Trickle Up Economic Development

Combating Inequality with Worker Cooperatives

Combating Inequality with Worker Cooperatives

“Work is a path toward personal and communal self-realization, individual perfecting and collective betterment; it is the exponent of a more unquestionable social and humanistic consciousness.”

― Don Jose Maria Arizmendiarrieta, Founder of the Mondragon Cooperative Corporation

Table of Contents

1. Executive summary

2. Background

3. State of Affairs

4. Why Worker Cooperatives?

5. Case Studies

6. Supportive Policies

7. Conclusion

8. Bibliography

Executive Summary

This paper aims to address the policy issue of inequality and by extension an economic model of development to reduce its degree. First, the background of the issue is investigated. Tracing the historical development of inequality before and after World War II. How inequality has resurged and to what extent. What policies have been used to combat it and why they haven’t been effective. Then we examine worker cooperatives or worker-owned and managed businesses. Poorly understood but highly effective means of both reducing inequality and providing equitable growth for communities and regions.

We look at a few case studies of cooperatives such as the world’s largest cooperative, Mondragon, which has raised the living standards of the Basque Country in Spain while making it a productive industrial powerhouse. We also examine the Emilia-Romagna region in Italy, the second wealthiest region with high living standards that produces over a third of its GDP from its vast network of variously sized cooperative businesses dating back from the mid1800s. These two regions dominated by cooperatives do not just rank well economically within their respective country but also generally across Europe and the world. They also provide objective indispensable historical data to support the notion of worker cooperatives as means for equitable economic growth that reduces inequality and that produces tangible benefits to their communities. They exhibit what is possible for cooperative economic development in terms of scale and scope across all sectors of the economy. Additionally, we cover a similar cooperative economic experiment, called the Cleveland Model, operating here within the US but at a much smaller scale that is changing minds about what is possible here at home. Through the Evergreen Cooperatives incubated in the Cleveland Model, we see a local economy that has been marginalized due to deindustrialization being transformed and democratized for the benefit of its inhabitants.

We then look at a few supportive policies aimed at increasing employee ownership and the number of worker cooperatives in the economy. Specifically policies like Democratic Ownership Funds that aim to transfer a firm’s equity to its workers or the concept of the Right of First Refusal which gives workers the option to buy their workplace if it is being closed to convert it to a worker cooperative. Additionally, we look at a special unemployment law called the Marcora Law which allows the unemployed to use their unemployment insurance to fund a worker cooperative.

We conclude by highlighting that the very cause of inequality lies within the ownership structure of firms and that the only irreversible way to truly reduce it and keep it at equitable levels that a democratic society could find acceptable and healthy is to democratize the economy through the establishment of worker cooperatives.

Background

For decades Americans have been fed the notion that a rising tide raises all boats. That as the economy grows everyone would benefit. This had been the case for two and a half decades from the late 1940s to the early 1970s. Dubbed the ‘Golden Age’ where the pay (wage + benefits) of the average worker rose in tandem with those of the highest income earners as the economy grew. However, in recent times that has not been the case. Since the late 1970s inequality has been accelerating unabated. In fact we are now entering what some are calling a new gilded age. As the shares of all income held by the top 1% has risen to over 20% starting in 1999 (see figure 1). The same levels we saw during the first gilded age that preceded the Great Depression.

At the same time overall productivity has also risen in an arithmetic like growth pattern while overall hourly compensation started stagnating around the same time that inequality started rising (see figure 2). When looking at both graphs one gets the sense that inequality and productivity have grown in lock-step. A conclusion that isn’t far from reality given the data we have collected over the past 40 years.

The economic effects of the gap between productivity and worker compensation have also been compounded by the decline of industrial production around our urban centers. This process has been most visible in the ‘rust belt’ region that cuts across the Northeastern and Midwestern United States. Since the 1980s this expansive area has experienced industrial decline, population loss, and urban decay. In the pre-decline periods manufacturing accounted for over 17 million jobs, however that number now hovers around 12 million jobs (see figure 3). Part of this decline is attributed to the offshoring of jobs, automation, and increased global competition.

Lastly the decline of unions over the same period of time have contributed to lower wages overall for all workers in addition to increasing the precariousness of the working class. While diminishing their political clout and voice at the political negotiating table. As in the other cases this particular process happened as a greater share of income was captured by the top income earners (see figure 4).

What this historical analysis and the data presented indicate is that companies and the people who own and run them are doing much better than the people who work at these companies. Additionally it shows that those who own the companies have the political and monetary capital to change regulations and laws to their benefit. Based on these facts, the question of why this is the case becomes important in fundamentally addressing the issue of inequality and all of its negative effects. Arguably this type of situation can only occur because of the lack of ownership and control that employees have within the companies they work in, as they have no say on the distribution of the gains from their productivity. These same gains can be and are converted into political capital to the benefit of those who control them solidifying their economic position and increasing their political clout if need be at the expense of workers and their communities.

State of Affairs

To date the types of policies recommended in combating inequality have been ineffective at slowing or reducing inequality as evidenced by the data presented. Most of these policies can be categorized as ‘Trickle Down’ economic policies or redistributive and include:

1. Tax rate reductions for corporations & the wealthy. These sort of policies form the backbone of what trickle down economic prescriptions are about. They suggest that lifting incomes at the top helps lift all boats through greater economic growth. However, most new research on the matter point to the opposite outcome and conclusively show that such policies hinder growth and increase inequality.

2. Tax credits for lower income households. The Earned Income Tax Credit (EITC) and Child Tax Credit are such policies. Both act as a short term stimulus to qualifying recipients. The EITC is designed to incentivize people to join the labor force and for low wage earners to increase their hours. While the Child Tax Credit is a finite amount of money that tax paying parents can qualify for based on their income and number of dependents/children they have. While both have been shown to be effective in boosting incomes they are not comprehensive and their effects are temporary. Additionally they do not change the underlying cause of inequality defined earlier as the lack of ownership and control over the incomes generated through labor within enterprises.

Worker Cooperatives (co-ops):

A cooperative in general is a farm, business, or other organization which is owned and run jointly by its members, who share the profits or benefits. There are several types of co-ops, including cooperatives owned by:

• The people buying the co-op’s goods or services called consumer cooperatives;

• There Co-ops owned by producers collaborating to process and market their products called producer cooperatives; and

• Co-ops owned by groups uniting to enhance their purchasing power called purchasing cooperatives.

• However, the most transformational type for society in terms of reducing inequality directly are co-ops owned by the people working within them known as worker cooperatives.

A worker cooperative defined specifically as a worker-owned company, is a one person one-vote, employee owned and controlled business. Worker cooperatives as we know them rose to prominence during the industrial revolution in England as part of the labour movement.

As democratic entities co-ops can be managed either by a direct democratic process, where workers assemble and vote on issues directly, as illustrated in the bottom part of the image or as a traditional firm as illustrated in the top part of the image (see figure 5), with executives at the top, and various levels of managers in between them and the workforce, the only difference is that the executives and board in such co-ops are elected by and are accountable to the employees of the firm and not outside shareholders. Though regardless of how a co-op is internally managed the principle of one worker, one vote is upheld.

Figure 5.

Why Worker Cooperatives?

• One reason is because capital is retained in the local & regional communities where they operate, strengthening these areas and allowing them to grow organically which provides local jobs and helps other businesses in the area.

• Another important reason, in this new gilded age of massive inequality, is that co-ops also have better pay differentials, which is the ratio between the highest paid worker (usually the CEO) to the lowest paid worker. Think about this, in 1965 this ratio was 20-to-1 for traditional firms in the US, now fast forward to 2018 where it stands at 278-to-1, meaning the highest paid worker in a traditional firm now makes 278 times more than the lowest paid worker and this is a conservative estimate. While in Cooperatives the manager-worker pay differential ranges from 2 to 1 at the low end and 15 to 1 at the top end.

• A third reason is that on average co-ops tend to pay more than their traditional counterparts of similar size, all else being equal. So a senior engineer on average gets paid more in a coop than in a traditional firm. For instance in the US, the average entry-level wage paid in co-ops was $19.67/hr. Which is much higher than the national minimum wage and higher than the $15/hr that has been fought over in recent years by workers across the country. Additionally, besides a wage, worker-owners also receive something called “patronage” which is their portion of the profit. In 2019 in the US, this amounted to an average of $8,241 paid to each worker-owner on top of their base pay.

• Then we have the resilience of co-ops during economic downturns. In a downturn worker co-operatives tend to drop wages rather than reducing their workforce and when business picks up again, they are ready to respond and can make up for the lost pay because employees enjoy a share of profit. Whereas, in traditional firms workers tend to get laid off.

• Lastly, research shows that co-ops are more productive than conventional businesses, with staff working “better and smarter” and production organised more efficiently. Since as worker-owners employees have more skin in the game.

Case Studies

Mondragon: The Mondragon Cooperative Corporation is a federation of worker cooperatives based in the Basque region of northern Spain. It is the largest single entity cooperative in the world. Founded in 1956 by Father José María Arizmendiarrieta Madariaga a Catholic priest. Mondragon first started as a Polytechnic school which today still exists as the Mondragon University. From its humble beginnings with Father José and his initial students the cooperative they started expanded over the years to become the tenth largest company in Spain in terms of asset turnover comprised of 96 self-governing cooperative businesses, eighty one thousand worker-owners, and 14 R&D centers divided across four areas: Finance, Industry, Retail, and Knowledge.

Governance in Mondragon is something that they have figured out well, taking into account the need for democratic decision making and managerial discretion (see figure 6). At the top you have the “General Assembly” which is the organization for all worker-owners of the various cooperatives. You then have the “Governing Council” which is similar to the Board of Directors at the top of each cooperative, followed by “Managing Director” which is akin to a CEO, and below that the “Managing Council” which is roughly equivalent to the executive leadership team in a traditional team. These sit at top various departments within the cooperative. In addition to those they have a “Social Council” which is an elective body somewhat similar to a labor union that serves an advisory role, and the “Audit” that translates to the audit committee of the board. The General Assembly meets once a year and its members elect the Governing Council which in turn selects the Managing Director under the principle of one-member, one-vote. Essitienly workers elect the board of directors for the various cooperatives in the federation which then go on to elect the CEOs, thus giving workers a profound and direct say in the long-term strategic direction of their business as they select their own bosses.

Figure 6.

The Mondragon system and its values have guided their federated system to success across a range of sectors over a period of decades. Showing that their model not only works but can compete in a globalized world against traditional firms. Thus their structures, achievements and failures act as a strong reservoir of knowledge from which we can tap for local and regional economic development. Their cooperative development model has allowed the Basque Country region in Northern Spain to attain:

• 5th highest GDP by region out of 19 in the country.

• 1st in GDP per capita.

• A Gini Index of 0.24, better than the best country (Norway 0.22).

• The strongest manufacturing base encompassing the automotive industry, aeronautics, energy, the environment, industrial design, machinery and engineering, among others..

Emilia-Romagna. While Mondragon can be viewed as a vertically integrated towering giant with a network of cooperatives all operating under one banner similar to large multinational corporations. The cooperative structure in the Italian Region of Emilia Romagna is more like a horizontal ecosystem of small & medium sized independent cooperatives forming a broad regional economic experience. Such a structure has the benefit of providing scale without overcentralization. This region with a population of around 4.5 million people, has a third of its GDP produced by cooperatives. In fact about two out of every three inhabitants are co-op members and 8 out of the 10 largest companies in the region are cooperatives. Emilia Romagna’s cooperative economy dates back to organizing that occurred around the 1850s mainly around agricultural activity. Some of the lessons we can learn from this region are the following:

1. Raise capital from customers. Italy’s largest retail chain called “Coop” controls 20% of the market and achieved its scale through crowdfunding in the ’80s and ’90s. It was able to tap its large membership base for the money needed to expand during these periods.

2. Politics & Policies matter. The growth of Italian cooperatives in the region has been facilitated by the deep political connections they have formed with political parties in the region and the Catholic Church. This allowed the passing of supportive policies. For instance by law each cooperative has to contribute a share of its profits to a cooperative federation to help fund the further development of more cooperatives.

Today Emilia-Romagna:

• Is the 4th highest GDP by region out of 20.

• Is 2nd in GDP per capita in Italy.

• Has a lower unemployment rate than national average.

The Cleveland Model: Is a novel economic development model founded on the synergy between what are called anchor institutions and local worker owned businesses. Its initiation and success has been due to a collaborative partnership between a few key players: Cleveland Foundation, the Democracy Collaborative, the Ohio Employee Ownership Center, and the City of Cleveland.

Cleveland Foundation (the world’s first community foundation) is a unique institution established in 1914 with an endowment funded by the gifts from many individuals and sources which are invested in perpetuity with earnings distributed to worthy organizations or causes in contrast to private foundations like the Gates foundation whose funding comes from a single person or entity. Today the Cleveland Foundation holds total assets worth $2.6 billion with an operating budget of $15.7 million.

The Democracy Collaborative is a research, advisory and development lab focused on the topic of a democratic economy. It was founded in 2000 as a research center at the University of Maryland dedicated to democratic renewal, civic engagement, and community revitalization.

The Ohio Employee Ownership Center (OEOC) is a non-profit, university-based program established at Kent State University in 1987 to provide outreach, information, and preliminary technical assistance to Ohio employees and business owners interested in exploring employee ownership.

How it works: The Cleveland economic model builds community wealth by linking anchor institutions to worker cooperatives. Anchor institutions are large local institutions like hospitals and universities that by their very nature once established tend not to move location. Such institutions spend hundreds of millions to billions of dollars in procurement and services annually. The idea is to create worker cooperatives that would then sell their goods and services to these anchor institutions creating a synergistic relationship that grows and keeps wealth local while helping to employee the local community. Situated between the two and helping to foster the relationship between them is a Community Non-Profit Corporation that manages a so-called “Revolving Fund” which is used to provide capital and technical assistance to existing cooperatives and provide funding for new worker cooperatives. To keep the ecosystem growing existing Cooperatives are contractually obligated to replenish the “Revolving Fund” with a share of their profits (see Figure 7 below).

The Cleveland Model has culminated in the Evergreen Cooperatives a network of employee-owned cooperatives in Cleveland. Bringing new life and hope to a deindustrialized city. To date the Evergreen Cooperative network is comprised of three cooperatives enterprises:

Evergreen Cooperative Laundry: Launched in 2009 as the initial leg of worker-owned Evergreen Cooperatives, Evergreen Cooperative Laundry is one of the few commercial laundry operators headquartered in the City of Cleveland. With more than 75 years of combined management experience in the laundry industry and a cost-effective, state-of-the-art facility with industry-leading green innovations, we offer clients in the hotel, hospital and nursing home industries consistent premium service at competitive rates.

Evergreen Energy Solutions: a regional leader in state-of-the-art, next-generation LED lighting systems, solar power and other energy-efficient solutions for Cleveland-area businesses, institutions and residential properties.

Green City Growers: a supplier of high-quality, sustainably grown fresh, tasty lettuce, gourmet greens and herbs to leading grocers, restaurants and food service establishments throughout northeast Ohio. THeir large state-of-the art greenhouse allows them to grow year-round and deliver their produce to customers within 48 hours of harvest.

Additionally in 2020 Evergreen’s Fund for Employee Ownership acquired its first company, setting Cleveland-based Berry Insulation a local 11 year old company with fifteen employees on a path to being owned by its workers and joining the Evergreen Cooperative network.

Supportive Policies

• Inclusive or Democratic Ownership Funds: are policy proposals to democratize corporate ownership and governance by requiring large companies to allocate or issue a set percentage of their equity into a locked fund that is democratically controlled by their workforce. The fund would grant dividend and voting rights to equal to the Fund’s share of equity. These policies aim to dilute stock rather than expropriate shareholders thus ensuring all stakeholders have a say.

• This kind of policy was proposed by the Labour Party in the UK during 2018. Their version of the policy would require corporations with 250 employees or more to gradually place 10% of their equity into Inclusive Ownership Funds (IOFs) owned by workers.

• Right of First Refusal: are policies that give the workers of any company being shuttered or sold, the option to buyout the company first before another party. Preserving jobs and the local economy in the process. A policy that would have been beneficial in preventing the degree of de-industrialization that we have seen across US cities in the past decades.

• A poll commissioned by The Democracy Collaborative with YouGov Blue found overwhelming support for a policy that would give workers the right of first refusal when their workplaces were slated for sale or closure, with 69% of respondents in support and only 10% opposed.

• Any right of first refusal policy would benefit from additional policies that would provide, for instance, loan guarantees for cooperative conversions an example of this is the Main Street Employee Ownership Act of 2018 passed by congress with the aim to authorize and empower the Small Business Administration to support small businesses transitioning to employee ownership by guaranteeing loans and promoting education on worker cooperatives.

• The Marcora Law: is a piece of legislation passed in 1985 by Italian Minister of Trade and Industry, Giovanni Marcora to support worker buyouts. The law, which came to be known as the Marcora Law, has helped to create 257 new employee owned firms, saving or creating 9,300 jobs. Under the law, the money due to workers as unemployment insurance can be used as capital to instead cooperatize their workplace or start new co-ops. “The idea behind the law was to consider the ever increasing and huge use of forms of unemployment benefits as a diversion of resources that could instead be used to expand the production base and involve unemployed workers into a productive function through forms of co-operative self-entrepreneurship and management,” explains Camillo De Berardinis, Managing Director of Co-operation Finance Enterprise, one of the two financial companies established under the Marcora Law to support of worker co-operatives and social co-operatives.

Conclusion

Over the past 50 years the US has undergone significant structural changes. Changes that have affected the working class and less conspicuously the middle class. Measured inequality has reached levels not seen since the times of kings and most recently the gilded age of the early 20th century. The excesses of the gilded age lead into the Great Depression of the 1930s and subsequent regulatory reform like the Glass-Steagall Act which kept commercial and investment banks as separate entities. These regulatory reforms, the strength of unions, along with the post war boom lead the US into its golden age between the years at the end of World War II into the early 1970s. An age defined by substantial economic growth that brought broadly shared prosperity. Incomes during this period grew at roughly the same rate up and down the income ladder and the gap between income rungs did not change much.

Beginning in the mid 1970s, as economic growth slowed due to increased competition the income gap widened leading us to where we are today. This drastic change in incomes and wealth was facilitated by corporate led campaigns of deregulation, offshoring of US production, automation, and the financialization of the economy. Unions, the typical barrier to the depreciation of labor’s income, were devastated and have not recovered. Across the US once vibrant cities now stand decayed as mere shadows of their former selves.

Connecting all the different aspects of this narrative is the underlying fact that these changes were precipitated by the decisions or reactions made by the minority at the top of the income ladder who own the majority of capital and businesses in the United States. Thus as the economy faced structural challenges, changes were made in an undemocratic fashion that have ended up affecting the vast majority of people and our collective future. How have governments responded to these changes? Mainly through contested redistributive welfare policies, ephemeral tax credits to the lower rungs of the income ladder, and various tax rate reductions and loopholes for corporations and the wealthy in the hope that they would spur investment and incomes across the board. While some of these reactions have had measured success in improving lives their effects have not been long lasting and to date unable to abate the consistent rise inequality we are seeing. While trickle down economic policies like the tax reductions have shown to be complete failures in both reducing inequality and increasing growth. As highlighted by a recent study by the London School of Economics on the effects of tax cuts over the past 50 years across 18 OECD countries. What that study showed was that reducing taxes for the wealthy lead to the opposite effect, increasing income inequality while having an insignificant effect on economic growth and unemployment.

Given that most Americans receive their incomes from salaries and wages. It is proper to examine the firms from which they derive their incomes. As it is within the firm that the crux of the problem ultimately emanates from. That is to say it is the lack of democratic control and ownership over firms that lead directly to an increase in inequality as the value generated within firms is controlled and appropriated by a minority consisting of shareholders, directors, and top executives. Who use their economic power to translate their dominance over to the political realm from which they can secure beneficial circumstances that protect and increase their economic position. This state of affairs brings to mind what can be done that would be more effective than the status quo. Part of that answer lies in democratizing the economy and to do that we have to start transforming the internal structure of firms as undemocratic institutions to their anthesis: worker owned and managed firms or worker cooperatives. Thankfully we have a rich history filled with examples of how this can be done and what kind of outcomes we can expect. As we saw with Mondragon in the Basque country of Spain and the Emilia-Romagna region of Italy, both areas have much higher standards of living relative to other domestic regions and countries.

Reimagining how firms are organized requires us to go beyond the policy tools of regulations and redistributive tax schemes to changing the nature of productive property, its governance, and control structure, that drives its behavior and actions. This is because how firms are owned and managed fundamentally informs how they function and in whose interest. Today firms operate as engines of wealth extraction and drivers of inequality. To change this dynamic we must adopt new policies that aim to democratize the workplace by increasing employee ownership across sectors and industries. Whether through firm conversions using the right of first refusal backed by government loan guarantees, philanthropy employed like in the Cleveland model, or novel ideas like democratic ownership funds and the Marcora Law. The point to keep in mind is that worker cooperatives represent an established viable path to equitable economic growth that is in sync with our political democratic values and that they resolve the age-old contradiction between the interest of workers on the one hand and owners on the other, and in doing so reduce inequality.

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Data used for graphs:
epi.org & fred.stlouisfed.org