Over the past 30 years, business has been pushing labor for concessions on wages and workplace flexibility. While wages stagnated and benefits were reduced, profits as a share of GDP rose to an all-time high. This is no doubt the reason why, despite a sluggish economic recovery, major Wall Street indices have been setting records. However, impending immigration reform may be the first step toward reversing this trend.
The history of capitalism has been characterized by a constant tug-of-war between labor and employers. It has not been a zero-sum game; business thrives when labor is cheap and flexible, but demand also increases when workers can buy more. Nevertheless, at any time there have always been losers along with winners.
When modern capitalism first emerged in Europe and North America early in the 19th century, employers enjoyed a decisive advantage. They could pay subsistence wages, set arbitrarily long hours and routinely use child labor. Safety and other workplace rules barely existed, nor were there any fringe benefits, even though some paternalistic bosses, of their own free will, provided housing, healthcare, education and even pensions to their workers.
The second half of the 19th century was marked by political and economic strife as workers demanded better conditions and higher wages. By the start of the 20th century the balance of power began to shift away from employers and toward labor. While there were various theories why this was so—the threat of leftist ideologies, the spread of representative democracy and the rise of trade unions—the more likely explanation was the changing relationship between supply and demand for labor. The rapid pace of industrialization and the emergence of large, labor-intensive industrial plants operated by tens of thousands of workers created huge demand for labor. Immigration and migration from countryside to cities could no longer satisfy this demand adequately, especially since urbanization also reduced fertility rates.
The first decades after the end of World War II were the high point for labor. The workforce became heavily unionized and blue-collar wages, both union and not, afforded single-breadwinner households middle-class lifestyles, complete with private homes and luxuries, such as several private cars. Not only did a 35-40 hour workweek become the norm, but employers paid for a variety of generous, and costly, benefits.
While it is true that more opulent workers provided higher demand for goods and services produced by companies, labor markets of the 1960s and 1970s became inflexible and cut into corporate profits. Profits before taxes as a share of GDP fell in the early 1950s and stayed low until the early 1980s, bottoming at around 6%.
However, the underlying supply and demand relationship in the labor market began to shift again around 1980. Technology enabled more production to move overseas, such that American workers were forced to compete head-on with much less costly and more flexible labor in poorer countries. This, plus growing illegal immigration in the century’s final decades, shifted power to employers and put downward pressure on wages.
Consensus estimates put the number of undocumented aliens in the United States at 10-12 million. A higher proportion of them are in the workforce compared to overall population, which means that there are some 7-8 million illegal workers. They make up a solid 5% of the workforce, but their impact on wages and workplace flexibility is even greater than their numbers suggest. Illegal immigrants take less prestigious jobs—such as working in a slaughterhouse, bussing tables at restaurants or cleaning houses. To attract legal employees to such vital occupations, wages would have had to go up, setting off a chain reaction of higher wages across the boards, higher prices and lower profits.