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Thomas Piketty’s Capital: Income inequality and trade union decline

Tue, Jun 17, 2014

Thomas Piketty’s Capital in the Twenty-First Century has been garnering reviews in publications throughout the world. In an April 2014 column in The New York Times, Paul Krugman, the 2008 Nobel Laureate in Economics, refers to Piketty’s Capital as “discourse-changing scholarship” in analyzing income inequality under capitalism. According to Krugman, this has horrified political conservatives because it has destroyed one of their most precious myths: that capitalist society is a meritocracy that justifies the earning and deserving of great wealth by the most affluent individuals.

Although much economics research is heavily based on abstract mathematics, Piketty’s volume is written squarely within the tradition of political economy. Piketty integrates history, sociology, politics, literature and even (a little bit of) popular culture to make his hard-hitting, data-driven arguments. While the Occupy Movement in the fall 2011 promoted the slogan “We are the 99 percent!” in order to raise the issue of income inequality, what is it that Piketty reveals in his book that is new?

Utilizing tax returns as opposed to household surveys for his data, Piketty, a professor at the Paris School of Economics, argues that income inequality in the U.S. (and other European countries) in the 21st century’s second decade is approaching levels found in the Gilded Age (U.S.) and the Belle Époque (France), circa 1870 to 1910. According to Piketty, the dramatic reduction in economic inequality that occurred between World War I and World War II was an historical aberration due to the occurrence of the two wars physically destroying large parts of Europe, Great Depression-era bankruptcies as well as the introduction of redistributionist economic policies such as the U.S. New Deal. Moreover, Piketty writes, if the current economic trajectory remains unchanged, income inequality will likely increase in the coming decades.

Piketty bases his position on the growth rates of industrial and post-industrial countries over the long term. He notes that high levels of economic growth can definitely lead to reductions in income inequality.

Piketty argues, however, that the extraordinary growth rates occurring in advanced nations throughout the 20th century are unlikely to return in the future.

He notes that advanced countries experience economic growth rates of 1.5% over extended periods of time (a century or longer). Capital’s net rate of return, which historically has been 4% to 5%, exceeds the economic growth rate, which is 1.5%. Thus, as Piketty contends, wealth continues to grow larger compared to the income of the vast majority of employees.

Piketty’s solution for reducing this dramatic economic inequality is to impose a global wealth tax, which he acknowledges is utopian given the world’s current political climate. But an existing institution has been successful in reducing economic inequality in the recent past – and if strengthened, could do the same in the future.

That institution is the trade union. In the United States, labor organizations, especially industrial unions, grew impressively during the New Deal era, especially after the passage of the 1935 National Labor Relations Act. This dramatic rise in collective bargaining led to what some commentators have called the Great Compression; a period lasting more than three decades through the early 1970s when the share of the national income earned by the very wealthy was reduced by one-third and workers doubled their real wages. During this period, nonunion workers also benefited from union bargaining power due to the “threat effect” where employers increased their employees’ wages and benefits to stave off organizing drives at their firms. During this time as well, union strength lowered executive compensation at unionized companies.

A 2011 study by Bruce Western and Jake Rosenfeld, published in the American Sociological Review, indicates that from 1973 to 2007, when private sector union membership dropped 76 percent for men and 63 percent for women, wage inequality rose more than 40 percent. These findings are consistent with studies conducted by prominent labor economists such as David Blanchflower, David Card and Richard Freeman from 1991 to 2003. Their research demonstrated that a substantial portion of the increase in wage inequality since 1979 is due to falling union density.

In his book’s conclusion, Piketty states that “all activists in the unions and in politics of whatever stripe” should be extremely interested in income inequality. U.S. trade unions have successfully moderated income inequality when they were at peak strength circa 1945 to 1973. While the decline in union coverage is not the only reason for increasing income inequality seen today, union revival would help to alleviate some of Piketty’s concerns regarding the future. Whether such an outcome is as utopian as Piketty’s proposed global wealth tax remains to be seen.

Victor Devinatz
StreetWise Contributor

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