Employee Ownership Can Broaden Wealth for the Young Middle Class

06/09/2017 04:51 pm ET

By Joseph R. Blasi

As the nation is in the midst of a rapid rethink of the fortunes of the middle class that is affecting both political parties, a new study suggest what kinds of companies might improve their wages and wealth. The study, Employee Ownership and Economic Well-being, shows that employee stock ownership is linked with better wages, wealth, and benefits for young workers as they move through their first two decades in the workforce. Have no doubt about it, these workers are at the frontline of capitalism where the failure of our economic system to build wealth for the middle class has to be sorted out or where even more severe disappointment will have to be admitted very soon with bad consequences for our society and economy at large.

Dr. Nancy Wiefek of the National Center for Employee Ownership (ownershipeconomy.org) ingeniously used information from the National Longitudinal Surveys of the U.S. Department of Labor’s Bureau of Labor Statistics to get into the weeds about what happened to a nationally representative group of 9,000 young people as they began their journey through the workforce from 1997, when they were close to 17 years old, to 2013, when they were close to 34 years old. In a standout finding, by 2013, the young people who worked for companies with Employee Stock Ownership Plans, namely ESOPs and similar plans, were in a much better situation than young people working in companies without ESOPs. The ESOP workers had 33% higher median wage income, 92% higher median household wealth, and greater access to nine other employee benefits such as flexible work schedules, parental leave, and tuition reimbursement, plus greater job stability. The two groups of young people started out in 1997 with about the same wages and wealth, similar education, marital status, and parents’ education. They came from similar parts of the country.

How was working in a company with an Employee Stock Ownership Plan or ESOP linked to these better outcomes? The young people in ESOP companies had higher median wages and household wealth whether their income was above or below $50,000, whether they were male or female, whether they were people of color or not, whether they were married or single, college-educated or without college, with or without children. This seems to cross over some of the usual fault lines of wealth in American society. One key difference is that workers in the typical ESOP company had a way to build up capital ownership in addition to wage income.

The typical ESOP is a benefit plan under the Employee Retirement Income Security Act of 1974 that allows companies to purchase stock with credit for their employees and then grant the stock ownership to the workers as the loan is paid back by the company. Retiring business owners of successful firms without daughters or sons ready to take over the business often sell to the managers and workers through an ESOP to allow the founding entrepreneurs to cash out their wealth and keep the company and the jobs and the ownership in the community going forward. The Wiefek study makes a statement about the potential impact of having more legislation at the Federal and the state and the local levels in order to make it much easier for employees to own a piece of these kinds of companies. Certainly, not every company is a candidate for an ESOP but trends suggest that scores of retiring business owners and millions of acres of family farms are in a terrible business succession crisis nationwide and millions of jobs and lots of wealth is on the line. Evidence also suggests that in African-American communities nationwide, there are scores of business owners ready to retire where this is a real issue for community development.

One issue the study highlights is the extent to which the employee stock ownership alone created or caused the better outcomes for workers or whether employee ownership companies are more likely to be the more successful or the more employee-friendly firms. This is an important question to resolve. In the study, for example, urban workers had more access to ESOPs. Certainly, other studies have shown that employee ownership companies have better economic performance, lower turnover, and higher job stability. This suggests that there may also be a bigger pie to share. However, the Wiefek evidence does suggest a non-partisan direction for public policy by pointing to the kinds of companies that may be worth encouraging.

For forty years the opportunity to participate in the buyout of a retiring business owner has been the major driver of the creation of employee ownership companies in the American economy. Now, we see some empirical evidence of the impact of this phenomenon specifically on younger workers. This may be an alternative, in some cases, to private equity buying many of these companies and reserving the wealth for only a few.

Employee ownership is a practical example of the middle class rethink in action and it is worth further examination as a case in point that constructive ideas might be possible across the political aisle.

Joseph Blasi is the J. Robert Beyster Distinguished Professor at the Rutgers University School of Management and Labor Relations. He is author of The Citizen’s Share: Reducing Inequality in the 21st Century (Yale University Press) and the Washington, D.C. thirdway.org think tank policy report, Having a Stake, written with Harvard colleague Richard Freeman and Rutgers colleague Douglas Kruse. The article represents the author’s personal opinions and not that of any institution.

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