What's Behind the Increase in Inequality?

The focus of this paper is the increase in earnings inequality over the last 30-plus years. Economists have well-developed theories that explain differences in wage levels among different categories of workers. Differences in educational attainment and skills are a major source of these differences; large organizations typically employ workers with a wide range of skills and responsibilities and pay them accordingly. As a result, the level of wage inequality within organizations is quite large. This paper does not challenge these results. It argues, however, that these theories are not adequate to explain a relatively recent phenomenon: the increase in recent decades in wage inequality among workers with similar levels of education and similar demographic characteristics who are employed in similar occupations but in different firms or establishments. These differences in wages are how most people experience inequality. Yet much of the analysis by economists has focused on developments that have enabled leading firms in the U.S. to increase their ability to extract monopoly rents.This paper reviews a wide-ranging literature that examines the increased ability of leading firms to extract monopoly rents. It also reviews the more recent and still thin literature on the increase in inequality among workers with similar characteristics but different employers. The contribution of this paper is the identification of a mechanism that reconciles these two strains of economic research and explains how the increase in rent extraction is linked to the increasingly unequal pay of U.S. workers with similar characteristics. I draw on joint work with Rosemary Batt (2014) to identify new opportunities for rent seeking behavior, and on joint work with Annette Bernhardt, Rosemary Batt and Susan Houseman (2016, 2017) on domestic outsourcing, inter-firm contracting and the growing importance of production networks to establish a mechanism that connects the increase in rents with this new type of increase in wage inequality

Domestic Outsourcing, Rent Seeking, and Increasing Inequality

An increasing share of the economy is organized around financial capitalism, where, in contrast to the past, capital market actors actively assert and manage their claims on wealth creation and distribution. These new actors challenge prior assumptions of managerial capitalism about the goals and governance of firms. The focus on shareholder value is credited with increasing firm efficiency and shareholder returns. This lecture analyzes the changes in organizational behavior and value extraction under financial capitalism

Testimony of Eileen Appelbaum Before the Commission on the Future of Worker-Management Relations

Testimony_Applebaum_011994.pdf: 107 downloads, before Oct. 1, 2020

A Primer on Private Equity at Work: Management, Employment, and Sustainability

[Excerpt] Private equity, hedge funds, sovereign wealth funds and other private pools of capital form part of the growing shadow banking system in the United States; these new financial intermediaries provide an alternative investment mechanism to the traditional banking system. Private equity and hedge funds have their origins in the U.S., while the first sovereign wealth fund was created by the Kuwaiti Government in 1953. While they have separate roots and distinct business models, these alternative investment vehicles increasingly have been merged into overarching asset management funds that encompass all three alternative investments. These funds have wielded increasing power in financial and non-financial sectors – not only via direct investments but also indirectly, as their strategies – such as high use of debt to fund investments – have been adopted by investment arms of banks and by publicly-traded corporations. This primer focuses on private equity (PE) because this is the new financial intermediary that most directly affects the management of, and employment relations in, operating companies that employ millions of U.S. workers. However, as the boundaries among alternative investment funds have begun to blur, we will touch on hedge funds and sovereign wealth funds as their activities relate to private equity. To address the question of why these new financial intermediaries have become prominent in the last three decades, we begin by outlining the changes in financial regulation in the U.S. and the characteristics of labor market institutions that have facilitated the emergence and rapid growth of private equity and other alternative investment funds. We outline the changes in size and scope of the private equity industry; describe the generic PE business model, using examples from the retail sector where it has been particularly active; and examine the sources of gains for PE investors. We then review the impact of private equity buyouts on the sustainability of the operating companies and on workers and employment relations in these companies. In the period since the collapse of the housing and real estate markets and the onset of recession and financial crisis, the risk of financial distress and even bankruptcies among the highly leveraged operating companies in PE portfolios has increased. We examine this increased risk to operating companies in this period. In addition, we discuss the experience of private equity firms in the post-crisis period, noting the signs of recovery in the sector as well as the continuing challenges facing private equity investors. We illustrate our points – both positive and negative – with brief case examples to help clarify the issues. We conclude with proposals for regulatory changes that are needed to curb the destructive outcomes associated with some types of private equity activity

Private Equity and the SEC after Dodd-Frank

A new report by Senior Economist Eileen Appelbaum of the Center for Economic and Policy Research (CEPR) shows just how much the recnt SEC investigations of private equity funds has revealed and why it remains important to continue to regulate the industry. The report reviews the widespread practices in the industry that have unfairly enriched some private equity firms at the expense of pension funds and other investors in their funds

Update: Are Lower Private Equity Returns the New Normal?

This report updates a version released in June 2016.U.S. private equity fundraising had its best year ever in 2015 -- raising $185 billion. But is the enthusiasm of investors warranted? Do PE buyout funds deliver outsized returns to investors and will they do so in the future? This report answers this question by reviewing the most recent empirical evidence on buyout fund performance; the answer is no. While median private equity buyout funds once beat the S&P 500, they have not done so since 2006 -- despite industry claims to the contrary

Expanding Federal Family and Medical Leave Coverage: Who Benefits from Changes in Eligibility Requirements?

The Family and Medical Leave Act provides job-protected, unpaid leave to employees in firms with 50 or more employees. However, coverage and eligibility restrictions result in 49.3 million employees (44.1 percent) in the private sector being ineligible for leave in 2012. This paper looks at eligibility by demographic characteristics and finds that the probability of being eligible increases with educational attainment. Young men with high school degrees or less had the lowest rate of FMLA eligibility of all the demographic groups. Our analysis of the FMLA Employee and Workplace surveys examines various proposals to expand eligibility coverage. Expanding FMLA coverage to smaller employers and to employees working fewer hours would increase access to job-protected leave for 1.4 million to 8.3 million more employees in the private sector. Women of childbearing age would especially benefit from an expansion in eligibility coverage

No Big Deal: The Impact of New York City's Paid Sick Days Law on Employers

In June 2013, New York City became the seventh -- and the largest -- U.S. jurisdiction to provide workers with paid sick days, with the passage of the Earned Sick Time Act, which took effect in April 2014. Under this law, covered workers employed in New York City private-sector companies and non-profit organizations with five or more employees accrue job-protected paid sick leave at a rate of one hour for every 30 hours worked. Employees of companies with one to four workers are entitled to unpaid sick leave. The law covers about 3.9 million workers employed in the City, 1.4 million of whom did not have access to paid sick days prior to its passage. When it was first proposed, critics of the paid sick time law argued that it would lead to a loss of jobs in the City and impose a major cost burden on employers, especially small businesses. They also predicted that such a law would invite widespread abuse by employees. However, as this report shows, these fears have proven unfounded. By their own account, the vast majority of employers were able to adjust quite easily to the new law, and for most the cost impact was minimal to nonexistent. Indeed, a year and a half after the law took effect, 86 percent of the employers we surveyed expressed support for the paid sick days law

Are Lower Private Equity Returns the New Normal?

U.S. private equity fundraising had its best year ever in 2015 -- raising $185 billion. But is the enthusiasm of investors warranted? Do PE buyout funds deliver outsized returns to investors and will they do so in the future? This report answers this question by reviewing the most recent empirical evidence on buyout fund performance; the answer is no. While median private equity buyout funds once beat the S&P 500, they have not done so since 2006 -- despite industry claims to the contrary

Economics and Politics of Work-Family Policy: The Case for a State Family Leave Insurance Program

Highlights the lack of paid sick and family leave laws and the need for family leave insurance, an employee-paid program that provides partial wage replacement when workers take time off to care for an ill family member or newborn or newly adopted child