Worker Cooperatives: A Bipartisan Solution to America’s Growing Income Inequality

BY BENJAMIN GILLIES

This piece appeared in our 2016 print journal. You can order your copy here.

The ancient Greek philosopher Plato argued that in order for a democratic society to function properly, the wealthiest members should never be more than five times as rich as its poorest.[i] Yet, in modern America, CEOs and other elites can earn up to 600 times the wages of their lowest-paid employees.[ii] Responding to this disparity, a small but growing number of laborers are forgoing work in traditional businesses and investing in an alternative model: the worker cooperative.

In a 2013 White House address, President Obama called economic inequality the “defining challenge of our time,”[iii] and even Republicans now criticize such inequity. While representatives on both the left and the right acknowledge the problem, they diverge on solutions. The major proposal for curbing inequality among many progressive politicians is for the government to raise taxes on the wealthy. Conservatives, meanwhile, vehemently oppose such an approach. They argue that burdening the companies we look to for job creation is a short-sighted strategy that leaves us worse off when businesses head to lower-tax jurisdictions.

Certainly, we do rely on companies to provide the jobs we need. Yet, over the last thirty years CEOs have faced extreme pressure to maximize returns to shareholders, capitalizing on outsourcing and the mechanization of production to boost efficiency. While investors often enjoyed soaring profits, these measures led to the hollowing out of the middle class. Raising taxes cannot alone solve this problem because it fails to address the inherently contradictory objectives of profit-driven companies and their wage-seeking employees. Instead, Americans can adopt a more holistic approach, exploring the potential of a business model that addresses the key challenges facing workers today.

The Benefits of Worker Cooperatives

Though worker cooperatives are relatively well-developed elsewhere—Spain’s famous Mondragon Cooperative, for example, has been highlighted by Forbes—they remain marginal in the United States.[i] Nevertheless, in today’s economic climate they offer a number of enticing benefits. Cooperatives are private, for-profit enterprises. Their workers, however, are the ones who own the company and make decisions. These owner-employees keep all profits, instead of seeing them distributed to outside stockholders who often have little connection to the business other than their initial investment.

In contrast to conventional corporations, worker co-ops frequently achieve the Platonic ideal, with the pay ratio between the highest- and lowest-paid workers between 3:1 and 5:1.[ii] This is not simply because higher-ups are paid less. With no need to provide a return to shareholders, more money can go directly to employees. Even more importantly, these businesses often offer regular hours, health insurance, and other benefits that are becoming increasingly difficult to come by for service employment in conventional companies. For example, for an ownership buy-in of $1,000 paid out over time through paycheck deductions, owner-employees in Cooperative Home Care Associates, the largest cooperative in New York City, enjoy wages of $16 per hour including benefits.[iii] At almost twice the market rate, it allows for a relatively comfortable living, which explains why “turnover stands at 15 percent, compared with an industry standard close to four times that.”[iv]

Through a one-worker, one-vote system, members are responsible for steering the company. This happens either directly through general assembly votes or, more commonly, by electing a board of directors. The decisions made therefore put workers’ interests first. During a downturn, employees may choose collectively to reduce working hours or pay and find innovative ways to boost sales, instead of laying themselves off. Moreover, because members have a strong vested interest in the success of the business, studies show they work harder and require less supervision, leading to better productivity.[v]

When Mondragon began in Spain in the 1950s, one of its goals was to create employment for a depressed community.[vi] Today, members continue to place high value on ensuring the long-term health of the cooperative, typically reinvesting 50–70 percent of profits back into the company rather than paying them out as dividends.[vii] This strategy ensures the enterprise has plenty of capital for growth. Members support this approach because they believe the goal is more than just personal gain; it is also to provide employment opportunities for their children and grandchildren in the future.[viii]

In Amherst, Massachusetts, the worker cooperative Collective Copies directly invests 10 percent of its profits in initiatives undertaken by youth groups and other local organizations.[ix] Organic Valley Cooperative in LaFarge, Wisconsin, similarly provides grants ranging from $500 to $50,000 to projects focused on community enhancement and organic research, while encouraging ecological sustainability in its own production processes.[x] Of course, other co-ops, particularly in low-paying industries, opt to return the majority of their profits to members. Either approach is acceptable. The point is that the employees themselves decide how their business evolves, and can adopt a more holistic perspective on what defines success than the CEOs of shareholder-owned companies. As a result, they often seek to mitigate the externalities imposed on the community in which they and their families live.

Perhaps most enticingly for an economy recovering from the financial crisis of 2008, evidence suggests growing the cooperative base might actually be a more effective long-term strategy for boosting employment than encouraging growth in traditional businesses. A number of Canadian studies show co-ops are less risky than conventional business start-ups. A 2011 British Columbia-focused report found 66.6 percent of cooperatives survived past the six-year mark, compared to 38 percent for the province’s businesses and 43 percent for Canada’s conventional companies as a whole.[xi] On the other side of the country, a 2008 study published by Quebec’s Ministry of Economic Development, Innovation, and Export noted 44 percent of cooperatives survived for at least a decade, compared to just 20 percent of conventional businesses.[xii]

The Slow Slog of Democracy

Certainly, the cooperative model is not a panacea. The democratic structure is time-consuming and onerous, going against the grain of the corporate hierarchy most Americans understand and accept. Operations at the Black Star Coop in Austin, Texas, are illustrative of the cooperative process, where every worker gets a chance to lead the monthly meeting. It “can be annoying,” says employee Dana Curtis, when new members bring up issues that have been extensively covered in the company’s past.[xiii]

Beyond this hassle, a lack of commitment to the democratic model can even lead to the eventual downfall of the enterprise. In 2006, the worker-owners of Burley, an Oregon-based cooperative that had thrived since the 1970s, sold the business to an investor who immediately laid off a number of staff. Sociologist Joel Shoening examined the fall of the cooperative, concluding the company had hired too many members who failed to buy into the democratic idea. Eventually, this rendered the structure unworkable. “The problem for Burley was not that it was a cooperative or that it was democratic, but that it was not cooperative or democratic enough,” Shoening wrote in his final analysis.[xiv] Through interviews with former employees he discovered that, as demand grew, the company took on more workers who prioritized their immediate wellbeing rather than balancing personal interest with the general health of the collective.[xv] As a result, the collective fell apart.

The lesson is that not every employee may be prepared to take on the effort and commitment to this structure—but when they do, the benefits can be substantial. Despite the small nuisances, Dana Curtis remains a strong proponent of the cooperative approach. “People can do so much more when they’re empowered,” she argues, and is quick to point out the advantages of having the entire team dedicated to problem solving whenever issues arise. When a lack of seating and slow service delivery caused sales to suffer, for example, the company had everyone pitching in to find solutions. These fixes were creative, and they worked: Black Star adopted a new point-of-sale system, started taking orders from places other than the counter, and covered their patio to provide extra seating space.[xvi]

Furthermore, not all employees need to be owners of the cooperative. Some may be unwilling to share the risk in return for dividends, but the higher wages and other benefits provide their own sense of investment in the business and reduce turnover.

Still, even when everyone is committed, cooperatives must operate within the same global economic system as corporate enterprises. This means facing pressures to incorporate new technology and increase efficiency to survive, and dealing with the tension between the need to cut costs and the desire to ensure employment for worker-owners. Given this constraint, it is unsurprising most cooperatives in operation in the United States have thus far been in labor-intensive industries.[xvii] That said, if the pool of cooperatives were to expand and the proper government supports were in place, it is plausible to see growth even in manufacturing and other sectors. Job retraining programs could assist workers in one cooperative transition to another as technologies rendered their positions redundant, providing the flexibility that shareholder corporations currently enjoy.

Admittedly, cooperatives remain marginal in the United States. Of the approximately 5.7 million US firms with employees[xviii], roughly 350 are employee-owned co-ops.[xix] With a growing number of citizens unsatisfied with the tumultuous work environment and stagnating wages of the modern economy, however, encouraging worker cooperatives might actually be one of the proposals most effectively able to win favor across the political spectrum from politicians looking to address inequality.

It can be tedious to use cooperative democracy to make major business decisions, but as workers in cooperatives attest, amazing things can happen when people have agency. (Photo Credit: Roger Blackwell, Flickr)

An Appealing Choice for Both the Left and Right

In 1978, a new Spanish constitution introduced a number of amendments to support growth in worker cooperatives.[xx] The most noteworthy was article 129, which explicitly ordered public authorities to promote co-ops through appropriate legislation.[xxi] Following this instruction, subsequent regulatory changes have allowed cooperatives to enjoy a preferential tax rate of 20 percent as opposed to the usual 35 percent.[xxii] Since the 1980s, Canadian federal and provincial governments have invested in a number of pilot projects and programs to promote co-op development.

Strong political support for worker cooperatives is in its nascent stages here in the United States, but is gaining significant ground at the local level. With many cities still reeling from the 2008 financial crisis, officials are willing to try novel approaches to encourage stronger job growth, and looking to worker cooperatives is part of their strategy. In Reading, Pennsylvania, the mayor is a strong advocate for co-op incubation as part of an economic re-localization plan that also includes public banking, urban agriculture initiatives, and investments in energy efficiency.[xxiii] Austin’s city council has directed the city manager to develop recommendations for the promotion of new and existing cooperatives, while Oakland, California, is looking at policies to give cooperatives preference in city contracting.[xxiv] In the biggest endorsement, New York City’s council allocated $1.2 million in 2015 to support the development of worker-owned businesses.[xxv]

At the national level, Senator Bernie Sanders put forward a proposal in 2014 to create a US Employee Ownership Bank to loan specifically to cooperatives, although the bill died in committee.[xxvi] Yet the appeal of worker cooperatives should not be limited to those on the left. The principles of empowering individuals to shape their own economic destiny and promote a more equitable distribution of revenue without government intervention is very much in line with the ideals espoused by the right. Indeed, former President Ronald Reagan touted the advantages of cooperatives when he said, “I can’t help but believe that in the future we will see in the United States [ . . . ] an increasing trend toward the next logical step, employee ownership. It is a path that befits a free people.”[xxvii] As such, adopting policies to further their development could comfortably find a home in the platform of any political candidate.

While it is unlikely the US Constitution will be changed anytime soon, there are a number of other measures that could be adopted. Worker cooperatives often have trouble borrowing because their primary asset is labor, which private banks will not accept as collateral. A bank similar to the one envisioned by Senator Sanders would thus be advantageous. Additionally, there are substantial legal restrictions on “mom and pop” investors that frequently prohibit them from investing in small businesses unless the company is able to prepare private placement memoranda or public offerings, which can cost upwards of $100,000—not realistic for many cooperative firms. Loosening these laws as appropriate would allow community members to support local businesses (including cooperatives) financially.[xxviii] Moreover, states can ensure their regulations permit cooperatives to establish investment funds to capitalize other co-ops as they see fit. Finally, rules surrounding pension fund requirements, which frequently incentivize investment in large global companies, can also be updated to enable willing pension-holders to finance enterprise in their own communities.[xxix]

As Melissa Hoover, executive director for the US Federation of Cooperatives points out, “starting a worker cooperative is a much less straightforward undertaking than forming a limited liability corporation or sole proprietorship.” This challenge is compounded by the fact that co-op founders are often workers with skills in their industry but no experience starting a company, and even attorneys and accountants often do not understand the cooperative model. As Hoover notes, this means that “if you are trying to set something up, unless you find one of those few attorneys who understand worker cooperatives, you’re basically trying to do it on your own.”[xxx] Ensuring state and federal small business resource centers have knowledgeable staff who can advise and encourage entrepreneurs interested in the cooperative model could therefore be a significant step in the promotion of cooperatives.

Finally, government initiatives can be retooled so as to remove unintended roadblocks for cooperatives. In New York City, for instance, the Department of Small Business Services formerly required all owners to fill out paperwork in order to access grants, which was onerous for cooperatives with dozens of worker-owners.[xxxi] Going through existing policies to see where requirements might unintentionally place excessive burden on co-ops and modifying them where appropriate would level the playing field between conventional and cooperative companies.

These are just a few examples of the initiatives candidates at all levels of government can explore as they work to elucidate a vision for addressing the financial and political chasm between the rich and the rest. Undoubtedly, worker cooperatives are not a silver bullet to the challenge of ongoing, increasing inequality in the United States, and diverse strategies are almost certainly necessary to address the causes of growing disparity. Still, in polarized Washington, support for these companies offers a rare bipartisan opportunity to bring renewed fairness into the American economy.

Benjamin Gillies is a Master of Public Policy candidate at the Harvard Kennedy School. He has worked for a number of Canadian federal government departments including Parks Canada and Veterans Affairs Canada, but most recently is the co-founder of two private companies in Winnipeg.

 

 

 

 

Photo by Stephanie Keith via Flickr


[i] Cameron Keng, “If Apple Were A Worker Cooperative, Each Employee Would Earn At Least $403K,” Forbes Magazine, 18 December 2014, http://www.forbes.com/sites/cameronkeng/2014/12/18/if-apple-was-a-worker-cooperative-each-employee-would-earn-at-least-403k/#5049a2936d02.

[ii] Jennifer Jones Austin, Worker Cooperatives for New York City: A Vision for Addressing Income Inequality (New York: Federation of Protestant Welfare Agencies, 2014), 14, http://fpwa.org/wp-content/uploads/2015/01/Worker-Cooperatives-for-NYC-A-Vision-for-Addressing-Income-Inequality.pdf.

[iii] Laura Flanders, “How America’s Largest Worker-owned Co-op Lifts People Out of Poverty,” YES! Magazine, 14 August 2014, http://www.yesmagazine.org/issues/the-end-of-poverty/how-america-s-largest-worker-owned-co-op-lifts-people-out-of-poverty.

[iv] Ibid.

[v] Richard B. Freeman and Joel Rogers. What Workers Want (Ithaca: ILR Press Books, 1999), 116, http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1026&context=books.

[vi] “Humanity at Work,” Mondragon Corporation, accessed 24 January 2016, http://www.mondragon-corporation.com/wp-content/uploads/MONDRAGON-ING.pdf.

[vii] Ibid.

[viii] Ibid.

[ix] “About us,” Collective Copies, accessed 20 January 2016, http://collectivecopies.com/about/about.htm.

[x] “About our giving,” Organic Valley Cooperative, accessed 20 January 2016, http://www.organicvalley.coop/about-us/power-of-we/about-our-giving/.

[xi] Michael Lewis and Pat Conaty, The Resilience Imperative: Cooperative Transitions to a Steady-state Economy, (Canada, New Society Publishers, 2012), 52, http://www.newsociety.com/Books/R/The-Resilience-Imperative.

[xii] Michél Clement and Caroline Bouchard, Taux de survie des cooperatives au Québec (edition 2008), Québec Ministère du Développement économique, de l’Innovation et de l’Exportation, 2008): 41, http://www.economie.gouv.qc.ca/fileadmin/contenu/publications/etudes_statistiques/secteur_cooperatif/coop_taux_survie_2008.pdf.

[xiii] Matt Cropp and Eric Davis. Interview with Dana Curtis and Johnny Livesay of the Black Star Co-op Pub and Brewery. Film. Cooperative Vermont, 29 May 2014, https://coopvt.wordpress.com/category/episodes/.

[xiv] Joel Schoening, “The Rise and Fall of Burley Design Cooperative,” Oregon Historical Quarterly 111 (2010): 331, http://doi.org/10.5403/oregonhistq.111.3.0312.

[xv] Ibid., 329.

[xvi] Matt Cropp and Eric Davis. Interview with Dana Curtis and Johnny Livesay of the Black Star Co-op Pub and Brewery. Film. Cooperative Vermont, 29 May 2014, https://coopvt.wordpress.com/category/episodes/.

[xvii] Black Adder, “Why Aren’t There More Worker Co-ops?” The American Catholic, 10 May 2010, http://the-american-catholic.com/2010/05/10/why-arent-there-more-worker-co-ops/.

[xviii] Mary Ellen Biery, “4 Things You Don’t Know About Private Companies,” Forbes Magazine, 26 May 2013,

http://www.forbes.com/sites/sageworks/2013/05/26/4-things-you-dont-know-about-private-companies/#139c4aeb70ce.

[xix] “What is a Worker Cooperative?” accessed 15 December 2015, https://usworker.coop/about/what-is-a-worker-coop.

[xx] Isabel Gemma Fajardo Garcia, “Spain,” in International Handbook of Cooperative Law, ed. Dante Cracogna et al. (New York: Springer, 2013), 701. (http://www.springer.com/us/book/9783642301285)

[xxi] Ibid, 702.

[xxii] Ibid, 703.

[xxiii] Abby Scher, “Solidarity, PA,” Dissent Magazine, Winter 2015, https://www.dissentmagazine.org/article/reading-pa-solidarity-economy.

[xxiv] John Duda, “City governments building community wealth and cooperative local economies,” community-wealth.org, 23 June 22014, http://community-wealth.org/content/city-governments-building-community-wealth-and-cooperative-local-economies.

[xxv] Flanders, “How America’s Largest Worker-owned Co-op Lifts People Out of Poverty,” YES! Magazine, 14 August 2014, http://www.yesmagazine.org/issues/the-end-of-poverty/how-america-s-largest-worker-owned-co-op-lifts-people-out-of-poverty.

[xxvi] “S. 2411 (113th): United States Employee Ownership Bank Act,” accessed 11 December 2015,

https://www.govtrack.us/congress/bills/113/s2411.

[xxvii] “President Ronald Reagan’s Speech on Project Economic Justice,” accessed 11 December 2015,

http://www.cesj.org/about-cesj/history-accomplishments/pres-reagans-speech-on-project-economic-justice/.

[xxviii] Michael Shuman, “Invest Locally: Put Your Money Where Your Life Is,” YES! Magazine, 5 June 2009, http://www.yesmagazine.org/issues/the-new-economy/invest-locally-put-your-money-where-your-life-is.

[xxix] Ibid.

[xxx] Nina Misuraca Ignaczak, “It Takes an Ecosystem: The Rise of Worker Cooperatives in the US,” Shareable, 16 July 2014, http://www.shareable.net/blog/it-takes-an-ecosystem-the-rise-of-worker-cooperatives-in-the-us.

[xxxi] Abby Scher, “Leveling the Playing Field for Worker Cooperatives,” Truth Out, 21 June 2014, http://www.truth-out.org/news/item/24406-leveling-the-playing-field-for-worker-cooperatives.

 


[i] Charles Tilley, “For fair pay, see Plato,” The Guardian, 3 June 2010, http://www.theguardian.com/commentisfree/2010/jun/03/public-sector-pay-cameron-executive-bonuses.

[ii] Sarah Jaffe, “Can worker cooperatives alleviate income inequality?” Aljazeera America, 13 January 2015, http://america.aljazeera.com/articles/2015/1/13/worker-run-cooperatives.html.

[iii] Barack Obama, “Remarks by the President on Economic Mobility,” (presented at the White House, Washington DC, 4 December 2013), https://www.whitehouse.gov/the-press-office/2013/12/04/remarks-president-economic-mobility.

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