation are the Russian war in Ukraine, supply bottlenecks due to decades of underinvestment, and corporate pricing power in key industries like energy and food. While raising interest rates will eventually cool off demand and tame inflation, it will do so across the entire economy, not just in the sectors affected by shortages, geopolitical strife, and corporate pricing power. It’s simply the wrong tool for the job, and it will set workers back at a critical moment, before they have had a chance to consolidate and institutionalize their increased power.
Corporate power, not worker power, is a major part of why inflation has persisted longer than many economists expected. In a recent column, Paul Krugman explained a phenomenon known as asymmetric pass-through, or “rockets and feathers,” which has long characterized the gasoline market. When costs rise, prices rocket up. But when costs fall, prices decline more slowly, like a feather. This phenomenon is very difficult to explain without the exercise of market power by oil refiners and marketers. They can raise prices by more than a simple pass-through of cost increases, while holding on to the price hikes when costs finally go down. There is plenty of evidence that this dynamic is contributing to the stubbornness of inflation in other industries as well.
As Josh Bivens of the Economic Policy Institute has pointed out, corporations are not just passing on cost increases to customers; they’re padding their profits as well. Profits account for over half of the recent increase in prices, well above the historical average of 11 percent. A paper by Mike Konczal and Niko Lusiani of the Roosevelt Institute finds that recent price hikes have been largest in the least competitive industries—as measured by pre-pandemic markups over costs—suggesting that monopoly power plays a role in driving inflation.
We have had forty years of policies biased toward high unemployment and disempowering workers. Transferring power from CEOs and financiers to the working majority would require a reconstruction of the structure of economic life in the United States: a national commitment to full employment, restrictions on employer power and discretion, and collective power for workers on the job. While our present system is coded for unfairness, inequality, and injustice, it can be designed to advance fairness, democracy, and justice. Durable laws and policies could help ensure the gains workers have made during the current economic expansion do not disappear once this period has passed.
Until fast-food workers’ Fight for $15 campaign won large minimum wage increases in several cities starting in 2011, creating a massive natural experiment, most mainstream economists believed labor markets were well-approximated by models of perfect competition. In these blackboard models, labor markets existed in a power-free state where both workers and employers were “price-takers” with no influence over wages. Any attempt by policymakers to boost the power of workers would introduce “distortions” resulting in higher unemployment rates, the “misallocation” of workers from the most socially valued occupations, and a wage-price spiral of inflation, with employers forced to pass on wage increases to consumers in the form of higher prices.
This year, Nobel laureate economist David Card—who was ahead of his peers in recognizing the role of employer power in setting wages—reflected on why economists have finally come to accept that their supply-and-demand models were wrong. His answer is that economists previously lacked good data to test their theories and simply assumed they were true based on their logical coherence. (He also, rather gratuitously, blamed the left-wing reputation of the originator of the theory of imperfect labor markets, Joan Robinson.) We now have better data, he argued, thanks in large part to the decade-long efforts of Fight for $15, which proved that policies that “artificially” raise wages do not necessarily cause unemployment, as the models predicted.
In our view, there are two important lessons here. First, policy gatekeeping by economists who warn of dire consequences to “interventionist” policies should generally be treated with skepticism. By fretting about the “unintended consequences” of doing almost anything, including fighting recessions with debt-financed fiscal policy, the dominant mode of thinking privileged the status quo and protected those who already have wealth and power. During the 1930s, President Roosevelt and his allies in Congress took a radically different approach. As he put it, “The country demands bold persistent experimentation. It is common sense to take a method and try it. If it fails admit it frankly and try another. But above all try something.” The only way to get evidence of the effects of policies is to test them out.
Second, blackboard economic models that ignore and naturalize how law and policy structure, enable, and create market processes generally do not correspond to reality. The balance of power between workers and employers does not flow from nature. Employer power to set wages depends on the effects of fiscal and monetary policy and antitrust and labor law. In concrete terms, employer power to set wages depends on alternative employment options for workers (fiscal and monetary policy), the effective ability of workers to change jobs (antitrust), and workers’ rights to form unions and confront bosses as a collective (labor law). The experience of the past few years has taught us that the supposed hard limits of theoretical economic models are often quite soft in the real world.
The United States tolerated a slack economy with slow recoveries through the last several business cycles. In sharp contrast, the recovery from the COVID-19 recession has been a remarkable reminder of the power of fiscal and monetary policy to fight unemployment, and of the needlessness of the suffering endured by unemployed and underemployed workers.
There are a number of ways that government could intervene in support of recent trends that have favored workers.
An obvious place to start is labor organizing. The historical record shows that unions do not grow slowly and steadily, but rather in sudden bursts, or “moments of madness.” It is vital that each upsurge is accompanied by the institutionalization of worker power in strong unions that persist after the wave of organizing activity subsides. Moments of union growth are rare and fleeting, and dependent to a large extent on government support, such as the 1940s War Labor Board’s requirement of union recognition in exchange for a no-strike pledge from workers. The PRO Act, which passed the House in 2021, would help institutionalize worker power by raising the penalties for violating workers’ rights to unionize, allowing unions to organize beyond increasingly fractured employers through secondary boycotts, and financially stabilize unions in “right to work” states by allowing them to collect dues from more workers.
Meanwhile, full employment—operating the economy at its maximum potential, without leaving workers who are willing and able to work idle—is crucial not only for the role it plays in raising working-class expectations in general, but also for its effect in compressing wage inequalities and mitigating structural disadvantages within the working class. Although the Civil Rights Act of 1964 restricts bosses’ ability to discriminate based on race, color, gender, sexual orientation, and other traits, slack labor markets give employers the freedom to do just that. During times of slack, the gap between employment rates of men and women, and Black and white workers, grows, while the gap shrinks when markets tighten.
It is also vital to directly confront the array of practices that employers currently use to disempower workers. Executives and managers, for example, collude with each other—and against workers—by agreeing to cap wages and not hire or recruit each other’s employees. In the mid-2000s, Steve Jobs, Eric Schmidt, and other Silicon Valley titans conspired along those lines, allegedly costing the tens of thousands of affected workers billions of dollars in lost wages and salaries. Employers have also locked tens of millions of workers in place by imposing non-compete contracts on them. These contracts restrict workers’ freedom to switch jobs or start a business in their line of work or industry for as long as two years after they leave. As the current hot labor market shows, effective job mobility—and credible threats to leave—are an important source of worker power. Non-competes deprive workers of vital leverage. The Federal Trade Commission should prohibit non-compete clauses for all workers regardless of income or occupation and allow all to leave for more rewarding positions—and to escape abusive and discriminatory workplaces. (As part of a labor and public interest coalition, the Open Markets Institute, where we both work, petitioned the FTC for such a rule in March 2019.) The government should also vigorously prosecute wage-fixing and other collusive conduct among employers—something that has only begun in earnest under the Biden administration.
In recent decades, powerful firms have used restrictive contracts to create business models in which they wield employment-like control but shed the duties of employers. Gig corporations are the most prominent example. Uber dictates pick-ups, routes, fares, and wages of drivers but insists they are “independent contractors” not entitled to the minimum wage, overtime, workers’ compensation, and the right to unionize. Such arrangements are everywhere, in fields as disparate as child care, construction, fast food, and poultry growing. These business models proliferated because the Supreme Court, starting in the late 1970s, permitted powerful lead firms to use contracts to control parties outside corporate boundaries, setting detailed mandates and prohibitions on the activities of those parties.
The federal government should outlaw these business models of “control without responsibility,” just as antitrust law restricted many contractual methods of control of independent workers and businesses in the postwar era. Working in concert with agencies such as the Department of Labor and National Labor Relations Board (NLRB), the FTC has expansive power to grant independence to Uber drivers, fast-food franchisees, poultry growers, and other currently corporate-controlled “independent” businesses and workers and compel firms that exercise employment-like control to accept the responsibilities of employers.
Employer power is also a function of market structure and firm size. Across the country, a few employers dominate many labor markets—a problem that is especially severe in rural areas and outer suburbs. On average, local labor markets effectively have just 2.3 employers potentially competing for workers. A worker with few prospective employers can expect to earn anywhere from 5 to 17 percent less than a similar worker with many potential places to work. And the problem goes beyond local labor markets. Large retailers such as Amazon and Walmart squeeze their suppliers for better terms, and these suppliers in turn cut wages and benefits to their workers to protect their margins.
Federal antitrust authorities should use their full suite of tools to target employer concentration and supply chain power. They should stop mergers that unduly concentrate local labor markets. They should also target practices such as below-cost pricing and extraction of concessions from suppliers. By enforcing laws passed in the early and mid-twentieth century, the Department of Justice and the FTC can stop mergers among rival employers and the abuse of buyer power.
Democratizing the economy requires giving workers not only more choices over employment options among different employers, but also more voice and power within the businesses that employ them. Businesses are social organizations that make some of the most important decisions affecting the political economy—what products to make, what kind of technology to invest in, where to build new plants and facilities, and how to distribute the proceeds from production among executives, shareholders, and workers. Employment should confer a kind of economic citizenship in the firm. Current law, however, structures business firms as authoritarian regimes with all power concentrated in the hands of boards and managers serving financial interests.
A key feature of this legal regime is at-will employment. Rare among other wealthy countries, at-will employment gives employers the ability to fire workers for any reason or no reason at all, outside of limited protections for workers unionizing or raising safety concerns, or for reasons pertaining to race, age, gender, religion, and certain other personal traits. Employers routinely violate even these limited protections with little consequence, a problem that the PRO Act—and more funding for the NLRB—would help alleviate.
Just-cause provisions, which almost every union contract contains, can limit this power of private government by requiring employers to provide a reason for firing a worker. But unions represent less than 7 percent of the private-sector workforce. A legally protected right to just cause for all workers would extend this right more broadly, and likely encourage more workers to unionize by mitigating the employer’s threat of termination. New York City ended at-will employment among fast-food businesses in July 2021; employers in the five boroughs now have to show that workers engaged in misconduct or failed to perform their jobs adequately in order to fire them. All workers should enjoy such protections.
While U.S. workers have a right, albeit a very weak one, to negotiate pay and working conditions through a union, they typically have no right to participate in firm decisions on pricing and investment. Under current American law, those rights belong to the board of directors, who typically see their role as maximizing short-term returns for shareholders. Under this “shareholder primacy” model of firm governance, boards and managers have focused on disgorging cash from corporations to hand over to investors via dividends, share buybacks, and mergers and acquisitions, rather than reinvesting profits in operations and employees. Limiting the power of shareholders by banning buybacks would be an important step to giving workers a greater role in corporate governance. But we should go further and minimize shareholder primacy with worker representation on corporate boards of directors.
The current moment of worker power may ultimately be fleeting. In addition to the Federal Reserve raising short-term interest rates to reduce aggregate demand and tame inflation, Congress, judges, and other policymakers have made many choices that keep workers weak: the failure to increase the minimum wage in line with inflation, the approval of “free trade” agreements like NAFTA without worker protections, the legalization of permanent replacements for striking workers and the ban on secondary boycotts, and the acceptance of legal gimmicks like avoiding labor law through the use of temp agencies, franchisees, or misclassifying workers as independent contractors, to name just a few. But just as economists were wrong to ascribe labor market conditions to immutable laws, we should not naturalize this state of affairs. National policymakers have the capacity to disperse power currently concentrated at the top of the social order to workers through a commitment to full employment, legal checks on employer discretion, and support for unionization.
Were Congress and federal regulators to enact the policies we have suggested to rebalance power in favor of workers, the sort of wage-price spiral that some political figures and pundits have incorrectly blamed for recent inflation would indeed become a possibility. The likelihood of this sort of inflation is increased by the fragmented nature of U.S. labor law, which pushes bargaining to the company or even plant level, and the unwillingness of business to share power. Because workers and consumers are the same people at the aggregate level, unions in the 1930s and 1940s sought policies to balance wage and price increases. Textile union economist Solomon Barkin called for automatic antitrust investigations into price increases in concentrated industries. Most famously, United Auto Workers leader Walter Reuther demanded that General Motors not raise the price of cars in response to wage increases during contract negotiations in 1946. Unions also understood that there might be a need for wage restraint in some cases. But that kind of balancing requires a business community willing to concede some power to workers; instead, labor was rebuffed in its aims to share responsibility for managing the postwar economy. As Barkin lamented, all that unions could do in response was make wage demands on the profits that companies reported.
While it is hard to imagine a social democratic economy with that level of worker power today, the task must have seemed equally daunting when the laissez-faire global order collapsed after the First World War. Just as then, we will have to build the ship while sailing it. At the beginning of the Great Depression, the labor movement hardly existed. The politicians behind the New Deal had no grand plan, but they responded to growing pressures from outside, and their policies further boosted the organized strength of workers in turn. If Democrats want to respond meaningfully to current conditions and build a lasting base of support, they should enact policies that create the constituencies and the power to win further reforms. Err on the side of bold experimentation in support of worker power.
Brian Callaci is the Chief Economist at the Open Markets Institute. He previously worked at the Strategic Organizing Center and Workers United.
Sandeep Vaheesan is the Legal Director at the Open Markets Institute.