Table of Contents
Introduction
This policy brief supports the spreading of capital ownership and the redistribution of profits in public companies among employees, at all levels. Granting workers a capital stake in the company would strengthen the synergy between workers’ interest and corporate performance while spurring economic growth and increasing social mobility. I shall argue for this conclusion by defining the problem that has been affecting the US ever since what Nobel laureate Paul Krugman labelled as ‘Great Divergence’ started in the late 1970s (Krugman, P. 2007, ch.7), then I shall outline how my policy would work in practical terms. Considering criticisms to my policy, I shall use economic argumentation to explain how such a policy would prove to be beneficial in reducing disparities in income and opportunity. I shall address how capital income has become very unequally distributed causing the exacerbation of income and wealth equality, and demonstrate positive implications of similar policies and approaches elsewhere.
The Rise in Income Inequality and its Consequences
With a Gini coefficient (measure of statistical dispersion to represent income or wealth distribution of a nation’s residents) of 0.49, the United States has the highest rate of income disparity among Western countries (Alston, P. 2018, p.4). My policy brief addresses the growing income disparity menacing American social fabric, which, over the last thirty years, has grown to reach levels of inequality unseen in the US since before World War II, with the very top earners capturing a large fraction of macroeconomic productivity gains (Saez, E. 2020, p.7). In 2018, top 20% of the population earned over half of all U.S. income (US Census Bureau, 2019, table D-2) while bottom 20% only earned 3.1% of (US Census Bureau, n.d., table H-3). The rise in economic inequality has been fuelling an increasing disparity in wealth distribution, leading to a rise in capital income concentration, which has been contributing to a further increase in top income and wealth shares, making the rich even richer.
Over the last three decades, large American companies have gone from having a combined profit margin of 268 billion dollars in the first quarter of 1990 to 1800 billion in the first quarter of 2019 (US Economic Analysis Bureau, 2020). This obsession with profit maximization has come at a cost with wages as a per cent of the economy decreasing over time to the point that in 2014, many American companies paid the lowest wages as a per cent of the economy in history (US Economic Analysis Bureau, 2020). To ‘maximize profits’, companies are neglecting the economy’s key growth driver: average Americans, who also happen to play a major role in consumer spending, which accounts for roughly 70% of all consumption in US economy (US Economic Analysis Bureau, 2020).
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Hence, income inequality creates the risk of a drastic fall in consumption. Consumption creates the demand that keeps companies profitable and hiring new workers, leading to economic growth. However, with the rich receiving a much larger share of all national income and wealthy individuals saving a larger fraction of their income than others (Dynan, K. E., Skinner, J. & Zeldes, S. P. 2000, p.32), they have money but rather than spending it they’d rather save it, while average Americans may not have the means to sustain their large contribution to total consumption. As a result, the economy’s total savings rise while consumption falls (Scott, H.R. & Pressman, S. 2015, p.491). Rising inequality thereby reduces economic growth and slower growth, in turn, increases unemployment, decreasing government tax revenues. Financial institutions that receive additional savings must lend their money to pay increasing interest to savers. At the same time, struggling households borrow money so that they can make ends meet. This additional lending to less creditworthy individuals increases loan risk. The result is a build-up of debt that, at some point, cannot be repaid anymore. If this sounds familiar, it’s because it is. This mechanism led to the failure of investment bank Lehman Brothers and the beginning of the Great Recession in 2008.
The consequences of income and wealth inequality are multiple and permeate America’s social fabric causing not only economic distress, but also social issues. For example, a 2002 World Bank paper found strong correlations between inequality and rates of violent crime (Fajnzylber, P. & Lederman, D. & Loayza, N. 2002, pp. 25-26). The authors state that the relationship appears to be causal and the implication is that high levels of inequality create a permanent underclass forced to compete, reinforcing class systems in society; this can lead to disillusion with the government and create a lack of social cohesion.
My Policy Design
My policy addresses the issues outlined above by making it mandatory for US public companies of all types to redistribute a part of their generated wealth among all their employees. Workers would be granted company shares in addition to their income and, as the firm for which they work for achieves predetermined performance objectives, they would receive dividends proportional to the number of stocks held. This constitutes a form of broad-based profit and ownership sharing scheme widely used in Europe, especially in France, the UK, and the Netherlands (Pendleton, A. 2001, p.32). This would encourage employees to work together towards a common goal and incentivize better company performances as all wages would be directly linked to the firm’s profits. Furthermore, workers would remain in the same company, thus favouring the development of beneficial firm-specific assets. The potential additional income would financially help employees, bridging the gap in income between blue and white-collar jobs. Workers would benefit from their collective efforts and this would help reduce income inequality and favour social mobility.
Economic Analysis
Economic theory suggests that a contributing factor to income and growth inequality is poor socioeconomic mobility. According to research by the OECD, the main mechanism through which inequality stifles growth is by undermining education opportunities for children from poor socioeconomic backgrounds, lowering social mobility and hampering skills development (Cingano, F. 2014, p.28). If we logically imply that the ability to invest of different individuals depends on their income or wealth level, poor individuals may not be able to afford worthwhile investments in education even if the rate of return (to the individual and society alike) is high. The proposed policy will change this by promoting a fairer distribution of the fruits of capitalism and allowing society to progress. As workers become active shareholders, they would have the right to participate in the appointment of the board of directors, hence, they would be granted employee representation at board level.
Workers representatives sitting in the board would ensure better working conditions and the involvement of workers in the decision-making process, also limiting informational asymmetry on company’s goals and strategies among the workforce. Profit-sharing could also allow workers to choose to put their dividends in company managed ‘emergency funds’ to help workers in difficult times, as in the case of the Covid-19 pandemic that left more than 26 million Americans applying for unemployment benefits between mid-March and April (Sherman, N. 2020).
Criticisms
However, supporters of ‘trickle-down economics’ believe that accumulation of wealth by the rich is good for the poor since some of the increased wealth at the top trickles down to the poor at the bottom. This mechanism has been formalized by Aghion and Bolton (see Aghion, P. and Bolton, P. 1997). However, critics believe trickle-down policies have damaged the U.S. economy (Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F. & Tsounta, E. 2015, pp.6-7). Further scepticism involves the idea that often one form of compensation just ends up meaning less of another. For example, if you encourage a company to provide health insurance, it may react by lowering salaries to keep overall costs unchanged (Goldman, D., Sood, N. and Leibowitz, A. 2005, p.8). But in ‘The Citizen’s Share’ (Blasi, J.R., Kruse, D.L. and Freeman, R.B. 2014) the authors reviewed a range of relevant studies and concluded that profit-sharing did increase workers’ total pay. My policy is based on a simple mechanism: in line with Rawls’ ‘Difference Principle’, it would be of the greatest benefit to the least advantaged (Rawls, J. 1971, p.70) by comprising a more ethical approach to profit maximization dynamics in US public companies.
Support for the Policy
In support of my policy, it is worth noting that profit-sharing and employee share ownership schemes have been on the agenda of the European Union (EU) for a long time in an attempt to potentially increase the Member States’ economic competitiveness (Lowitzsch, J. et al. 2009, pp.200-201). Financial participation has been statistically linked to greater productivity and higher profits (Lowitzsch, J. et al. 2009, p.218) and the successful Chinese telecom giant Huawei is a great example of this. Its owner and founder Ren Zhengfei only owns 1.4% of the company’s total capital share, leaving the rest to over 80,000 employees (De Cremer, D. and Tao, T. 2015).
Conclusion
In conclusion, I have demonstrated how the introduction of this policy would reduce income, wealth and social inequality caused by the concentration of income in the US. As I have illustrated, this would reduce the country’s economic divide, making public companies give their shares to employees and including their representatives in the board of directors. This more ethical approach to profit maximization would serve as a strong incentive, enhancing productivity while ensuring better working conditions. Over the long run, it would lead to greater social mobility and a fairer distribution of wealth.
