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Growth and Worker Capitalism
Many Americans believe there is an income gap." A good response to this view is to paraphrase Mark Twain: Reports of income inequality are greatly exaggerated. This discussion should begin by dispelling four of the main myths about income inequality.
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who seem locked-in at the bottom, for the overwhelming majority of the American people, the trend toward upward mobility is consistent.
Consider the findings of a study by economist Isabelle Sawhill about economic mobility. She took the years 1984 through 1985, when the US was having a high growth rate of 6%, and found that 40% of those in the economic quintile the lowest one-fifth of income moved up out of that category in a single year. In America, the tide is still rising.
The tendency to exaggerate income inequality also tends to obscure the amazing economic gains of recent years.
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According to a recent Peter Hart survey, 43% of all American adults now own stock, a number that has doubled in recent years. Say that a worker earns $32,000 annually and puts 5% of his or her wages into an IRA each year. After 30 years, based on a 10% rate of return the average rate since the stock market opened in 1927 the worker will have accumulated almost $350,000. Thats real wealth for ordinary people.
The good news far outweighs the bad. But there is still some news that many people dislike.
There is a core underclass in the United States that is not sharing in the benefits of our booming economy. As of 1996, over 36 million Americans were classified as being in poverty. Of these people, 7.2 million were unemployed. The remaining poor include welfare recipients, children, low-income workers and the elderly poor. The good news is that this number is down from over 15% of the population in 1993. But saying that 14% of Americans are poor should make no one happy.
Another group that is falling behind is comprised of people without adequate skills and education. They have an at-best 12th grade education and are having difficulty making ends meet. In 1996, over 36 million American adults almost 19% of the adult population lacked a high school diploma.
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The relationship between education and earning power is clear. According to the 1996 Economic Report of the President, each additional year of post-high school education is worth roughly 5- to 15% in additional income. Among persons 18 years and older, those not holding a high school diploma have difficulty competing and need real, practical help.
How can ordinary people be helped to increase their income and share in the wealth of the economy? How can worker capitalism be fostered?
This discussion should begin with a single premise: We cannot lose sight of the need to maintain strong growth and full employment. The benefits of growth are apparent to any observer of the economy. If the growth rate were to be raised by half a percentage point over the next seven years, on a cumulative basis, tremendous gains would be achieved. Real GDP would increase by $675 billion; direct compensation to labor wages and salaries would increase by $390 billion; and the pretax income of the average family would increase by almost $6,600.
The question, then, is how to keep the economy growing and workers employed while increasing compensation for current workers and bringing the underclass into the economic mainstream? The answer is the four Ts" training, taxes, technology and trade along with new models of compensation for Americas workers.
First, the educational system and job-training programs need to be significantly improved. A high percentage of college freshmen have to take remedial reading classes just to function at the university level. The anecdotes about high school graduates who cant add are well known. The school system (kindergarten through high school) needs choice and competition while government job programs need to be consolidated and reformed.
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This needs to done because education pays. By the early 1990s, the earnings differential between high school and college graduates was almost 90%. As noted earlier, each additional year of schooling after high school is worth from 5 - 15% in higher earnings. Education raises productivity in manufacturing, for example, a one-year increase in the educational level of workers equals an 8.5% hike in productivity.
In addition to improving training and education, tax reform is needed, most especially when it comes to Social Security, a great program that needs to be saved. Right now, the FICA tax is eating up 15% of workers paychecks. By 2005, Social Security will be running in the red and will cease to exist within about 30 years. If workers were allowed to put all their Social Security contributions into an IRA, based on a 10% annual rate of return, someone making $32,000 would have $840,000 after 30 years. Private investment accounts work. Theyve worked in Chile, Britain and Singapore. And they would work in America.
Next, the United States needs to stay on track with its strong technology base. Two-thirds of productivity growth stems from technology improvements. Higher productivity means higher compensation.
As mentioned earlier, high-tech companies need qualified workers. The success of the American economy depends on high technology. And that means substantial improvements in education and training.
The fourth t" is trade. Trade now accounts for over 30% of our economic growth. Trade means employment security in well-paying jobs here at home. Companies that export offer workers, on average, 15% more in pay and 40% more in benefits. America must go where the money is overseas to keep growing.
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Finally, the US needs to look well beyond the old static models of hourly wages and time clocks. Incentive-based pay, stock ownership, 401(k) plans, employee stock option programs, or ESOPs, and bonus compensation are, taken together, the new way of helping our workers more fully benefit from our economy.
Consider: In 1975, slightly less than 250,000 workers less than a third of percent of everyone employed nationwide were involved in some form of employee ownership. By 1996, almost 16 million employees representing 12.4% of total civilian employment participated in employee ownership plans.
Here is a specific example: At Oregon Steel Mills in the 1980s, a management-led buyout, using the companys employees stock ownership program, gave employees 100% ownership of the company. The result? Productivity skyrocketed by 300%. Sales and earnings grew on average by more than 40% from 1989 through 1992. The average pay of $50,000 before benefits is 25% higher than the industry average and more than 100 Oregon Steel employees became millionaires in the value of their stockholdings just three years after the company went public in 1988.
Americas workers are competing successfully in the global economy. The US must continue to help these workers do so. They must be turned into entrepreneurs and turn laborers into capitalists. This worker capitalism" is the recipe for economic success.
The United States is poised on the edge of a new era of opportunity and prosperity. Americas workers need the tools to thrive in this new era, tools that offer greater individual empowerment, technology, training and higher compensation. Thats where the future lies, and it is a bright one for Americas workers.
© Friedrich Ebert Stiftung | technical support | net edition fes-library | Juli 2000