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  • The Economist

Turning Workers Into Capitalists

Employee share ownership has merit. But that does not justify further government incentives.

In an effort to rebuild New England’s cod industry after the war of independence, George Washington signed a law in 1792 giving shipowners “allowances” (i.e., subsidies) to offset the tariffs they had to pay on their inputs. Two conditions were attached to the support: shipowners had to sign a profit-sharing agreement with their crew, with whom they also had to split the allowance. Thus one of America’s first tax breaks was designed to encourage owners to share profits with their workers.

This was no accident, according to “The Citizen’s Share,” a new book by Joseph Blasi and Douglas Kruse of Rutgers University and Richard Freeman of Harvard University. The authors argue that America’s founders put priority on shared rewards and the broad ownership of capital, and were not afraid to use the federal government to advance them. This mindset, the authors explain, has periodically motivated American business and politics ever since, from the 19th-century Homestead Acts (which distributed land free to those willing to till it) to the 1974 legislation creating employee stock-ownership plans (ESOPs), tax-advantaged trusts that borrow money to buy shares for workers.

As a result, surprisingly large numbers of American workers share in some way in their employers’ success. Based on a series of national surveys, the authors reckon that some 47 percent of full-time workers have one or more forms of capital stake in the firm for which they work, whether from profit-sharing schemes (40 percent), stock ownership (21 percent) or stock options (10 percent). About a tenth of Fortune 500 companies, from Procter & Gamble to Goldman Sachs, have employee shareholdings of 5 percent or more. Almost a fifth of America’s biggest private firms, including behemoths like Cargill and Mars, have profit-sharing or share-ownership schemes. Some 10 million people work for companies with ESOPs.

In most cases the stakes are fairly small: the median employee shareholding is worth $10,000. The scale of workers’ equity has not increased enough to counter two bigger trends that have dramatically increased inequality of incomes in America over the past 30 years: the widening gap in pay between the top 1 percent and the rest, and the overall squeeze in the share of national income going to wages. To counter this concentration of wealth, and live up to the ideals of the country’s founders, Messrs. Blasi, Freeman and Kruse argue that America needs another dose of Washington’s medicine: more incentives for employees to build ownership stakes in the firms they work for.

These academics — two economists and a sociologist — are on the center-left. The same logic, however, is currently motivating policy in the Conservative-led government of America’s former colonial master. Britain also has a tradition of employee share ownership. John Lewis, a big retailer that is owned by a trust on behalf of its employees, is one example. To boost what is often dubbed the “John Lewis economy.” the government has made it easier to set up employee share schemes, and created some £50m ($81 million) of tax incentives to encourage ownership by employees. In the recent privatization of the Royal Mail, one-tenth of the shares were distributed to the firm’s workers.


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