Promoting Inclusive Growth: We Know What Works
The Local Solutions Support Center is excited to continue a blog series featuring our 2022 Research Cohort. Each month, a member of our Research Cohort will explore a different topic and its connection to preemption. Here, Mildred E. Warner of Cornell University explores how abusive state preemption legislation suppresses wages, undermining inclusive growth. Warner explains how we can promote more inclusive growth by raising returns to labor.
How can we promote inclusive economic growth? This question has gained importance, especially since the Great Recession. States and localities spend billions in economic development subsidies. They also work to create a business-friendly regulatory climate. The goal is to promote jobs and economic growth. But despite dramatic increases in productivity since the 1970s, workers’ wages have been relatively stagnant and income inequality has grown. According to the Economic Policy Institute, from 1979 to 2018, overall worker productivity in the U.S. economy increased by 70%, while the compensation for a typical worker rose by only 12%.¹ Why have workers failed to benefit from overall gains in productivity? Economic structure, population characteristics and public policy all play a role.
What can governments do to help promote inclusive growth? Raising the minimum wage, promoting fair labor standards, paid leave (which was part of the House-passed Build Back Better legislation), and job training and skill upgrading programs are all part of the mix. Thirty-one states have now set minimum wages above the federal minimum of $7.25/hour.² Fourteen states now have mandated paid sick leave.³ Hundreds of cities have adopted living wage policies. These policies raise the floor and promote more inclusive growth. COVID-19 increased recognition of the importance of these policies and led several additional states to raise their minimum wage and mandate paid sick leave.² ' ³ Unfortunately efforts to address these issues at the federal level have not been successful. This makes state action especially important.
But there is another movement afoot where states preempt local governments from enacting these economic equality policies. Twenty-six states preempt local minimum wage laws, and twenty-three preempt local paid leave laws.⁴ These preemptive laws are more common in states with lower minimum wages and those with Republican control.⁵ This preemption of local policymaking is used as a means to promote economic growth, on the argument that such labor protections will undermine economic growth. Is that true? The evidence suggests the opposite.
“This preemption of local policymaking is used as a means to promote economic growth, on the argument that such labor protections will undermine economic growth. Is that true? The evidence suggests the opposite. ... Corporate capture of state legislation does not yield an economic productivity premium. But it does suppress wages, and this undermines inclusive growth. ”
A recent study looked at overall economic productivity and returns to labor (calculated as total wages divided by total number of workers) for all US counties. It found that where state policy is more focused on corporate interests, returns to labor are lower but overall productivity is not higher. Corporate capture of state legislation does not yield an economic productivity premium. But it does suppress wages, and this undermines inclusive growth.⁶
The process is not uniform across jurisdictions. The study found the highest returns to labor are in suburban areas. Labor returns in metro core areas and rural areas are lower, despite higher overall productivity. Labor also has lower returns in areas where natural resources, manufacturing and health and education sectors dominate the economy.
What can be done to help workers capture more of their share of economic productivity? Historically unions have played a role. This study found labor returns are higher in states with higher unionization levels, but productivity is not lower. According to another study of unionization’s effects, this is because unions force managers to manage better.⁷
The American Legislative Exchange Council (ALEC) has been especially effective in pushing state preemptive policies that they believe support corporate interests. Drawing on a study measuring ALEC-sponsored bills from 1996 – 2013,⁸ we found that states that passed more ALEC bills had lower returns to labor but did not have higher productivity.⁷ The same was true for states under Republican control – lower returns to labor but no difference in overall productivity.
So the answer is clear. We can promote more inclusive growth by raising returns to labor. Such protections will not hurt economic productivity. States and cities have a role to play, in setting policy that raises the floor and promotes more inclusive growth. Everyone can win in an economy that supports workers. Even in states that have preempted progressive action, cities have joined with coalitions of community, labor and religious groups to push for change.⁹ ' ¹⁰ Change is possible, and it benefits us all.
The pandemic has highlighted the need for a more balanced economic policy, which promotes productivity and supports workers. Workers are essential. They drive economic productivity. To do so, they need fair wages, paid sick leave and child care supports. By abusing preemption, many states are getting in the way of localities pursuing such policies. And the recently passed Federal Inflation Reduction Act (the scaled down version of Build Back Better) failed to include any of these economic supports. While early pandemic policy supported paid sick leave and premium pay in the short term, we need permanent policy shifts at both the state and federal levels to lead the country toward more inclusive growth.