Turning Back the Tide of Inequity

Federal monetary and fiscal policies buoyed the stock market during the pandemic, but they did not keep millions of American families from sliding below the poverty line. Yet daily news commentaries tracking quarterly earnings and shareholder profits have painted a rosy picture of the 2021 economic recovery. The latest plan by the Biden Administration to help economically struggling families is a step in the right direction, but the proposed measures are not enough to address the threats posed by the extreme wealth disparity in the US that began to take hold decades ago.

WAGE STAGNATION

According to a recent study by RAND, the wealth gap in America has grown into a chasm over the past fifty years. The report estimates that the US income gap takes nearly $2.5 trillion from the bottom 90% of workers annually and redistributes it to the top 1%, who increase their wealth by suppressing wage increases, weakening labor laws, and destroying unions. Decades of wage stagnation and benefits reductions coupled with soaring costs in healthcare, childcare, and education have hobbled an entire generation of young adults, who will struggle mightily to have the kind of economic stability that was accessible to previous generations.

The report states that although wages have kept pace with inflation––which is to say they have remained stagnant––the median worker should be making twice what they earn now considering the increase in productivity. The most acute consequence of stationary wages is that the real cost of living has outpaced inflation. Major expenses such as housing, transportation, and education that could once be sustained on a single earner’s income now require working multiple jobs or a dual-income household, according to the Manhattan Institute.

Failed federal policies are not the only reason tens of millions of Americans cannot earn a living wage within a forty-hour work week. Much of corporate America actively misclassifies workers as contractors and fights proposals to increase the minimum wage. The federal minimum wage has not risen above $7.25/hour in more than a decade. Yet, the Economic Policy Institute estimates that raising the federal minimum wage to $15/hour would pull approximately 32 million Americans (nearly one tenth of the population) out of poverty. The continued stalemate in Congress over a minimum-wage increase discounts the desperate need of average citizens in favor of corporations lobbying against it.

Hospitality and food industry leaders often claim that raising wages for service workers would force price increases on the consumer. Upon closer inspection, however, it seems some companies are more than willing to increase prices—yet for a different set of priorities. Chipotle, for example, recently increased its menu prices by 4%, which reporters attributed to the planned increase ($2-$6) in hourly pay for line workers. However, few outlets noted that Chipotle CEO Brian Niccol also received a $24M pay raise (more than doubling his salary) during the pandemic, which means he earns approximately 2,900 times more than his average employee. Additionally, Chipotle announced a plan to spend $153M on stock buybacks. The buyback will not contribute to material improvements within the company, but it will inflate the share price––which keeps the shareholders happy. It should be noted that 85% of stocks in America are owned by the top 10% of households, another facet of the extreme concentration of wealth in the United States.

CEO PAY RATIO

While most corporate sectors in America fight wage increases for lower-level employees, executive management at these companies have put no such limits on their own salaries, as shown by Chipotle. The Institute for Policy Studies reports that during the pandemic, average CEO compensation increased by 29% among many companies, while median worker pay fell by 2%. Board directors often moved goalposts in order to reward CEOs for weathering a “tough” year by changing compensation criteria so that executives could continue to qualify for large raises and generous stock options. One Bloomberg commentator’s titular quip on the pay trends was “Heads, I Win. Tails, I Win Almost As Much.” Though lavish CEO compensation is nothing new, as described below, sustaining them at the expense of workers during a year defined by economic devastation is not only morally bankrupt, but reckless.

The pay ratio gap in the US has been rising for the past five decades, with the chasm exploding in the 1990s. The ratio varies among institutions, but there is consistent agreement that while average worker pay has increased by double digits, CEO pay has increased by triple to quadruple digits. After the 2008 economic collapse, a new rule in the Dodd-Frank Act gave shareholders the right to vote on CEO compensation packages. Corporate governance experts anticipated a curbing effect on the sweeping rise in CEO pay. That has obviously not occurred even though approval ratings have decreased over time, likely because “say on pay” votes are non-binding. So, while firms may be required to listen to shareholders at the annual meeting, they have no obligation to heed shareholder recommendations.

TURN BACK THE TIDE

The US is in the midst of a Second Gilded Age, the stark inequities of which are becoming difficult to hide. Waiting for the government to enforce better tax structures, stronger labor policies, and measures to foster local economies is not a reasonable expectation.

As socially responsible investors, we understand the importance of where and how we invest. Supporting cooperative businesses is perhaps one of the most effective means of building a wage-equitable economy. A cooperative structure signifies the entity is owned by the members, who will share in the profits and losses.

Social Venture Circle, in conjunction with the American Sustainable Business Council, recently held an event called “Investing Strategically to Close the Wealth Gap.” Several funds that Natural Investments uses for clients, including Seed Commons and Apis & Heritage Legacy Fund, participated in a discussion on how employee-owned enterprises give equity and control to workers. When laborers have input and benefit from profit-sharing, they also achieve higher incomes and better workplace conditions. Through research and experience, we have learned that investing in grocery, housing, and worker cooperatives is a concrete way to cultivate an equitable, thriving society. And we continue to lead the way in supporting the growth in the cooperative economic model.

This publication is distributed to clients and friends of Natural Investments, LLC (NI). NI is an investment adviser registered with the SEC. It is for educational purposes only and is not intended to contain recommendations or solicit sales of any specific investment. Authors, representatives, or related persons of NI may own securities mentioned in here.