Worker-Owned Businesses: A New Avenue for Inclusive Growth in the US

February 3, 2016

With massive job loss predicted to be on the way due to technology advances, and barriers to entrepreneurship among women and minorities, what’s a solution for new progress towards inclusive growth? Worker-owned businesses, say experts on two panels held last week.

This piece was produced by News Deeply for the Inclusion Hub.

Inclusive growth is lagging in the United States.

A majority of Americans no longer believe that children from all income groups have the same chance to get ahead, a national poll released January 30 shows. Only eight of the country’s 100 largest metropolitan areas experienced inclusive economic growth from 2009 to 2014, according to a Brookings Institution report released January 28.

It’s no wonder that concern about how to build a better economy is dominating the presidential election season, on both ends of the political spectrum.

“Growth and prosperity have not seemed to have impacted inclusion outcomes to a great extent,” Richard Shearer, the Brookings report’s primary author, told Next City.

“Metro Monitor: Tracking growth, prosperity, and inclusion in the 100 largest U.S. metropolitan areas”, the new report and data visualization tool by the Brookings Institution, shows that while 95 of those areas had economic growth in general, only eight showed progress on economic growth indicators such as a higher employment rate or a rising median income. Racial income gaps also got worse in most of the regions during that time period, Next City reported.

Figuring out how to create economic growth that includes women, low-income and minority residents is critical not just for communities, but also for the United States as a whole.

How can that be done?

A growing national and international movement believes that an unusual business structure— worker-owned cooperatives— is a powerful tool to do just that: create better jobs for minority, women, and low-wage workers, and build assets in marginalized communities.

Last week, both the Aspen Institute and Citi Community Development hosted two different panel discussions to explore how this may be a method for inclusive growth worth investing in.

“There’s a common misperception that worker cooperatives are for hippies; that they’re a utopian strategy,” Melissa Hoover, executive director of the Democracy at Work Institute, told the Citi Community Development panel. “But in 2016, people are using worker coops not to exit the modern economy, but to enter it, because they’ve been locked out of good jobs or ownership.”

Explaining Worker Cooperatives

“We’ve got this great solution and nobody knows what it is,” Marjorie Kelly, executive vice president of the Democracy Collaborative, told the Aspen Institute audience.

The Aspen Institute panel, “Can Inclusive Economic Development Build Better Jobs and a Stronger Regional Economy?” held January 27 in Washington D.C., examined the experiences of the Democracy Collaborative, Wellspring Cooperative Corporation, and the city of Richmond, Virginia, which established the country’s first Office of Community Wealth Building. On January 29 Citi Community Development hosted the “Cooperative Growth Ecosystem” webinar, a panel discussion that is part of its Building the Inclusive Economy initiative. Panelists discussed how organizations like the National Urban League, Democracy at Work Institute and Project Equity are helping to develop worker-owned cooperatives.

Plant workers on an assembly line at Spain's Mondragon Group, an international model for worker-owned cooperatives (Credit: RAFA RIVAS/AFP/Getty Images) TO GO WITH AFP STORY BY GABRIEL RUBIO (Photo credit should read RAFA RIVAS/AFP/Getty Images)

Plant workers on an assembly line at Spain’s Mondragon Corporation, an international model for worker-owned cooperatives (Credit: RAFA RIVAS/AFP/Getty Images)
TO GO WITH AFP STORY BY GABRIEL RUBIO (Photo credit should read RAFA RIVAS/AFP/Getty Images)

What is a cooperative? Simply put, it’s a business owned by the people who work in it. One can be established as a startup, or converted to a worker-owned model when the previous owner sells the business to his or her employees. Most adhere to democratic decision-making in which each worker-owner — called a member — gets one vote.

They are part of what is often called the “solidary economy”, which encompasses things like community land trusts and community-supported agriculture. In 2012, the United Nations founded a solidarity economy taskforce leading up to the development of the Sustainable Development Goals, and the International Labor Organization runs an annual solidarity economy academy.

Cooperatives are uncommon in the United States, but they may be gaining traction. There are about 300 or 400 that employ about 7,000 people, producing around $400 million in revenue, according to the Democracy at Work Institute; more than a fifth of those cooperatives were established between 2010 and 2013. Generally, members get 20 percent of net profits distributed back to them each year, with the rest saved for future operating needs.

Worker-owned businesses aren’t without their challenges — both operationally and financially.

“A primary barrier to worker coops is equity capital,” said Cy Richardson, senior vice president of the National Urban League, speaking on Citi panel. “It’s unusually difficult for cooperatives because they typically must generate cash from within their membership.”

Coops that need a loan can approach a bank, but usually require that the members contribute at least 50 percent of the funds needed to operate, according to research by the University of Wisconsin. Impact-oriented investment organizations are a solution, but not widespread. Three Community Development Financial Institutions (CDFIs) focus on lending to cooperatives: One Pacific Coast Bank on the West Coast, and LEAF and Cooperative Capital Fund in New England.

There’s a steep learning curve in learning how to operate a business. Incubating organizations like the Wellspring Cooperative Corporation provide intensive training to new coop employee-owners. “We’re up against the pressure that it’s a business: we have to produce,” Emily Kawano, Wellspring’s co-director, told the Aspen panel.

“The whole culture of ownership is difficult,” said Kawano. “People are used to coming in, being workers and clocking out; things like goofing around.” Interpersonal conflict is a typical problem in any business, Kawano said, but adjusting to workforce democracy in cooperatives can be tough. Some people prefer traditional manager/employee structure; after Zappos eliminated managers, 18 percent of employees quit, the Washington Post reported.

Not Just Jobs: Good Jobs

For inclusive growth to happen, cities must attract and develop jobs that poor residents are qualified for, can access geographically, and that pay enough to support them.

Worker-owned cooperatives are one way to make this happen; corporate-nonprofit collaboration is another. In Chicago, one of the nation’s most racially segregated cities, the nonprofit real estate development organization Chicago Neighborhood Initiatives (CNI) purchased and developed a large land site in Pullman, a predominantly low-income, minority neighborhood. After community consultations revealed residents wanted retail outlets and local lower-skill job opportunities, CNI allowed Walmart to open on the site — with a formal agreement to hire most staff locally, CNI’s president told the audience at the “Next America: Connecting All Neighborhoods to Opportunity” panel discussion in November 2015, hosted by the National Journal and sponsored by MasterCard.

“When you look at employee-owned companies, research shows they pay up to 12 percent more in wages, and employees have two to three times more retirement savings,” said Kelly.

Job quality means more than just salary, however.

Research on U.S. microenterprises shows that employees value stability and flexibility, and they believe the small businesses in which they work provide that. More than one-third of Americans experience income volatility during the year. If given the choice, most would choose stable income over higher income, according to research by the U.S. Financial Diaries.

“Erratic scheduling: cooperatives actually do things to address that,” Cornell University sociologist Sanjay Pinto told the Aspen Institute panel. The U.S.’s largest and oldest worker-owned cooperative, Cooperative Home Care Associates in New York City, has a minimum-work guarantee that ensures many staff are paid for a minimum 30-hour workweek, even if they’re scheduled fewer hours.

“A lot of this has been happening in domestic work sphere: nannies, home care, cleaners,” Pinto said. “They’re largely immigrant women of color who face a lot of barriers to traditional employment.”

While Silicon Valley has been developing tech startups like Handy, an app that connects independent home cleaners to clients, Cooperative Home Care Associates has been improving job quality both for its own employees and for the entire industry.

In October 2015, the nonprofit it founded, PHI, won an eight-year fight to get the Supreme Court to rule that minimum wage and overtime laws must be enforced for home care workers — improving hourly income for up to two million low-paid U.S. workers.

Demographic Moment of Opportunity

At the same time that job growth is being threatened by the fourth industrial revolution — the technological shift projected to decimate middle-income jobs — there is a big opportunity to increase business ownership among women, minorities, and low-wage workers.

“Right now there is a massive wave of entrepreneur retirements hitting over the next 15 to 20 years” as the Baby Boomer generation ages, Kelly said. “It’s being called a multi-trillion dollar opportunity.”

Business owners planning to retire have three choices: pass on to children, close, or sell. The number of small businesses listed for sale in 2015 was at a six-year high, the New York Times reported.

“If you keep companies locally-owned and convert them to worker ownership, you’re going to have better jobs and more financial security,” Kelly said.

In low-income and minority communities, “most small African-American businesses are first-generation owned,” said Richardson. Most do not have children interested in or qualified to take over the family business, and few know about the option to convert ownership to their employees, Richardson said. Community development organizations should advocate for and support succession planning that sets in place a shift to a worker-owned cooperative model. This could prevent business closure and employee job loss, or avoid a sale to private equity that could lead to a neighborhood’s gentrification.

“Doing so will not only generate new wealth and income opportunities in some of our nation’s most economically distressed communities,” Richardson said. “The growth and expansion of these [worker-owned] businesses will be good for the national economy, full stop.”

Even if businesses aren’t sold to employees, this demographic change is creating new opportunities for women and minorities to acquire businesses. More than 30 percent of prospective buyers age 30 to 49 identify themselves as non-white, while more than 20 percent are women, the New York Times reported from a study done by the largest national site for small business sales. Access to microfinance capital is critical for many of these buyers to make the leap to ownership.

Collaboration between local governments, financing entities, community development organizations, and business owners will be key to making that happen — and it’s a path that shows promise for creating not just economic growth, but inclusive growth.

“All economic development does not accrue to the benefit of poor people,” said Richmond mayor Dwight Jones, speaking on the Aspen Institute panel; his city has pledged to reduce poverty by 40 percent over the next 15 years. “We have to be intentional that the economic development happens not just in a city, but particularly in the poor parts.”

 

 

 

 

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