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.”