Reducing Economic Inequality through Democratic Worker-Ownership

Income inequality in the United States has not been this bad in almost a century—not since the end of the 1920s, just before the country crashed into the Great Depression.(1) Today, despite maintaining one of the highest per-capita national Gross Domestic Products worldwide, the United States also has one of the most unequal income distributions in the developed world.(2)

Income gains for top earners in the United States have skyrocketed over the last several decades, far outpacing the modest gains seen by middle-wage and low-wage workers. While the top 1 percent wage has increased by 138 percent since 1979, the wages of the entire bottom 90 percent of earners have grown by the comparatively meager margin of just 15 percent (Figure 1).(3) Even as very high-wage workers have enjoyed steadily rising hourly wages, wages for middle-wage workers are stagnant, growing just 6 percent overall since 1979.(4) Low-wage workers have fared worse yet, seeing a 5 percent drop in hourly wages over the past four decades (Figure 2).(5)

The pay disparities between CEOs and rank-and-file employees offer a particularly illustrative example of just how drastically income inequality has increased in recent decades in the United States. In 1965, the CEOs of the top 350 largest publicly traded companies in the United States earned twenty times more than did their typical employee. Today, these CEOs make nearly 300 times more than they pay their typical workers.(6)

Patterns of wealth inequality in the United States have followed an even more extreme version of this trend. The proportion of wealth held by the wealthiest Americans has been continuously increasing since 1978.(7) The share of wealth held by the richest 1 percent of American families reached 41.8 percent in 2012, with top 0.1 percent wealthiest—numbering just 160,000 families—holding a grossly disproportionate 22 percent of total wealth.(8) The bottom 90 percent, on the other hand—a group comprising more than 144 million American families—held just 22.8 percent of wealth the same year.(9)

The Great Recession brought the long-standing income and wealth inequality crisis into sharp focus. Just before the Recession, income inequality peaked, exactly as it did before the Great Depression—and immediately after, businesses and jobs evaporated as the economy crumbled, devastating local economies across the country and leaving millions of families at the mercy of plummeting incomes and skyrocketing unemployment rates. The number of Americans living in poverty spiked, with minority communities seeing particularly large declines in income and increases in poverty.(10) The country has since seen only tepid recovery in poverty rates, and long-term unemployment rates remain well above their pre-Recession levels.(11) Despite modest increases in national median household income, incomes are still not back to where they were before the Recession, and many local economies across the country have not recovered.(12)

By punctuating long-present patterns of severe income and wealth inequality, the Great Recession revealed just how starkly unequal the United States has become. But we have not arrived here by mere chance. Rather, the national economic inequality crisis is rooted in the policy choices our county has made—choices including the continual depression of the national minimum wage, erosion of collective bargaining, and deregulation of industry and of the financial sector.(13) Policies like these have allowed wealth to disproportionately concentrate at the top, in the hands of a select few, leaving less and less left for the vast majority of the nation’s workers.(14) Yet if we have chosen this inequitable path, then we are also free to choose another—one that will lead toward greater income equality, fairer wealth distribution, and a more democratic economic system.

It is imperative that we, as a nation, develop policies that not only mitigate existing economic inequality and poverty, but that actually reverse these trends for the long term. Beyond perpetuating poverty, fomenting social unrest, incurring greater burdens on social services, and producing countless other toxic consequences, numerous studies, as well as our recent first-hand experience with the Great Recession, affirm that income inequality is bad not only for low-income individuals, but also bad for the economy at large.(15) Whereas income and wealth inequality lead to economic stagnation and social instability, greater economic equality, on the other hand, produces economic growth and social stability.(16) A fairer, inclusive employment system will undoubtedly be a critical component of building a more equitable, sustainable economy—so how do we begin making real, measurable steps toward this nebulous goal?

Employee-owned businesses offer one concrete, proven way forward. By creating a policy environment to support and promote democratic employee-owned businesses, the United States could promote a more equitable employment system and a more just distribution of wealth. Doing so would not only help the country recover from the recent economic devastation of the Great Recession, but also begin to reverse the deep wealth and income disparities that have plagued American workers and families for decades.

Why Employee-Ownership?

Employee-owned companies are a specific type of for-profit business owned by their workers; democratic employee-owned businesses are owned and also run by their workers. As a concept, employee-ownership is primarily about profit-sharing and worker participation. Employee-owned companies allow workers to take home a bigger, fairer share of the fruits of their labor by sharing company profits with employees. In doing so, employee-ownership more equitably distributes wealth throughout the workforce, helping to even out the lopsided capital accumulation trends that have produced the United States’ massive income and wealth disparities. Models of democratic employee-ownership not only share wealth with employees, but also incorporate employee-owners into decision-making and management processes.17 By establishing employee participation as the cornerstone of day-to-day business operations, democratic employee-owned businesses promote economic democracy also at the micro-scale, in the workplace itself. These two fundamental characteristics of democratic employee-owned businesses—equitable wealth distribution and employee participation—make them valuable vehicles for correcting deleterious income and wealth imbalances, and for building greater economic inclusivity, stability, and sustainability.

Democratic worker-ownership offers a simple, feasible, yet still largely untapped way to navigate this treacherous terrain.

Democratic worker-ownership offers a particularly timely and promising solution to a set of formidable challenges currently facing the United States. A confluence of past, present, and future economic and demographic trends—including decades’ worth of deep-seated income and wealth inequality, the recent and continuing economic devastation of the Great Recession, and now an entire generation of businesses with uncertain futures as the looming “Silver Tsunami” of baby boomer business owners near retirement—present significant threats to workers, communities, and local economies throughout the nation. Democratic worker-ownership offers a simple, feasible, yet still largely untapped way to navigate this treacherous terrain.

One specific form of democratic employee-owned business, the worker-owned cooperative business, holds particularly rich potential as a tool for repairing the broken U.S. economy. A necessary first step in harnessing the potential of this uniquely beneficial but little-known type of business is to help grow the sector to scale. To do so, it is crucial that the United States establish a national-level regulatory framework for worker-cooperatives. Foundational components of such a framework could include a clear, universal definition for worker-cooperatives and a national worker-cooperative incorporation code; financial support mechanisms, such as a dedicated worker-ownership fund; and cross-sector partnerships with the existing decentralized network of employee ownership service providers.

The following pages outline what a worker-cooperative regulatory framework could look like in the United States. Italy’s experience of successfully expanding its worker-cooperative sector by creating a sophisticated regulatory framework and strong cross-sector partnerships provides valuable guidance.18 The Italian example not only evinces the critical role public policy plays in enabling democratic worker-owned business models to thrive, but also illustrates the proven capacity of the worker-cooperative model to combat unemployment, affect regional economic revitalization, and promote inclusive economic development. By taking actions similar to Italy’s to support and grow its own democratic worker-owned business sector, the United States could unlock the potential of this unique business model as a critical tool for reducing income inequality and unemployment, and for building a more equitable, inclusive, and just economy.

Employee Ownership, Profit-Sharing, and Democratic Management

The worker-owned cooperative is a particular form of democratic employee-owned business that exists within a broader spectrum of employee-owned businesses and democratic workplaces. At one end of the spectrum are employee-owned businesses that emphasize sharing company profits with workers, but that do not include employee-owners in decision-making and daily management operations; and at the other end are democratic workplaces that prioritize employee participation, but are not employee-owned. Worker-cooperatives sit somewhere in the middle, and emphasize both profit sharing and worker participation as foundational, interconnected tenets of employee-ownership.

Besides worker-cooperatives, other models of broad-based employee-ownership include stock options and similar individual equity plans; Employee Stock Purchase Plans; pension plans, including 401(k)s; and Employee Stock Ownership Plans (ESOPs).19 The primary purpose of each of these options is to provide more wealth to employees. For the most part, these models do so by functioning as a sort of pension plan for employees. In some cases, democratic management is also a central component of these employee ownership models; democratic ESOPs, for instance, overlay worker-cooperatives’ employee participation principles on the ESOP business structure. But unlike worker-cooperatives, which always include both employee ownership and employee control, the employee-owners of companies structured around these other models of employee-ownership do not necessarily participate in decision-making any more than do employees in conventionally owned companies. In the absence of the full protections of a democratically run worker cooperative, the ESOP model has been vulnerable to abuses and less worker power than traditional workplace. As we detail later in the paper, this created a number of high profile ESOP failures like United Airlines and the Tribune Company which illustrate how important employee participation in employee ownership structures is to their ultimate success.

Democratic workplaces, on the other hand, emphasize including employees in management and decision-making processes, but are not necessarily employee-owned. One example of how any type of company—employee-owned or investor-owned alike—may choose to promote employee participation is through an open-book approach to management. Companies that implement open-book management strategies share income statements, balance sheets, and other company data with employees, train employees to understand financial numbers, and may engage employees in a gainsharing program.20

Within the universe of democratically controlled companies, the most common type of organization is the cooperative business. Cooperatives are member-owned, member-run, and member-serving businesses based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity.21 Several distinct categories of cooperative business exist, including worker-cooperatives, which are owned and controlled by their workers; marketing cooperatives, which are owned by and benefit members who use the cooperative to help sell their products; consumer, purchasing, and farm supply cooperatives, which are organized to provide better availability, selection, pricing, or delivery of products or services to individual consumers, businesses, or farmers; and multi-stakeholder cooperatives, which comprise and serve multiple types of cooperative members.22

Worker-owned cooperatives bring together the wealth-sharing principles of employee ownership with cooperatives’ prioritization of economic democracy (Figure 3). This combination positions worker-cooperatives as an exceptionally promising tool for building a fairer, more stable U.S. economy.

What Is a Worker-Cooperative?

Worker-cooperatives are owned and run by their members—the individuals who are also their workers.23 There are two foundational characteristics of worker-cooperatives: (1) worker-members invest in and together own the business, which distributes surplus to them; and (2) decision-making is democratic, adhering to the general principle of one member-one vote.24 Although worker-cooperatives make decisions democratically, not every worker-member necessarily participates in every decision; different worker-cooperatives may create very different democratic decision-making structures depending on the size and type of the business.25 Some cooperatives adhere to a flattened model of management, in which every worker-member votes in company decision-making processes, while others may choose a more hierarchical model in which worker-owners elect selected representatives to a decision-making body, such as a board of directors, rather than every worker-owner voting directly.26

Worker-cooperative businesses exist in many countries throughout the world, and span a diverse range of industries. Individual worker-cooperative businesses may include anywhere from several worker-owners to tens of thousands. The world’s largest worker-cooperative, the Mondragón Corporation in Spain, has more than 74,000 employees, and accounted for 3.7 percent of the Basque Country’s total employment across all sectors and 3.6 percent of the region’s total GDP in 2012.27

In the United States, the worker-cooperative sector is very small relative to many other countries. The U.S. Federation of Worker-Cooperatives estimates that approximately 350 worker-cooperatives employing some 7,000 people exist in the United States today, distributed throughout a number of different industries.28 As the following pages describe, the still-small scale of the American worker-cooperative sector is closely tied to the fact that the United States lacks a national-level regulatory framework around worker-cooperatives. In contrast, the strong cooperative economies maintained by many other countries have grown out of public policies these nations have established to support and grow their respective cooperative business sectors.29 Establishing a universal regulatory framework would remove many of the significant barriers that currently inhibit the worker-cooperative sector’s growth potential in the United States, and would be an essential first step toward growing the democratic employee-owned business sector to scale.

Benefits of Worker-Cooperatives

When it comes to promoting economic fairness and sustainability, worker-cooperatives not only “talk the talk,” but also “walk the walk.” They produce demonstrably better outcomes for workers, for businesses, for local communities, and for society and the economy at large than do conventionally owned businesses.30

How Society and the Economy Benefit

One of the most powerful benefits of democratic worker-ownership is the role it can play in promoting economic equality by reducing income and wealth disparities. Worker-owned cooperatives combat income inequality and decrease wealth gaps in two critical ways. First, employee income ratios—meaning the ratio between the highest-paid and the lowest-paid employee—are dramatically lower in worker-cooperatives than in many conventional investor-owned businesses. Second, by expanding ownership opportunities to workers, worker-cooperatives allow a much larger portion of the population to build wealth through business ownership.

Exorbitant pay ratios are a critical factor contributing to the national economic inequality crisis. An estimate by the Economic Policy Institute places the CEO-to-worker pay ratio in the United States at 296:1; the AFL-CIO reports the ratio to be even larger, at 373:1, meaning that CEOs are earning, on average, 373 times more than their typical rank-and-file worker.31 These extreme pay disparities in investor-owned corporations stand in sharp contrast to the typical wage difference between the highest-paid and lowest-paid employees in worker-cooperatives. For example, the CEO of the Spanish Mondragón Corporation—the largest worker-cooperative in the world—earned just nine times more than the cooperative’s lowest-paid employee in 2011.32 In Cooperative Home Care Associates, the largest worker-cooperative in the United States, the CEO-to-minimum-wage-worker pay ratio hit its peak in 2006—at just 11:1.33

The far smaller pay ratios found in worker-owned cooperatives mean that instead of the vast majority of a company’s profits going into the pockets of CEOs, workers get to take home a larger, fairer portion of what they produce. Sharing a larger portion of company profits with employees holds significant benefits for individual workers and for the economy at large. For low-income workers, profit-sharing combats poverty by increasing workers’ take-home pay. And in a broader sense, more equitably distributing income amongst workers promotes economic inclusion and increases workers’ capacity to participate in the economy.

In addition to reducing income inequality by more equitably distributing earnings among workers, worker-ownership is a valuable way for workers to build long-term wealth. For business owners, whose company functions not only as a source of income during their tenure as owner, but also as a major investment that an owner can cash out by selling the company. Worker-cooperatives provide a major new portion of the population the opportunity to move from rank-and-file wage worker to business owner, and to gain access to the wealth-building potential of business ownership. In this way, worker-cooperatives open a channel for wealth-building that rarely exists for low-wage or lower-skilled workers in conventionally-owned businesses.

It is important to note that by extending business ownership to historically marginalized communities, worker-ownership could play a part in shrinking the racial wealth gap in the United States.34 Individuals of color are far less likely to own their own businesses in the United States, and are thus less likely to benefit from the wealth-building opportunities offered by business ownership.35 Exclusion from this important asset-building opportunity contributes to the severity of the racial wealth gap, where the typical black and Latino households hold a tiny fraction of the wealth possessed by typical white households: on average, black households have just 6 percent the amount of wealth that white households do, and Latino households have 8 percent the amount of wealth that white households possess.36 These long-range wealth disparities compound the more immediate realities of racialized poverty, in which individuals of color are far more likely to live under the poverty line37 and in concentrated-poverty neighborhoods than white Americans.38 By extending high-quality, stable employment and business ownership opportunities to low-income and marginalized communities—communities that are, more often than not, also communities of color—worker-ownership could play a meaningful part in addressing the racialized income and wealth inequality crisis. Worker-ownership may already have begun proving its potential to help dismantle racial economic disparities: in 2012 and 2013, almost 60 percent of people in new worker cooperatives were people of color.39

The above examples illustrate how worker-cooperative businesses play a critical role in supporting economic stability and sustainability by reducing income and wealth disparities. But in addition to promoting economic equality at the macro-scale, democratic worker-ownership also produces demonstrably better (and more immediately visible) outcomes for workers, for businesses, and for local communities.

How Workers Benefit

Because worker-owned cooperative businesses operate for the benefit of their members—the worker-owners who work in, run, and also own the business—employees of worker-cooperatives fare better in many respects than their counterparts in conventionally owned firms. Each worker-owner of a worker-cooperative holds one voting share in the company, and so each individual worker-owner retains direct control over his or her own working conditions, wages, and job security.

In some cases, this democratic model of direct employee control has produced higher wages for workers employed by worker-cooperatives than for those employed by comparable conventional firms.40 For example, one study of a worker-owned grocery in the San Francisco Bay Area found that average compensation for the grocery’s worker-owners was 40 percent higher than the average for unionized grocery workers in California.41 Similarly, members of the California-based Women’s Action to Gain Economic Security (WAGES) worker-cooperatives reported seeing a 70-80 percent increase in family income after joining the cooperative.42 At Cooperative Home Care Associates (CHCA), the nation’s largest worker-cooperatives, above-average pay coupled with fuller than normal work schedules has led to increased earnings; workers at CHCA work an average of thirty-six hours per week, compared with the industry average of 25–30.43

Beyond incentivizing better base wages, worker-cooperatives also increase workers’ take-home pay by directly distributing any year-end surplus to their worker-owners. The worker-members of a worker-cooperative collectively decide how to divide surpluses between re-investing some revenue as retained earnings in the business’ collective account, and distributing some as dividends the cooperative pays to each worker-member based on the relative amount of work he or she did.44 In general, each worker-member will receive a portion of these patronage dividends in a cash payment at the end of the fiscal year. The cooperative will allocate the remainder to a member account held for each worker-owner, which he or she can cash out at some point in the future as specified by the cooperative’s bylaws.45 In both situations, workers directly earn a significant portion of the profits they created, instead of those profits ending up primarily in the pockets of outside investors.

Perhaps equally important as these increases in take-home pay for employees is the overall better treatment and security that worker-owners enjoy compared with the employees of conventionally owned businesses. During times of economic downturn, worker-owned businesses prioritize job preservation, and have demonstrated that they are more likely than are conventional firms to choose to temporarily reduce hours or adjust wages rather than cut jobs.46 In addition to better job security for workers, this translates to lower unemployment rates and helps to insulate local economies during crisis periods.

Worker-ownership also mitigates economic inequality by increasing long-term wealth-building opportunities for workers.

Worker-ownership also mitigates economic inequality by increasing long-term wealth-building opportunities for workers. Since every worker-member of a worker-cooperative holds an ownership share in the company, each worker-owner is entitled to the long-run benefits of business ownership. If the members decide to sell or dissolve the worker-cooperative, every worker-owner receives a portion of the company’s value.47 Because worker-ownership allows a larger and more diverse group of people to participate in business ownership, it can thereby become an invaluable opportunity for low-wage workers to build wealth through ownership and lift themselves out of the cycle of persistent poverty.

How Businesses Benefit

Like their workers, businesses themselves also benefit from adopting a democratic employee-owned business structure. As co-owners of the business, worker-owners have inherently more meaningful roles in determining the businesses’ success and a greater stake in how the company fares. A 2012 study by McKinsey & Company found cooperatives to be “particularly effective” in creating employee mobilization “because members participate in the cooperative’s direction-setting process,” which provides co-op employees with “a strong sense of ownership of, and belonging to, their organization.”48 Unsurprisingly, studies have also found a correlation between broad-based employee ownership and higher productivity rates, along with improved overall firm performance.49

In a similar vein, empirical evidence demonstrates that employee-owned businesses and cooperatives are more resilient than are conventional investor-owned firms: they have higher survival rates and fare better during economic downturns than do conventionally owned companies. Some researchers have found that higher resilience among cooperatives is related primarily to greater employment stability,50 while others take a broader view, and argue that the “resilience of worker cooperatives is linked to the intrinsic motivations of self-management for worker-members, and the positive externalities they bring to local communities.”51 In the UK, for example, data from the Office for National Statistics reveals that twice as many cooperatives survive the difficult first five years as other businesses.52 A study by the Québec Ministry of Economic Development, Innovation, and Export found similar results for cooperatives in Québec: the survival rate for new cooperatives after five years was 62 percent, as compared with 35 percent for all businesses (Figure 3).53 Even after ten years, cooperative businesses in Québec maintained a survival rate more than double that achieved by all businesses (44 percent and 20 percent, respectively).54 This same trend has been documented by studies of Italian industrial worker-cooperatives. Between 2007 and 2013, the survival rate of new Italian industrial cooperatives far outpaced that of all Italian enterprises: less than half of all businesses, 48 percent, had survived through their first three years, compared with fully 87 percent of the cooperatives studied.55

Importantly, worker-cooperatives are more resilient than conventional investor-owned firms particularly during times of economic crisis.56 During economic downturns, worker-cooperatives fail at lower rates,57 experience much less job loss,58 and are able to more efficiently manage short-term issues that emerge during crisis situations.59

How Local Communities Benefit

Worker-owned enterprises create stronger local economies by rooting businesses in their communities.60 Because ownership and labor are one and the same in worker-cooperatives, and because workers themselves make the company’s critical strategic decisions, there is little danger of a worker-cooperative business unexpectedly picking up and leaving or being sold to outside investors and dissolved. As Paul Soglin, mayor of Madison, Wisconsin, noted, “With a cooperative, you don’t have to worry about a buy-out. You don’t have to worry about a CEO one day picking up and moving the company to Fargo. With a cooperative, you can have confidence that the company and the wealth it generates is going to stay local.”61 By essentially anchoring businesses in place, worker-cooperatives also reduce the risk of retail “desertification” that so frequently plagues communities suffering from disinvestment or decline.62

“With a cooperative, you don’t have to worry about a buy-out. You don’t have to worry about a CEO one day picking up and moving the company to Fargo. With a cooperative, you can have confidence that the company and the wealth it generates is going to stay local.”

At their core, cooperative businesses exist for the benefit of their members and their communities. The seven foundational cooperative principles (established by the International Cooperative Alliance in 1995) include “concern for community,” meaning that by definition, a cooperative entity should “work for the sustainable development of their communities through policies approved by their members.”63 As a result, cooperative businesses tend to purchase locally more frequently and re-invest more in the local economy and community than do conventionally owned businesses. The results of a 2012 study by the National Cooperative Grocers Association provides an example. The study, which measured the impact of food co-ops versus conventional grocers on the local economy, found that $0.38 of every dollar spent at a food co-op is reinvested in the local economy, compared to just $0.24 at conventional grocers.64

The resilience and greater relative benefits of cooperative and employee-owned enterprises for workers, businesses, and local communities are closely linked to self-management.65 Instead of owners being distant investors who are interested solely in increasing profits, worker-owners are at once employees, owners, and community members. As a result, they have much reason to promote the wellbeing of employees, of the local economy, and of the community as they do to ensure the long-term viability and profitability of the company.

Importantly, worker-ownership offers exceptional benefits to their surrounding communities and local economies particularly during times of crisis. Worker-cooperatives function as a micro-economic counterweight to lost jobs and business closure during economic downturns, and they have also demonstrated their effectiveness at helping rebuild and revitalize local economies after periods of crisis.66 Employee-owned businesses are counter-cyclical by nature: while conventional businesses experience heightened closure rates in times of economic crisis, worker-cooperatives tend to emerge in greater concentrations during downturns and act as “shock-absorbers” to meet the socioeconomic needs of local communities.67 Throughout Europe and much of the Global South, for example, where unemployment continues to rise and conventionally owned businesses are closing at elevated rates (as of the end of 2015), the worker-cooperative sector is in a period of growth.68 In addition to new cooperatives emerging during times of economic crisis, existing cooperatives also tend to weather downturns better than other businesses: worker cooperatives experience far lower rates of job loss and also fail at lower rates during economic downturns than do conventional investor-owned firms.69

Case Study: Emilia Romagna

The revitalization of the Emilia Romagna region of Italy offers one illustrative example of the cooperative business sector’s effectiveness at transforming regional economic distress into sustainable prosperity. Situated in Northern Italy, Emilia Romagna is today one of the wealthiest regions, per capita, in the European Union,70 and also has one of the highest concentrations of cooperative businesses in the world.71 But Emilia Romagna has not always been so fortunate. Less than a century ago, World War II devastated Emilia Romagna’s economy, leaving it one of the most impoverished regions of Italy, beset by high unemployment rates and lacking any viable industry base upon which to rebuild.

Worker-cooperatives played a leading role in transforming Emilia Romagna’s economy from near-collapse into one of the strongest regional economies in Italy and the EU.72 The Emilia Romagna government launched an economic development strategy centered on small business development that emphasized promoting employee-owned businesses and cooperatives of all kinds. From this initial strategy grew thousands of small- and medium-sized worker-cooperatives, which over the years have become an incredibly dense, well-connected network spanning nearly all sectors. Today, nearly two out of every three citizens of Emilia Romagna’s population of 4.3 million are members of one or more of the region’s 8,000 cooperatives,73 and cooperatives generate 40 percent of the region’s GDP.74 Thanks in large part to its strong cooperative sector, Emilia Romagna has one of the highest regional GDPs in Italy and throughout Europe; the region has a low unemployment rate relative to the Italian national average;75 and the European Commission describes Emilia Romagna as a “leading region in Europe in terms of entrepreneurship and economic dynamism.”76 Emilia Romagna’s journey from one of the most economically distressed regions in Italy and Europe to one of the most thriving demonstrates the power of the cooperative sector to drive local economic revitalization and sustainable economic development.

The Global Cooperative Sector

Cooperative ownership not only promotes overall economic and social stability, sustainability, and equity at the macro-scale, it also produces demonstrably better outcomes for individuals, businesses, local economies, and communities on a more immediate, tangible level. International organizations and countries throughout the world have recognized these exceptional social and economic benefits, and have taken concrete steps to support worker-cooperatives within their broader efforts to promote cooperative businesses at large.77

The past several decades are replete with instances of global governance organizations declaring their support for cooperative businesses and encouraging their members to adopt policies that promote them. In 2001, the United Nations published a set of guidelines “aimed at creating a supportive environment for the development of cooperatives,” citing as the impetus for the guidelines “the significance of cooperatives as associations and enterprises through which citizens can effectively improve their lives while contributing to the economic, social, cultural, and political advancement of their community and nation.”78 A year later, the International Labor Organization (ILO) adopted the “Promotion of Cooperatives Recommendation” (ILO Recommendation No. 193 of 2002), which states that “Measures should be adopted to promote the potential of cooperatives in all countries,” given the “importance of cooperatives in job creation, mobilizing resources, generating investment and their contribution to the economy.”79 More recently, the United Nations General Assembly declared 2012 the International Year of Cooperatives, highlighting “the contribution of cooperatives to socioeconomic development, particularly their impact on poverty reduction, employment generation and social integration”.80

And in 2013, the European Parliament adopted a resolution on “the contribution of cooperatives to overcoming the [economic] crisis,” which recognizes that cooperatives “play an essential role in the European economy, especially in time of crisis, by combining profitability with solidarity, creating high-quality jobs, strengthening social, economic, and regional cohesion, and generating social capital.”81

Countries across the world, from Brazil, to India, to South Africa, to Spain, have also recognized the social and economic value of cooperative businesses, and have acted to promote their respective cooperative sectors by established legal frameworks that support and govern the operations of cooperative businesses.82 As a result of this definitive, widespread international support, cooperative businesses are today a major—and growing—part of the global economy.83 Throughout the world, cooperatives employ more than 250 million people, and in 2013, generated $2.95 trillion in turnover.84 In addition to contributing significantly to the global economy, cooperatives are also a major source of employment worldwide. Within the G20 countries, for instance, co-operative employment makes up almost 12 percent of the total employed population.85

Although estimating the global number of worker-cooperatives within the broader cooperative sector is no straightforward task, given that definitions and legal treatment of worker-cooperatives vary across international boundaries, the International Organisation of Industrial and Service Cooperatives (CICOPA) estimates that the global cooperative sector includes some 10.8 million worker-members.86 Within Europe, 1.5 million workers are co-owners of worker-cooperatives, specifically.87 It is clear that at least in some regions, worker-cooperatives represent a majority share of the overall cooperative sector.88 In the Basque Country, for example, worker-members account for approximately 57 percent of total cooperative employment.89 The Mondragón federation of cooperatives—the world’s largest worker-cooperative, with over 74,000 employees90—provides on its own for over half of the Basque Country’s total cooperative employment. In the Emilia Romagna region of Italy, which boasts one of the highest concentrations of cooperatives businesses anywhere in the world, worker-members comprise an estimated 35 percent of cooperative employment.91

The U.S. Cooperative Sector

The United States is relatively well represented in the global cooperative sector in terms of some types of cooperatives, such as agricultural cooperatives, utility cooperatives, and financial cooperatives. For these types of cooperative businesses, the United States has established clear, national-level regulations and tax incentives, allowing them to become normalized, widespread forms of business across the country. But the U.S. worker-cooperative sector is a different story: it is a tiny fraction of that of many other countries.92 This disparity is due in large part to the fact that the United States, unlike many other countries, has established no cohesive national regulatory framework, no consolidated system of support, nor even a codified definition for worker-owned cooperative businesses. Worker-cooperatives in the United States are thus primarily regulated under an inconsistent patchwork of idiosyncratic state-level laws. At the national level, no explicit regulations around worker-cooperatives exist, leaving worker-cooperatives loosely governed under regulations designed for other types of cooperatives.

Current U.S. Cooperative Law

Federal regulations around cooperatives exist primarily in the tax code. Since the late nineteenth century, the United States has implicitly recognized the social and economic value of cooperatives in offering certain tax exemptions for businesses that operate as cooperatives.93 The modern tax code includes regulations around cooperative businesses in sections I.R.C. 501(c)(12); I.R.C. 521; and I.R.C. Subchapter T (sections 1381-1388 inclusive). I.R.C. 501(c)(12) applies to specific types of cooperatives, and provides federal income tax exemption for “benevolent life insurance associations of a purely local character; mutual ditch or irrigation companies; mutual or cooperative telephone companies, mutual or cooperative electric companies; and ‘like organizations.’”94 Similarly, I.R.C. 521 establishes tax-exempt status for farmers’ cooperatives.95 Subchapter T, added to the tax code in 1962, is the default legislation for cooperatives in general. The sections of Subchapter T allow “any corporation operating on a cooperative basis” to deduct from their gross taxable income the amount they pay in patronage refunds.96