Canadians across the political spectrum have realized that something has gone wrong with the economy.
Much debate has centered on inequality and the ever-widening gap between rich and poor in many developed nations. The Gini coefficient is a number used to measure how distant a country is from completely equal distribution of incomes. 0 represents complete equality (all incomes equally distributed) and 1 is complete inequality in that one person would hold all the income and the rest of society would have none.
Canada’s Gini coefficient has steadily risen since the early 1990s and, relative to other developed nation peers, ranks 12th out of 17 (the US being the most unequal).
While there is reason to pay attention to these stats and to discuss the merits of more equal societies, inequality should be thought of as a symptom – not the disease. In many ways, focusing on inequality is a distraction from the true structural issues which cause this stratification.
The real culprit is a fake form of capitalism which has concentrated economic and political power in the hands of a few dominant corporations, leaving workers and consumers with little to no bargaining power. Canada, and to a larger degree – the United States, has devolved from free markets ripe with competition, new entrants, and innovation to a monopolistic (and oligopolistic) system where a few firms control every industry. For more evidence of this, see our blog post here.
Capitalism is the greatest system ever to lift people out of poverty and create wealth, but the “capitalism” we see today is a far cry from competitive markets. What we have today is a grotesque, deformed version of capitalism. The distorted representation we see is as far away from the real thing as Disney’s Pirates of the Caribbean are from real pirates.
A major economic puzzle in recent years has been: why are wages growing so slowly despite an expanding economy and a booming stock market?
Workers have created massive gains in productivity that have helped the economy grow yet, unlike previous economic expansions, there has been no big increase in wages. Workers are not sharing in the gains from economic prosperity, and they are feeling the squeeze.
Employee Compensation as a Percentage of GDP has been Falling for Years
(Source: Economic Cycle Research Institute)
Due to industrial concentration, a number of firms now have monopsony power – that is, they are the only buyers of labor. A monopoly means there is one seller, and a monopsony means there is only one buyer. In a monopsony, workers have little choice in where they work and have little negotiating power for wages with employers. In a healthy economy, many firms would be competing equally for workers and would be incentivized to entice new hires with higher wages and better benefit packages. But monopsonies make it easier for firms to depress worker wages.
Recently, economists looked into the problem of labor market monopsony to find out just how bad the situation is. The evidence is depressing. Economists Marshall Steinbaum, Ioana Marinescu, and Jose Azar looked at job markets across the US to see how concentrated employers were. They found that almost all commuting zones where workers would search for a job were highly concentrated, and this dragged down wages. The results of wage decreases were extremely troubling. They showed that going from a very competitive to a highly concentrated job market is associated with a 15-25% decline in wages.
The research explains why the average worker feels that the economy is tilted against them. Workers’ options in industry after industry are limited, and they are bargaining against monopolists and oligopolists when it comes to getting paid. Add to this the changing nature of work from full-time to contractual or ‘gig,’ and a disassociated and disempowered workforce emerges.
So what can business owners do to play their own part in restoring true capitalism and a better balance for workers? Despite record gains in stock markets in recent years, workers are mostly left out of these capital gains. The unequal distribution of ownership is more pressing than the issue of income.
Instead of solely advocating for policies like minimum wage, workers should instead be demanding an increase in ownership of the capital they’ve created. Workers should demand stock ownership.
Louis Kelso championed the first employee stock ownership plans (ESOPs) by concluding that the public has a right to own the gains from industry. In the US, only about 50% of Americans own any stock at all and usually through a disassociated 401k plan. Companies that are family owned, meaning they have a longer-standing interest in the company’s success. Kelso claims, “A human individual can earn income just as legitimately through privately owned capital as through privately owned labor.”
It is incumbent upon all business owners, CEOs, and industry leaders to consider how best to help workers share in economic gains they’ve helped create. When the middle class falls out of an economy, the economy starves itself. Increased employee stock ownership would help restore more equilibrium to the worker vs company power imbalance, and would help ameliorate some of the excesses of income inequality.
Praise for Myth of Capitalism
“Tepper and Hearn have written an impressive and important book, documenting …the very substantial increase in concentration on the supply side of US industry, leading to a decline in competition and a substantial shift in market and political power away from consumers and labor and toward the owners of capital. The consequences extend to rising inequality, slowing productivity growth, and shifts in the pattern of regulation in favor of corporations. Pieces of these growth patterns have been described before. But this book uniquely pulls it altogether. One hopes that it will have the impact that it clearly deserves.”
- Michael Spence – NYU, Nobel Prize in economics 2001
“What’s wrong with American capitalism today? Why is it so good for the elite, and so bad for everyone else? Is inequality the problem? Tepper and Hearn make the case that inequality is the symptom, not the disease. The problem is too little competition, not too much. They provide an immensely readable and persuasive account, superbly well-informed by a mass of recent data and research.”
- Sir Angus Deaton – Princeton University, Nobel Prize in economics 2015
“A broad-ranging and deeply-researched analysis of the inexorable growth of monopolies and oligopolies over the past four decades. Tepper makes a compelling case that the government’s failure to reign in tech titans and other corporate behemoths is at the root of perhaps the most troubling macroeconomic trends of our time, including rising inequality and slowing productivity…”
- Kenneth Rogoff – Harvard University, Former Chief Economist – IMF, Author of bestseller This Time is Different