Fun at the Frontier

The folks who’ve benefitted the most from our unequal economy have a new explanation for why we’ve become so unequal.

Hold on to your wallets. This could cost you.

The most telling divide in our economic world today, this new explanation goes, has become the gap that’s opened up between the world’s most innovative companies and all the other firms that make up the global corporate scene.

These innovative, highly productive “frontier firms” — the top 5 percent or so of companies — are creating fantastic piles of wealth, the story continues, and making our lives ever better and better.

All our other corporate outfits — the “laggard” firms — are contributing precious little. They’re leaving the vast majority of us in an insecure economic no-man’s-land where life never seems to get any easier.

This inequality creation tale is gaining adherents in some important places — like the upper echelons of the OECD, the Paris-based economic research agency that the world’s major developed nations fund and run. High-ranking officials from all the OECD nations will be meeting in Paris this coming week.

Representatives from many of the world’s top trade unions will be on hand in Paris, too, and they intend to challenge the new frontier-firms narrative.

“The  OECD  description  of  a  business  world  divided  between  a  top  5 percent  of  ultra-productive ‘frontier firms’ and a large majority of ‘laggard’ firms needs a serious reassessment,” the Trade Union Advisory Committee to the OECD noted in a pre-meeting statement.

Should we particularly care about any of this back-and-forth on “frontier firms”? You bet we should. Explanations matter. They carry policy implications. And the policy implications that our global movers and shakers are drawing from the frontier-firms story could make our contemporary inequality even worse.

The most dangerous of these implications? The notion that we owe whatever economic prosperity we have to the genius of these high-performing frontier firms. So let’s get out government out of the way and let these frontier firms work more wonders. Let’s deregulate the economy. Let’s free companies from labor-protection rules that reduce their flexibility. Let’s limit collective bargaining.

Sound familiar? The rich and the corporations they run sang essentially the same tune back in the 1970s, and policy makers took that tune to heart. We’ve had over a generation of deregulation and “free market” domination, and unions of the developed world have a far smaller presence today than they had in the middle of the 20th century.

In effect, the frontier-firms narrative is greasing the skids for another round of public policies that double down on the policies that have left our world phenomenally more unequal.

“As trade union  membership  declines,  inequality  rises,” notes the OECD’s Trade Union Advisory Committee. “And  yet  OECD  recommendations  have largely  remained  the  same:  reduce  labor  market  dualism  by  reducing  employment protection  legislation  for  regular  workers,  decentralize  collective  bargaining  systems — including opt-outs for individual companies — and reduce what is termed as ‘excess coverage’ of collective bargaining.”

Trade union leaders are urging the OECD to go in a different direction. Higher levels of productivity, they note, don’t automatically translate into higher wages in a world where unions remain weak. In fact, they point out, the weaker the pressure for higher wages, the slower the growth in productivity.

Those “highly productive” frontier firms, on closer inspection, turn out to be not so spectacularly productive. The gap between these firms and the “laggards,” the OECD’s own researchers readily acknowledge, is growing because the productivity of the non-frontier firms “has declined.”

And how do we explain this decline? Unions point to our current lack of sector-level bargaining as one example. In many developed nations, workers and management used to bargain by sector. An entire auto industry, for instance, would end up with a single set of standards for wages and working conditions.

That single standard gave all managements in the sector a powerful incentive to make their labor as productive as possible — by investing in worker training and more advanced equipment or by involving workers more closely in decisions on how the firm could become more efficient.

In the absence of a single standard, managements feel little pressure to become more productive. They can simply compete by paying workers less.

Over time, this dynamic tends to fragment the corporate community. A few firms — the frontier “champions” — specialize in “high-value” activities that pay higher wages, and the many end up with outsourced “low-value” activities that accommodate only precarious and low-paid labor.

The world’s OECD nations, concludes the OECD Trade Union Advisory Committee, are never going to undo this fragmentation by continuing to genuflect before deregulated “free markets.” Trying “to replicate ‘champions’” won’t turn the tide against inequality. Forging a new social contract — with “labor standards that apply for all workers and all workplaces”— just might.