On this day in economic and business history...

The modern labor community has its own method of dating history. There's "Before Reagan," which covers much of the history of labor rights in the 20th century, and then there's "After Reagan," which begins on Aug. 5, 1981, when President Ronald Reagan broke the strike of the Professional Air Traffic Controllers Organization, or PATCO.

The PATCO strike was, more than any other event of the last half-century, a turning point in the relationship between labor and government, as well as the relationship between labor and business interests. It set the tone for the Reagan presidency and set the stage for a shift in power from labor to capital. Let's examine what happened so we can better understand its effect on the American economy.

The story of the PATCO-Reagan showdown began during the 1980 presidential campaign, when Republican candidate Reagan courted PATCO's endorsement. A letter from Reagan to PATCO president Robert Poli promised cooperation and support, should he be elected:

I have been briefed by members of my staff as to the deplorable state of our nation's air traffic control system. They have told me that too few people working unreasonable hours with obsolete equipment has placed the nation's air travelers in unwarranted danger. In an area so clearly related to public policy the Carter administration has failed to act responsibly.

You can rest assured that if I am elected president, I will take whatever steps are necessary to provide our air traffic controllers with the most modern equipment available and to adjust staff levels and work days so that they are commensurate with achieving a maximum degree of public safety. ...

I pledge to you that my administration will work very closely with you to bring about a spirit of cooperation between the president and the air traffic controllers. Such harmony can and must exist if we are to restore the people's confidence in their government.

The administration of President Jimmy Carter had not helped the controllers as they had hoped, and a deteriorated relationship with the Federal Aviation Administration (headed by Carter appointees) led PATCO to endorse Reagan toward the end of the 1980 campaign. It was one of only four AFL-CIO unions to do so.

Shortly after Reagan's inauguration in 1981, PATCO began to negotiate a new contract with a fresh, Reagan-appointed head of the FAA. Their demands were quite optimistic, to say the least: Controllers wanted a four-day, 32-hour work week and a $10,000 annual pay raise -- equal to nearly $26,000 today, or roughly half of the current median U.S. annual household wage. This $770 million package was countered with a $40 million FAA offer -- far less than might content the controllers. At the same time that PATCO was starting its contract negotiations, the Reagan Department of Justice was working with the FAA to compile what a District Court Judge would later decry as a "hit list" -- a list of PATCO members to arrest and prosecute should a strike occur.

The two sides were clearly angling for a strike, which finally took place on Aug. 3 when 13,000 controllers did not report to work. PATCO's leaders hoped the strike might also win the union freedom from its designation as a civil-service (government) union -- a status that legally restricted it from striking. Reagan immediately denounced the strike as illegal and a "peril to national safety," demanding that the controllers return to work through the authority he held under the Taft-Hartley Act. If they did not, Reagan promised to fire them all.

Some 1,300 striking controllers returned to work, and the FAA implemented a contingency plan that involved supervisory personnel and military controllers. Soon, most flights were back on schedule, and PATCO's position was severely weakened. Reagan carried out his threat two days later, on Aug. 5, and more than 11,000 striking controllers were fired. Not only did Reagan terminate their employment, but he also banned them from federal service for life. PATCO was decertified as a representative union that October, and although some of the strikers were allowed to reapply for jobs several years later, it was not until 1993 that President Bill Clinton lifted the lifetime ban on the entire group.

The impact of Reagan's destruction of PATCO was far-reaching. Joseph McCartin, writing for The New York Times three decades later, noted Reagan's near-term gains and the long-term effect of the strike's failure:

By firing those who refused to heed his warning, and breaking their union, Reagan took a considerable risk. Even his closest advisors worried that a major air disaster might result from the wholesale replacement of striking controllers. Air travel was significantly curtailed, and it took several years and billions of dollars (much more than PATCO had demanded) to return the system to its pre-strike levels.

But the risk paid off for Reagan in the short run. He showed federal workers and Soviet leaders alike how tough he could be. Although there were 39 illegal work stoppages against the federal government between 1962 and 1981, no significant federal job actions followed Reagan's firing of the PATCO strikers. His forceful handling of the walkout, meanwhile, impressed the Soviets, strengthening his hand in the talks he later pursued with Mikhail Gorbachev. ...

By 2010, the number of workers participating in walkouts was less than 2% of what it had been when Reagan led the actors' strike in 1952. Lacking the leverage that strikes once provided, unions have been unable to pressure employers to increase wages as productivity rises. Inequality has ballooned to a level not seen since Reagan's boyhood in the 1920s.

Time rates the Reagan-PATCO showdown as the third-most notable federal standoff in American history, also noting that major strikes dwindled from more than 300 a year before PATCO to just 30 per year (and still falling) two decades later.

When Reagan led the Screen Actors Guild walkout in 1952, roughly a third of the entire American workforce belonged to a labor union. Today, about 12% of the workforce is unionized. Corporate profits are at an all-time postwar high as a percentage of GDP, and wages as a percentage of GDP have fallen to an all-time low. The Dow Jones Industrial Average (DJINDICES:^DJI) began what would be the longest and strongest secular bull market in its history a year after Reagan broke PATCO, producing real gains of nearly 700% from 1982 to 2000, even though real corporate earnings only doubled during the same period. These market gains -- which took place at a time when millions of Americans were becoming stock market participants -- helped the nation overlook a growing divide between labor and capital that only became widely apparent following the 2007 financial crisis.

These broad, secular economic trends can't be blamed solely on the PATCO breakup, as there are always multiple forces at work in the world. However, in some rare cases, a single event can steer many of those forces toward the same destination.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

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