For years, amid increasing inequality and fears that technology will limit opportunities for work in the future, philanthropists and advocates on both sides of the political aisle have looked to workforce training programs as a primary solution. For example, last summer Ivanka Trump launched a “Find Something New” initiative to reskill workers who had lost their jobs in the pandemic. Meanwhile, as part of a broader 10-year, $750 billion initiative, President-elect Joe Biden has proposed a $50 billion investment in workforce training “to identify in-demand knowledge and skills in a community and develop or modernize training programs.”
Regardless of what happens to Biden’s proposal on Capitol Hill, the broader trendline is clear. For example, the total amount invested in workforce development by the 1,000 largest US philanthropies has already increased by over 50 percent in the last 10 years.
Funders and advocates of training programs see in these programs real possibilities for expanding opportunity and reducing inequality by bringing young, disadvantaged workers into proximity with good (or at least better) jobs than they might already have access to (e.g., in low-wage intensive sectors like fast food and retail).
There is only one problem: Expecting workforce development to reduce US inequality is largely a matter of wishful thinking.
Yes, it is true that well-designed training programs can improve worker wages. But our recent review of the latest research on training programs suggests many of them are exceedingly unlikely to reduce US inequality. Reversing rising income inequality requires investing in programs that pay attention to market conditions and workers’ bargaining power, so that workers can command a larger share of the value that their productive labor generates.
In recent decades, we know that there has been a massive shift of income and wealth from workers to owners of capital. For example, NPQ observed last year that had the income share of median workers been the same in 2018 as in 1998, these workers “would earn $6,000 a year more”—an absolutely enormous sum, as large as five CARES Act stimulus checks.
Back in 2018, Jerome Powell, chair of the Federal Reserve, testified to Congress and said the decline in the share of economic growth flowing to workers was “very troubling.” Powell based his remarks on Federal Reserve data, which showed that the overall share of income going to workers had fallen from 66 percent to 62 percent since the start of the century.
Training programs are often touted as win-win solutions, but because they raise profits as well as wages, they are too often pushing against the wind in terms of reducing inequality.
Is there a better option? There is, but it requires designing workforce training with worker power in mind. For instance, sectoral workforce programs can be designed to shift the balance of bargaining power. This kind of program is most often created when it is co-governed by both labor and management from multiple enterprises. Workforce training programs that are designed in this way have the best chance of expanding the size of the pie and ensuring a more equitable distribution that improves the well-being of working families.
To understand why, it’s important to understand the labor markets in which training programs exist. To start, it’s helpful to break the labor market into its constituent parts:
- On one side are employers who need workers’ skills and time to make goods and services that customers value, but who are limited by the extent to which they can differentiate pay for workers based on skills, because of factors like a lack of information, internal administrative constraints, and considerations of internal equity and shop-floor relationships.
- On the other side are workers, who have to balance their jobs against all of the non-work dimensions of their lives: providing care to family members, balancing civic and social activities, and handling the bumps and shocks of a society with unreliable social insurance and public goods. All of these constraints on the employee side are barriers to job mobility, strengthening employers’ market power and limiting workers’ bargaining power by reducing their ability to harness competition between employers.
The result of the two sets of frictions is what economists call monopsony. Put in less technical terms, a monopsony is a market where the buyer—in this case, the companies that “buy” the labor of workers—have disproportionate market power. A monopoly, of course, is a market where the seller has disproportionate power; think Google in search engines or Facebook in social media, for example.
Monopsony creates a situation where employers often choose to maximize their profits by paying less in wages. Depressing wages, however, is not a cost-free matter to employers. Workers may be disadvantaged in the marketplace, but they are not stupid. Workers who are being underpaid tend to leave and tend to be reluctant to apply for jobs at the underpaying employer. It is therefore common for employers who pay lower wages to complain about having high turnover and about having difficulty attracting job applicants.
Of course, one solution to having too high turnover and not attracting job applicants would be for employers to raise wages. But why do that when these employers can instead use their political power to ask the public and philanthropists to cover the bill?
Sad, but true: Too many workforce development programs end up helping fund increases to the supply of workers with the skills employers want, but little more. And if you remember your Econ 101 class, you’ll recall that an increase in supply, absent an increase in demand, lowers the price. Et voilà! Wages stay depressed.
In the US, employers’ power relative to workers has been growing for decades for many reasons, not the least of which include the plummeting number of workers represented by unions, increased employer ability to surveil the workplace, the weakened social safety net, and growing wealth concentration. As a result, investments in skills that increase workers’ productivity are unlikely to raise workers’ wages as much as they do employers’ profits. Even when a training program improves participants’ wages, it may do little to narrow economic inequality.
Indeed, there is significant evidence that the rate of economic return to schooling and other training is largely an outcome of how the economy affects employers’ power in the labor market. One study found that employers raised the skills requirements on jobs during the slack labor market of the Great Recession and then slowly (but not completely) lowered those requirements as the recession subsided. Further, when we looked at the effects of training programs in different countries, we found that in labor markets with higher union density, training programs are more likely to raise wages.
Closer to home, programs codesigned by unions and other worker organizations are much more likely to reduce wage inequality than more traditional training programs. For example, research shows that the federal government’s Jobs Corps program’s effects on wages are small and not lasting. In contrast, newer “sectoral programs” co-designed by unions and employers have shown much more promising results.
For example, the Wisconsin Regional Training Partnership, a sectoral program that unions helped design and manage, has extremely high returns. Similarly, Project QUEST—a San Antonio-based sectoral training program founded by worker and community organizations, including the Industrial Areas Foundation—has also had remarkable success. A study of Project QUEST showed that increase wage earnings persisted for participants years out, with an average $9,000 increase in earnings (20 percent over the control group), with larger effects for older workers.
Sectoral training programs are typically designed to include a number of complementary components. Participants get not only training but access to wraparound services ranging from job search assistance to childcare and transportation to career coaching at the end of the program. These programs also create very specific pathways to multiple employers after training.
We can understand these more effective interventions as both providing training and smoothing out frictions throughout the labor market. There are still research questions to sort out regarding the relative contributions of the components. What we do know is that it is possible to lift wages and provide employers with the skilled workers they need, but that reducing economic inequality requires more—in particular, a design that does not ignore power inequalities but instead consciously seeks to even the scales by providing a boost to the market power of workers in the economy and the workplace.
What are the lessons here for government and philanthropy? One lesson is that programs need to involve many employers, not be designed for just a few. This ensures workers earn a portable credential, rather than one valued by only a few employers. The litmus test philanthropists should use in judging programs should not be employers’ willingness to contribute resources to finance the program. Rather funders should look for programs where the employers involved are willing to compete for trained workers by paying higher wages and benefits.
Further, philanthropists and governments should favor programs that are co-designed by worker organizations that have power in the community independent of the training program, especially unions. This will have the dual effect of, first, ensuring benefits accrue to workers rather than being hogged by already market-favored employers and, second, selecting training programs that prepare participants for jobs in industries where workers have more power rather than sectors where workers have less power. In addition, funders would be building capacity in these organizations, many of which are accountable to members and workers rather than just donors. These are the programs most likely to build worker power in ways that reduce economic inequality.
Finally, philanthropists and government leaders focused on addressing growing inequality would be wise to look beyond training programs. Yes, well-designed training programs can reduce inequality, but it’s important to recognize that they may never be as effective as other activities worker organizations take on.
For example, compare the Industrial Areas Foundation’s very successful Project Quest training program to its recent campaign for a $15/hour minimum wage for municipal and school workers in the San Antonio Valley. Project Quest led to a 20 percent earnings increase for participants, but the minimum wage campaign led to a 50 percent wage increase, from $10 to $15 an hour.
For philanthropists and government leaders who want to narrow economic inequality it is important to recognize this: there is no way to substantially reduce inequality without changing the balance of power between labor and capital.
Empowering unions and other worker organization helps achieve this, whether these organizations act through successful skills training programs, policy reform, or with collective bargaining agreements.
Philanthropy and government, for their part, can strengthen institutions that foster more balanced bargaining between highly concentrated, organized capital and highly diffuse labor. Supporting workforce development programs can be one part of a strategy to do this rebalancing, but such an outcome is only likely if unions and related worker organizations are equal participants with employers in program design.
Suzanne Kahn is Director of the Education, Jobs, and Worker Power Program at the Roosevelt Institute.
Suresh Naidu is Associate Professor of International and Public Affairs and Economics at Columbia University.
Aaron Sojourner is an Associate Professor and labor economist at the University of Minnesota’s Carlson School of Management.
Originally Published by nonprofitquarterly.org