The Reward Work Act and Worker Compensation

By James Dail (CMC ’21)

One of the most persistent problems that the U.S. has faced over the past several decades is the persistent lack of wage growth. Adjusting for inflation, most U.S. workers have not received a raise since the 1970s. Though this has been a long-term phenomenon, this trend is especially puzzling at this particular economic moment: whenever an economy has a low unemployment rate, economic models dictate that wages must rise in order to keep the labor market competitive, since companies no longer have an abundant supply of labor to choose from. Yet this is not happening today, and wages remain low even though the unemployment rate is the lowest it has been in decades, and some industries, such as trucking, are having trouble attracting workers. Senator Tammy Baldwin of Wisconsin introduced legislation earlier this year to alleviate this problem. The legislation stems from the belief that wage stagnation is inextricably linked to stock repurchases and excessive dividend payouts. While it has noble intentions, her plan may not achieve its goals, and there are better ways of alleviating stagnant wages, such as reviving labor unions or by requiring companies to give all of their workers shares.

A common belief that emerged in the world of business in the late 1970s is that a public company exists to only to maximize its value to shareholders. This takes on the form of a higher return on stock dividends or new stock repurchases. A stock repurchase occurs when a company buys some of its outstanding shares at their trading price. After it does this, there are fewer shares outstanding, but the company’s underlying value has not changed. This boosts the stock price for the remaining shares, to the benefit of the remaining shareholders. Senator Baldwin’s plan, titled the Reward Work Act, stems from the thought that by investing all of their excess net income into stock repurchases and dividend payments, companies are neglecting to pay workers higher wages. The plan has two central components. It would ban stock repurchases outright, and a corporation’s workers would elect a third of the members of the board of directors, who would be union representatives speaking on the behalf of company employees. In Senator Baldwin’s view, this would do two things to raise wages. Firs one of the mechanisms that rewards shareholders at the expense of workers would end. Second, private sector labor unions would gain renewed power through having a seat at the table where they can better negotiate on behalf of workers.

The problem with Senator Baldwin’s legislation is that, while it would likely give workers higher wages based on data from other countries that have tried something similar, it is an imperfect solution. At its heart, it represents a trade-off between stock compensation and wages for workers, but this trade-off is needless. A solution closer to a panacea would be to mandate that all workers in a large corporation, such as those that are traded on the S&P 500, are to be rewarded with stock compensation in addition to what they are already paid in wages. At present, stock repurchases mostly affect executives, but if all workers were rewarded with stock compensation, then they could reap the benefits as well.

Wages have not increased for US workers since the 1970s. Directly giving all workers of large companies stock options to exercise would alleviate this problem while still allowing for shareholders to be compensated through share repurchases. This would translate into a more equitable society where a greater share of US citizens may lead healthy and productive lives.

 

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