The Wagner Act’s Original Sin

Dear Oren,

Thanks for the invitation to converse on what’s wrong with American labor law, how to fix it, and the potential for sectoral bargaining in particular.  I thought I’d use this first volley to share my own thinking about the history, trajectory, successes and failures of 85 years of U.S. labor law and unions, which provides the context for why I think sectoral bargaining is a far better model than the workplace- and enterprise-based bargaining system that has largely failed American workers.

Where I think you and I start with a lot of agreement is that things aren’t going particularly well for most American workers right now. Wages have been largely stagnant for a generation. Intergenerational economic mobility is now lower than at any point since World War II.  The risk and cost of retirement and higher education has been transferred from employers and governments to families. Housing, higher education and healthcare costs have grown 2.5x to as much as 7x faster than wages.

And as you’ve pointed out, it now takes 53 weeks of median male earnings or 66 weeks of median female earnings to pay for (only) housing, health care, a vehicle, and college tuition, up from 30 weeks of (male) earnings in 1985. Additionally, according to research released this week by the RAND Corporation, a strikingly disproportionate share of the nation’s GDP growth since the mid-1970s has been captured by the top 1% of income earners, at the expense of the bottom 90% (despite the significant increase in women’s workforce participation rates over the same period of time); in fact, the share of taxable income going to Americans in the bottom 90% has actually fallen from 67% to 50%, while the top 1% more than doubled its share.

And this was before the COVID-19 recession, which has done nothing but accelerate the already historically high levels of income inequality and erode family financial security even further.

As I’ve noted here before, unless workers can wield real power – economic power, bargaining power, political power – no amount of policy discussion is likely to result in any different outcome. In the United States and most other developed countries, unions are the vehicle through which workers have united for power and for a seat at the table with their employers, within their industries, and at various levels of government decision-making.

But America’s system of labor law—the rules governing the organizing of workers into unions and then their collective bargaining with employers—is on its deathbed, with only 6% of private sector workers covered by collective bargaining agreements, even though record-high number of American workers, especially millennials, would prefer to be represented by a union.  This is in part because withering attacks on unions by employers and their political proxies have been so effective, but the underlying problem is that the United States has a uniquely flawed set of labor laws to begin with, creating unions that were simultaneously too optimized for workplace-level conflict but too weak to prevail, too focused on existing members and employers and not enough on broader economics or the common good. Employers in turn have every incentive imaginable to oppose unions and erode worker power, even if that’s bad economics in the long run.

The Wagner Act: A Workplace-Centric Model

Inequality, financial insecurity and instability, and a deep economic crisis are the same problems Congress sought to address when it passed the National Labor Relations Act (or “Wagner Act”) in 1935.   The preamble of the Act reads, in part:

The inequality of bargaining power between employees who do not possess full freedom of association or actual liberty of contract and employers who are organized in the corporate or other forms of ownership association substantially burdens and affects the flow of commerce, and tends to aggravate recurrent business depressions, by depressing wage rates and the purchasing power of wage earners in industry and by preventing the stabilization of competitive wage rates and working conditions within and between industries.

Experience has proved that protection by law of the right of employees to organize and bargain collectively safeguards commerce from injury, impairment, or interruption, and promotes the flow of commerce by removing certain recognized sources of industrial strife and unrest, by encouraging practices fundamental to the friendly adjustment of industrial disputes arising out of differences as to wages, hours, or other working conditions, and by restoring equality of bargaining power between employers and employees.

Or in other words: in an era of powerful corporations, we needed unions to make sure workers had the bargaining power to increase wages, both for their own family financial stability, but also to enable them to participate fully in the economy as customers, and to ensure that there were lawful ways to solve industrial disputes short of crippling strikes and lockouts.

For a few decades, the new system worked – especially in large industrial settings like manufacturing and transportation, and later in hospitals and hospitality.  American workers joined unions by the millions, a new middle class arose, poverty declined, and American consumers powered three decades of economic growth in large part through consumer spending and rising demand.   Big business and big labor existed in a de facto detente in the post-War era, agreeing to limit spheres of conflict to periodic bargaining and strikes while each benefitting from a growing economy and the proverbial tide lifting all their boats.  For most of the 20^th century, inequality was an inverse function of unions’ market share (or in labor-argot “density”): when unions were stronger, more national income flowed to the middle class and less to the wealthy.

But the Wagner model was deeply flawed.  Because it was at its core a workplace-centric model, non-union workplaces had lower costs and more flexibility than unionized ones, even within the same company.  As long as the dominant employers in major industries like autos, steel, and transportation were heavily unionized, unions were able to raise wages and improve benefits during periods of economic growth, and protect hard-won gains during recessions, without putting their employers at any real disadvantage versus each other.   But the opt-in, voluntarist, workplace-by-workplace system of collective bargaining coverage created ample opportunities for union avoidance.  The more any given industry became non-union, the more remaining unionized companies perceived a need to limit union gains at the bargaining table, or bust their unions entirely, to remain competitive.  Improved transportation and communication networks and increasingly mobile capital allowed employers to relocate work to non-union geographies in the U.S. south or the global south, or simply to non-union workplaces, subcontractors or franchisees.

Unions, meanwhile, faced their own set of perverse incentives.   Only union members vote in union officer elections and only union members pay dues, so many unions tended to focus only on extracting short-term economic gains for their existing members from existing employers and not on organizing the competition or making long-term partnerships with industry to improve quality and productivity along with compensation, in turn creating even more disincentive for firms to tolerate unions, at least if they had any other choice.   And America’s unions never had a real seat at any table beyond the workplace – not in the boardroom, much less at an industry-wide or economy-wide level.

The collective bargaining system of the 1930’s was already under stress by the early 1970’s.  Then came the perfect storm: the rise of a market-fundamentalist ideology that equated shareholders’ interests with the common good, labor-saving technological advancements, globalization, and governments both Democratic and Republican that increasingly saw unions as (variously) outdated, irrelevant, or pernicious.  Most of the big strikes of the 1980’s failed.   Multiple attempts at federal labor law reform within the Wagner framework failed.  Unions went from representing 1-in-3 American workers to 1-in-10.  The weaker unions became, the less impact they could have on wages and benefits, and the more fiercely they clung to existing employer, industrial and geographic strongholds. In the absence of industrial power, they turned to political power and public policy to bolster organizing and bargaining campaigns, and to secure via regulation what they could not attain through bargaining.  Today’s geographic and industrial map of still-strong unions thus reads like a list of publicly-funded or publicly-regulated industries (transportation, telecommunications, commercial construction, health care, education, public service, gaming, hospitality) in states and cities with pro-union politics (basically: the route of the Acela Express, the Pacific coast, and a handful of cities in the upper-Midwest).

And just as the middle-class share of national income grew while unions were strong, since the 1970’s it’s been declining at a nearly identical rate as unions themselves.  While union members themselves are unquestionably better off than non-union workers, enjoying higher pay, better benefits, and more job security, they are now a tiny fraction of the private-sector workforce.  After 85 years of the National Labor Relations Act, we’re back where we started: stagnant wages; high levels of inequality; financial insecurity and instability for a majority of families; low rates of economic mobility; and unions that are too weak and inaccessible to solve the problems most workers face.

Moving Beyond Wagner: Sectoral Bargaining

The American model isn’t the only model.  In most European countries, and several in the global south, bargaining doesn’t take place primarily at the workplace level, and collective bargaining coverage isn’t restricted to workplaces that have affirmatively opted-in through a government-supervised representation election.  Rather, unions bargain (often with trade associations) to set terms and conditions of employment by industry and geography, regardless of the union membership at the workplace or firm level.   This is called sectoral bargaining.

In my view, sectoral bargaining has several advantages over enterprise- or workplace- level bargaining.

First, sectoral bargaining covers all (or most) of the workers in a sector, leading to much more extensive coverage, which in turn means far more workers benefit from negotiated wages, benefits, and working conditions.   Only 10% of U.S. workers benefit from union contracts, but 95% of workers do in Austria, 96% in Belgium, 91% in Finland, etc.

Second, sectoral bargaining also covers all employers in a sector, eliminating incentives for employers to oppose union formation.  With labor costs within a sector taken out of competition, it’s both less appealing and infinitely harder for employers to engage in a race to the bottom through outsourcing, subcontracting or workplace-fissuring.  And with labor costs far more equal among competitors within a sector, more productive firms become more attractive to capital investments.

Third, with the issue of union representation and labor costs settled through sector-wide agreements, not through workplace conflict, unions and employers can focus on more than just their disagreements: partnering to provide worker voice and productivity improvements through works councils, establishing union-provided employee benefits, and calibrating negotiating demands to promote economic growth, high employment levels, and long-term competitiveness for a nation’s industry.

The result? According to the OECD, the developed countries with some sort of sectoral bargaining generally have higher employment levels, higher wages, lower levels of wage inequality (overall and specifically for women, immigrants, and non-college educated workers), and more leisure time for workers. Enterprise-bargaining countries (the U.S. along with the U.K., Japan, Canada and South Korea) generally have lower wages, more inequality, and longer work-weeks.

Finally, the more problems can be solved through bilateral collective bargaining between private sector actors (unions and trade associations), the less need there is for government to directly intervene in the employment relationship.  The unions and trade associations in Sweden, for example, are fiercely resistant to government meddling in anything that can be solved at the bargaining table. And Angela Merkel argued against a minimum wage law in 2013 as unnecessary because wages are best determined through collective bargaining coverage.

When your book The Once and Future Worker was published, I found myself agreeing with you on far more than I thought I would, and especially delighted that a serious policy thinker on the political right would argue for a set of worker-centric economic policies.  But I was disappointed by your skepticism of pattern or association bargaining (the closest tools available in the U.S. to European-style sectoral bargaining).

I’ve enjoyed our conversations on this issue over the last couple of years and am curious how your views have developed.  Is it hopeless for a progressive former labor leader like me to imagine a zone of potential agreement with a right-of-center policy leader like you?

In Solidarity,

David Rolf