Statement of Richard L. Trumka, Secretary-Treasurer, American Federation of Labor-Congress of Industrial Organizations

Testimony Before the Full Committee
of the House Committee on Ways and Means

January 23, 2007

Thank you, Chairman Rangel, and other members of the Committee.  I welcome the opportunity to be here today to testify on behalf of the 10 million members of the AFL-CIO and share our views on the vitally important question of the state of the American economy.

Any consideration of the American economy today must address one simple, but central, question:  “Why, in the richest country in the world, is it so difficult for so many families to make a living by working?”

The U.S. economy is now producing over $13 trillion a year and, despite a recent slowdown, has been growing at a respectable, if not spectacular, three percent a year.  American workers are the most productive workers in the world, and they are more productive today than ever.  Americans work hard and log more hours than workers in any other developed country. 

Nevertheless, the vast majority of American’s are struggling to maintain their living standards in the face of stagnating wages, rising economic insecurity, eroding health care and retirement benefits and mounting debt.  At the richest moment in our nation’s history, the American Dream is fading for a majority of American workers.

We can, and must, do better.  But doing so requires us to fundamentally rethink our country’s economic policies.  We congratulate the Committee for holding these hearings and hope that this is the beginning of a thorough review of our country’s economic policies.

We must restore the promise of America – that all of our citizens can expect that by working hard and playing by the rules, they can participate fully in the benefits of a rapidly growing and competitive national economy.

The Fading American Dream

American workers are suffering a now generation-long stagnation of family income and rising economic insecurity.

Since 1980, labor productivity has increased over 80 percent, but the real median wage has hardly budged, increasing only 2 percent over a quarter century.  Real median family income has increased a modest 13 percent over this period, but only because each job requires more hours, each worker is working more jobs and each family is sending more family members to work.

Moreover, the volatility of family income -- and with it the economic anxiety so many feels -- has increased sharply over the same period.  Jacob Hacker the Yale political scientist estimates that the chances of a family suffering a 20 percent or greater decline in their income over a two-year period have doubled since 1980. 

Aggravating the economic anxiety of working families are rising health care costs and dwindling retirement assets.  Only half of American families have an employer-provided retirement plan of any sort, a proportion largely unchanged for decades.  However, whereas 40 percent of workers participated in employer guaranteed “defined benefit” pension plans in 1980, today only 20 percent have such plans.  In substituting “defined-contribution” for defined benefit plans, employers are shifting the risk of retirement onto workers.  And American workers are ill prepared to carry this risk.

And, as health care costs continue to rise, employers shift more and more of the cost of health care onto the shoulders of American workers.  Again, working families with stagnating earnings are in no position to shoulder these costs and the ranks of the uninsured continue to rise. Today over 46 million Americans have no health insurance at all, despite the fact that as a nation we spend more on health care than any country in history.

The increased volatility of income and increasing burden of risk for family health care and retirement security are exacerbating the acute anxiety that so many working families are feeling. 

However, the stagnation of wages and family incomes has ruptured the crucial relation between wages and productivity that was the heart of the “social contract” that American business and labor struck in the early post-WWII period and that provided the foundation for building the American middle class.  When wages advanced with productivity from 1946-73, we grew together as a nation.  Since then, increasingly, we are growing apart -- economically, socially and politically.

Over half of all the gains from increased productivity since 1980 have accrued to the top 10 percent of American families, most of it to the top one- percent.  Indeed, the incomes of top .01 percent of American families – those earning over six million dollars a year – have increased by 497 percent over this period.

As a result of the rupture between wages and productivity, an enormous redistribution of income – perhaps the largest in our history – has occurred from poor and working Americans to the top twenty percent of our families.  Today, America has the most unequal distribution of income and wealth of any developed country in the world.  And income and wealth are more unequally distributed in America today than at any time since the 1920s.

The explosion of CEO pay is both a cause and a symbol of growing economic inequality.  Whereas the average CEO of a major American corporation earned twenty times that of an average worker in 1980, today the average CEO earns 431 times what the average worker earns.  This means that the average CEO earns more on the first working day of the year than the average worker earns by working all year.  Indeed the same CEO earns more before lunch on the first day of the year than a minimum wage worker earns all year.  

Our wealthiest families prosper as never before, but the vast majority of working families are left behind.  Working families are struggling to make ends meet on stagnating earnings and, most of all, they are concerned about the future of their children.  They are anxious about their ability to retire and terrified of what a serious accident or sickness might mean for their families’ economic security.  They are also increasingly angry about the sheer injustice of our country’s growing inequality.

Failed Economic Policies

There are many contributing causes to the stagnation of wages and the rupture of the productivity-wage relationship over the past thirty years.  Central to them all, I suggest to you, is a steadily growing imbalance of bargaining power between workers and their employers.  The implicit “social contract” that allowed Americans to grow together, and build the American middle class, in the early post-WWII decades rested on a rough balance of power between workers and their unions on one side and employers on the other. 

Today, this balance of power has eroded and the social contract with American workers is unraveling.  America’s CEOs, who once viewed themselves as stewards of our country’s productive assets, today present themselves as agents of shareholders in whose name they aggressively shift good American jobs off-shore, reduce workers’ pay and walk away from their health care and retirement obligations.  Parenthetically, it is a point of some concern among shareholders, that such a large proportion of the gains from increasing productivity withheld from employees on shareholders’ behalf, are finding their way into the compensation packages of the CEO’s themselves.

Beyond the problem of executive compensation and conflicted corporate governance practices, however, American corporations are facing two enormous challenges that have changed the way they do business and are poisoning their relationship with their employees.  The first is intense competition in product markets – produced by globalization abroad and deregulation domestically – that have limited their pricing power.  The second is pressure from institutional investors in capital markets to increase shareholder value by raising profit margins. 

If corporations must increase margins, but cannot raise prices, they must reduce costs.  And most of the costs of business are in employee compensation in one form or another.  Therefore, “the market,” as business leaders say, is forcing American corporations to aggressive reduce compensation costs however they can: by outsourcing and off-shoring work, by reducing worker pay and by shifting the costs of health care and retirement onto workers.  These same forces are behind corporation demands to lower their tax and regulatory burdens in the name of “competitiveness.”

Behind these changes in the business and competitive strategies of America’s corporations, however, there is a much more fundamental change in our country’s economic policies that I would like to briefly explore with you.  The shift in economic policies in the late 1970s from a “Keynesian consensus” to what George Soros has called “free market fundamentalism” explains much, in my view, about changing corporate behavior,  the imbalance of power between workers and their employers, stagnating wages and the growing divide between productivity and wages.

I think of the policies that make up “free market fundamentalism” as a box that is systematically weakening the bargaining power of American workers, constraining their living standards and driving the growing inequality of income and wealth in our country.

• On one side of the box is “globalization,” unbalanced trade agreements that force American workers into direct competition with the most impoverished and oppressed workers in the world, destroy millions of good manufacturing jobs and shift bargaining power toward employers who demand concessions under the threat of off-shoring jobs.

• On the opposite side of the box are “small government” policies that privatize and de-regulate public services and provide tax cuts for corporations and the wealthy, all to “get government off our backs.”

• The bottom of the box is “price stability.” Unbalanced macro-economic policies that focus exclusively on inflation and ignore the federal government’s responsibility to “maximize employment,” even out the business cycle and assure rapid economic growth.

• The top of the box is “labor market flexibility,” policies that erode the minimum wage and other labor standards, fail to enforce workers’ right to organize and bargain collectively and strip workers of social protection, particularly in the areas of health care and retirement security.

Each of these economic policy groups – “globalization,” “small government,” ”price stability” and “labor market flexibility” – may sound innocent enough.  But they each undermine employment security of American workers.  And together they powerfully weaken the bargaining power of workers and provide corporations with both the incentive and the means to enrich themselves at the expense of their employees.    

Restoring America’s Promise

To balance bargaining power between employees and their employers, rebuild the relationship between wages and productivity and restore America’s promise, we must begin by reflecting on the purpose of the economy and the goal of the economic policies that guide our country’s economic development. 

Do Americans as workers exist to serve the needs of the economy?  Or does the economy exist to serve the needs of Americans, the vast majority of whom earn their living by working?  In our view, the economy exists to serve the needs of the American people, not the other way around, and the goal of economic policy is to support a strong and internationally competitive national economy whose benefits are shared broadly by all Americans. 

We must change direction in our country’s economic policies to assure that the economy meets the urgent needs of the majority of American workers.  To do so, we must reconnect with three important economic values that resonate powerfully with all Americans.  Our country’s economic policies should assure that:

First, anyone who wants to work in America should have a job.  We need more balanced macroeconomic policies that serve the dual goal of “full employment,” as well as “price stability,” that is, the Fed’s goal should be to maximize growth and employment consistent with reasonable price stability.  The Humphrey-Hawkins Act mandates the Federal Reserve to serve these dual objectives, but only Congress can hold the Fed accountable for serving both. 

We also need more coordination between the fiscal policy of Treasury and the monetary policy of the Fed.  In recent years, the Treasury has been absent from its responsibility to help smooth the business cycle and support rapid growth and full employment.  One school of thought at Treasury is to cut taxes and hope for the best.  Another school of thought has been to balance the federal budget and hope for the best.  Neither school well serves the country’s need for rapid growth and full employment.  Moreover, both schools have supported “strong dollar” policies that have contributed to mis-aligned exchange rates, particularly with China and other Asian trading partners,  and left American manufacturers  at a distinct competitive disadvantage in global markets.

 Second, anyone who works every day  (a) should not live in poverty,  (b) should have access to quality health care for themselves and their family and (c) should be able to stop working at some point in their lives and enjoy a dignified and secure retirement. 

The increase in the minimum wage to $7.25 an hour recently approved in the House is  desperately needed and long overdue.  But this increase will still leave a family of three in poverty and dependent on public assistance.  To allow low-wage workers to participate equitably in our country’s productivity growth, we need to restore the minimum wage to its traditional level of one half the average wage for non-supervisory workers in the private sector.  Today that would be over $8.00 per hour.

We must also reform our failing health care system to provide affordable, quality care for every American.   As I have already mentioned, we spend twice as much on health care as other developed nations whose citizens enjoy superior public health outcomes.  There are a variety of approaches to health care reform that would cover the uninsured, without increasing our national health care expenditures. Many of these approaches would also provide better means for improving quality and restraining health care cost increases.  They would also help reduce the burden on employers and improve their competitive position in global markets.

Reforming our health care system and restraining cost increases would also contribute greatly to our ability to provide a secure retirement for American workers.  There are an increasing number of voices in Washington calling for “entitlement spending” reform to address long-term costs of Medicare and Medicaid.  Reforming our health care system should relax some of the pressure to cut retirement benefits and allow space for bolstering Social Security and our fragile pension system. 

And third American workers should enjoy the fundamental freedom to associate with their fellow workers and, if they wish, organize unions at their workplace and bargain collectively for dignity at work and a fair share in the value they help create.

Over 20,000 workers are illegally fired every year for exercising their most fundamental rights – freedom of opinion, expression and association.  The Congress should take immediate action to pass the Employee Free Choice Act to allow workers the freedom to organize free of employer interference and the fear of job loss.  This Act would represent an enormous step toward restoring balance between workers and their employers and helping repair the ruptured productivity-wage relationship.

I will conclude by briefly mentioning one other, particularly important, question:  The policies we need to assure a competitive American economy in a rapidly globalizing world. 

We have lost 3.4 million good manufacturing jobs since 1998 partially as a result of misguided exchange rate policies, unbalanced trade policies and corporate strategies to aggressively off-shore manufacturing operations.  Moreover, Princeton economist, Alan Blinder warns that as many as 42 million service sector jobs are also vulnerable to off-shoring, many held by highly educated and highly paid American workers.

In addition to the exchange rate policies I have already mentioned, I suggest we need a strategic pause in negotiating new international trade agreements until we can formulate the policies we need – internationally and domestically – to assure a competitive American economy able to produce more of what we consume.  We simply cannot continue to borrow six percent of GDP a year, much of it from the central banks of our trading partners.  Either we find a way to produce more or, one way or another, we will be forced to consume less.

Internationally, this requires more balanced trade policies that protect the rights of workers as well as they protect intellectual property.  Only with effective worker rights globally will the benefits of globalization be equitably shared with workers in the U.S. and abroad. 

Domestically, it requires a national economic strategy to rebuild our manufacturing capacity.  This is important not just because of the need for more good manufacturing jobs, but crucial if we are to reduce our trade deficit and dependence on foreign borrowing. 

The American economy can work for all Americans, but to do so will require a change of course for our country’s economic policies.  I do not pretend to have all the answers to the many economic challenges we face.  But I believe workable policies to these challenges can emerge from a national dialogue that involves business, labor and the public at large.  I commend the Committee for beginning this dialogue.

Thank you again for the opportunity to be with you today and share the views of the American labor movement.