Employee stock ownership plans appear to equalize wealth and wage distributions, according to a paper by Jared Bernstein. However, their effect may be limited by plan design and access.

Bernstein is a senior fellow at the Center on Budget and Policy Priorities and served as chief economist for Vice President Joe Biden from 2009 to 2011. The paper, “Employee Ownership, ESOPs, Wealth and Wages,” was sponsored by the Employee-Owned S Corporations of America, an advocate for employee-owned S corporations.

Bernstein wrote that ESOPs help reduce income inequality in “at least two ways.” One, they increase earnings for lower income workers compared to higher earners. They also help lower earners accumulate a larger share of their firm’s profits, which tend to be concentrated among the wealthiest earners.

“When a lower-income person claims a larger share of a type of income that’s more unequally distributed, inequality is ‘mechanically’ reduced,” Bernstein wrote.

He noted that while more people own stocks today than in the past, the value of that ownership is highly concentrated, with 80% of the value of the stock market held by the wealthiest 10% of households.

About 15 million workers at 6,800 companies are covered by ESOPs, according to the National Center for Employee Ownership, or about 10% of people employed in 2015. Bernstein referred to research from the Economic Policy Institute that found between 1973 and 2014, workers’ productivity increased 72%, while median compensation increased only 9%.

Firms that offer ESOPs tend to have more equal wage distributions than non-ESOP firms, he found. “While ESOPs can increase the wealth of those who depend mostly on paychecks, equalization within the labor share remains a dominant source of inequality and a driving force behind the gap between wage and productivity growth,” he wrote.

While ESOPs may reduce income inequality “somewhat,” according to Bernstein, that “might not amount to very much. Shares of company stock tend to be distributed proportionally to salaries, linking earnings inequality to wealth inequality, he wrote. However, earnings are less concentrated than wealth, so some equalization can still be expected.

Furthermore, considering the limited number of employees who have company stock options, and their relatively small holdings in those options, the income equalization effect is fairly limited. Bernstein noted that “accumulation matters: Those who’ve been in ownership plans for years have a lot more to show for it than newcomers.”

Bernstein pointed out that substituting wages for stock ownership doesn’t do anything to lower income inequality. If  “a dollar from an ESOP gets traded off with a dollar from wages,” he wrote, “then inequality is less likely to be reduced, and equally importantly, workers are not better off.”

Furthermore, “given the ‘time value of money’ (a dollar today is worth more than a dollar tomorrow),” he argued, workers are “arguably worse off” if wages are substituted with ESOPs rather than supplemented.

That’s not typically an issue for firms that offer ESOPs. Bernstein found that companies that offer ownership plans were more likely to also offer higher compensation and other retirement plans. The participants themselves were more likely to have other forms of wealth, too, like 401(k)s, even though balances in ESOPs were more than twice as large. “From the important perspective of diversification, the fact that company stock tends not to be an ESOP participants’ sole holding is of course a feature, not a bug,” Bernstein wrote.

Research suggests that firms with ESOPs weather economic storms a little better than non-ESOP firms. Bernstein pointed to forthcoming research from Ana Kurtulus and Doug Kruse that found “employee ownership firms had higher survival rates during 1999-2010.” Firms that didn’t offer ESOPs were 20% more likely to disappear and 30% more likely to go bankrupt or be liquidated.

Furthermore, firms with deeper employee ownership were more stable than firms with less, according to the report.

Research to explain that effect is limited, but Bernstein suggested a cooperative culture and more flexible wages may be behind it, as firms can “’can increase worker effort and general willingness on the part of workers to make adjustments during times of economic distress, which can increase firm productivity and lower the firm’s need to lay off workers during financial distress.’”

Another possible explanation is that ESOP firms are simply more financially secure. Bernstein referred to NCEO data that show ESOP firms have fewer loan defaults, with an average 0.2% default rate on bank loans between 2009 and 2013, compared with an average annual rate between 2% and 3.75% for mid-market firms.

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