A better deal for the world's workers

The last four decades of globalization and technological innovation have been a boon for those with the skills, wealth, and connections to take advantage of new markets and opportunities. But ordinary workers have had much less to cheer about.

In advanced economies, earnings for those with less education often stagnated despite gains in overall labor productivity. Since 1979, for example, US production workers’ compensation has risen by less than a third of the rate of productivity growth.

Labor-market insecurity and inequality rose, and many communities were left behind as factories closed and jobs migrated elsewhere. In developing countries, where standard economic theory predicted that workers would be the main beneficiary of the expanding global division of labor, corporations and capital again reaped the biggest gains.

As a result of the global COVID-19 pandemic, labor problems are receiving renewed attention – and rightly so. But how can workers not only get their fair share but also have access to decent jobs that enable meaningful lives?

One approach is to rely on the enlightened self-interest of large corporations. Happy, fulfilled workers are more productive, less likely to quit, and more likely to provide good customer service. MIT’s Zeynep Ton has shown that retail establishments can cut costs and boost profits by paying good wages, investing in their workers, and responding to employees’ needs.

But many firms that claim to take the high road in labor standards are also vehemently anti-union; taking the low road by minimizing workers’ pay and say is too often a profitable corporate strategy. Historically, it is the countervailing power of labor – through collective action and union organization – that has brought about the most significant gains for workers.

So, a second strategy to help workers consists of increasing the organizational power of labor vis-à-vis employers. US President Joe Biden has explicitly endorsed this approach, arguing that the shrinking of the American middle class is a consequence of the decline in union power, and has vowed to strengthen organized labor and collective bargaining.

In countries such as the United States, where unions have become significantly weaker, this strategy is indispensable to redress imbalances in bargaining power.

A third strategy, which aims to minimize unemployment, is to ensure adequate labor demand through expansionary macroeconomic policies. When fiscal policy keeps aggregate demand high, employers chase workers – rather than the other way around – and unemployment can remain low.

Research by Larry Mishel and Josh Bivens of the Economic Policy Institute shows that macroeconomic austerity is a major reason why US wages have lagged behind productivity since the 1980s.

By contrast, the Biden administration’s aggressive fiscal response to the COVID-19 crisis has ensured that US wages have increased amid a sharp fall in unemployment. But although tight labor markets can help workers, they can also pose an inflation risk.

Moreover, macroeconomic policy cannot target the lowest-skilled workers or the regions where jobs are most needed.

A fourth strategy, then, is to shift the structure of demand in the economy in order to benefit less-educated workers and depressed regions in particular. The shortage of secure, middle-class jobs is closely linked to the disappearance – as a result of globalization and technological change – of blue-collar manufacturing work and service-sector sales and clerical jobs.

Policymakers must focus on expanding the supply of jobs in the middle of the skill distribution in order to reverse these polarizing effects. This entails revising existing industrial and business-development programs so that incentives go to the firms most likely to generate decent jobs in the right places and are designed with these firms’ needs in mind. Conventional industrial policies that target skill- and capital-intensive manufacturing, and rely heavily on tax breaks, will not do much to spur the expansion of good jobs for those who most need them. Copyright, Project Syndicate, 2021

Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government,