Back in 1894, President Grover Cleveland ordered government troops to break up a railroad workers' strike, arousing the ire of labor leaders. Fearing riots and a backlash in an election year, Cleveland signed the law that introduced a new national holiday.

Resident Scholar Kevin A. Hassett

Labor Day was envisioned by organized labor as a day for political marches and union organization. But the holiday has become something quite different in the U.S. For most of us, it just marks the end of summer and the return of the school year.

Americans love their holiday, but rather than take to the streets, most seem to prefer grilling hamburgers in the backyard. Indeed, American involvement in the labor movement is waning, with membership declining as a percentage of the workforce since 1983, the earliest year that data has been continuously collected by the Labor Department. Today, membership stands at 12.5 percent, the lowest figure since the start of the data series.

It is this development that identifies Labor Day as perhaps America's strangest official holiday. Of our 10 federal holidays, three--Columbus Day, Washington's birthday, Martin Luther King Day--celebrate the lives of specific people. Three others, Christmas, Thanksgiving and New Year's Day, celebrate calendar days of particular significance; two others, Veterans' Day and Memorial Day, remember our soldiers.

Heroic Workers?

Labor Day, a time designed to celebrate accomplishment at the workplace, seems far out of place--except if you accept the ideology of labor leaders. To them, the economy is a battlefield between oppressed workers and greedy capitalists. Workers who strike and combat the capitalists are as heroic as our soldiers, and worthy of solemn ceremony.

This view of the workings of an economy is Marxist in origin, but it is a very poor description of a modern economy. Free markets lead to a flow of capital to its most productive use, and that benefits all of a country's citizens. Capital doesn't oppress the worker, it is his salvation.

So capital and labor aren't enemies. One couldn't succeed without the other. A lot of countries have surprisingly begun to embrace that view.

In 1994, the U.S. had the 18th-lowest corporate-tax rate in the Organization for Economic Cooperation and Development, a group of the richest nations, even after President Bill Clinton signed legislation increasing it.

Since then, a wave of capital-friendly reforms has spread throughout the OECD. As of 2005, without any further increases, the U.S. had the second-highest combined corporate-tax rate, just below Japan. Even Germany has a lower rate and is looking to drop it further still, with the Ministry of Finance proposing that it be reduced to 30 percent.

Taxes Oppress

Capital-friendly policies have received an especially warm reception in former Soviet states and vassal nations. Out of 17 such nations, 12 scaled down top-tier corporate income-tax rates in the 1990s and early 2000s.

And what of the workers? Recent academic work has shown they ultimately bear a large part of the burden of capital taxes in the form of lower wages. In a recent study I completed with Aparna Mathur, we found that countries that lower their capital taxes see significant increases in manufacturing wages, while those with high taxes see their blue-collar wages fall behind.

The evidence is clear; workers' pay is linked to their productivity, not oppressively held at the subsistence level as Marx suggested.

Failed Ideology

Which suggests that our practice of paying respect to only labor on the first Monday of September inappropriately honors a failed ideology.

So here's a simple proposal: Rather than call this holiday "Labor Day," we should rename it something that recognizes that labor is but one part of the production process. We should celebrate "Labor and Capital Day" instead.

We can be euphoric that workers in the U.S. economy have accomplished so much this year, but we should also celebrate that our economy has attracted so much capital to help our workers. By singling out labor, we implicitly support the view that labor is opposed to capital. By honoring both, we codify into our law a respect for the capitalist system that, much to Marx's surprise, has delivered prosperity to workers and investors alike.

Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI.