Minimum Wage

A Scandinavian friend recently asked me, following a discussion with some of her Scandinavian friends, “As an American, would you leave the market forces to decide on the level of wages?”

What follows is my reply.

As with so many issues, particularly in economics, there is good reasoning to support both sides of the argument. If everyone earns the same in the end, then there is no incentive to work hard, to strive to achieve one's full potential. So on the one hand, the extreme of completely equal income regardless of effort or contribution could prove disastrous, with an economy that doesn't produce enough GNI to support people's basic needs, and also fails to innovate.

On the other extreme of the issue, where an unchecked market is left to set wages at any level, power quickly becomes concentrated in the hands of a few at the top, who can then collude to keep wages low. This was the case early on in the industrial revolution, and it's the reason labor unions were formed and collective bargaining became an effective tactic for negotiating higher wages.

People may initially be willing to work for incomes that don't provide for a subsistence living, but this is not a tenable scenario over the long term. Eventually, people will band together, and you've set yourself up for political upheaval and/or revolution.

The problem with many conservatives' and libertarians' arguments about labor conditions is that they're advocating for both the removal of minimum wage AND the abolition of organized labor. This is a recipe for disaster.

The problem with many liberals' and socialists’ arguments about labor conditions is that they advocate for wages and benefits that are unrealistic and want to see unions strengthened in industries where unions can actually cause more harm than good.

A couple examples come to mind. For example, the collapse of the auto industry in Detroit might in part be attributed to labor unions' unrealistic demands. Some US auto workers' total compensation packages were significantly higher than the going market would have predicted to work on assembly lines in relatively low-skilled labor because the unions had badgered car manufacturers into paying such high salaries. This was untenable and has been corrected in new hires, but now the wage gap between the newer hires and experienced workers is a problem plaguing the industry.

Another example is teachers' unions in the US, which have lobbied for and succeeded in creating a system where teachers are compensated based on tenure rather than classroom performance. This is hugely problematic, as US schools are falling well behind those of other nations around the world, with no reversing trend in site. We're failing the next generation of youth, and the incentive structure in compensating public school teachers is arguably a major contributing factor. (Another is that teachers at all levels of tenure and skill generally are WAY underpaid given their contribution to society.)

On the other hand, however (and this is certainly the more pressing issue facing society) is the destructive, poisonous nature of inequality in society. In the US, this has reached a fever pitch, with Fortune 500 CEOs making an average 380 times (and in some cases much more) their companies' average workers' salaries. Income inequality is running rampant in the US, with a tax code and political system that both favor and entrench the ultra rich in society. Social mobility (one's ability to achieve the ironically titled "American Dream") is way down in the US, but our perception of one's ability to succeed in climbing the social ladder remains unchanged. We think we're as socially mobile as Scandinavians, we think we should be even more socially mobile than we are, and we're actually much worse off than we could imagine.

An excellent book I read last year called "The Spirit Level" (kind of a strange title, I know) talks about how income inequality is linked to a host of social ills, everything from incarceration rates to public health issues to trust issues to teenage pregnancy to education problems. I highly recommend the book. The authors conclude that it doesn't matter how inequality exists (whether through institutionalized inequality with a permanent elite rich and a permanent poor or simply as a result of free market forces) and it also doesn't matter how you relieve inequality (whether through redistributive taxes or just a culture that frowns on accepting excessive pay). The main message is inequality is bad and needs to be addressed, for the good of society. Their conclusions are based on the results of some 30+ years of social science research from a variety of disciplines.

Additional research suggests that happiness/wellbeing scores are uncorrelated to increases in income beyond a middle-class to upper middle-class income, pointing instead to all the societal ills associated with increasing inequality. In other words, more money doesn't make you happier. There will always be someone richer than you, you will make new friends who have more money and whose lives and possessions you will always envy, there will always be a nicer car to drive, a nicer vacation to take, a bigger house to buy...but none of it will make you any happier. That's what the research suggests, at least for those who have already hit the middle or upper-middle classes. However, income up to the point of achieving middle or upper-middle class status is correlated with improved wellbeing, suggesting the high incomes of some people, while they provide no wellbeing benefit to those earning them, could provide improved wellbeing to those not achieving the middle or upper-middle class incomes. Interestingly, inequality is associated with decreased wellbeing at all income levels, both rich and poor, although the poor are affected more dramatically. Accepting improving wellbeing as a normative goal, then, suggests we should figure out a way to achieve greater equality. Experience has proven donations to charity are insufficient, thus making the case for redistributive tax schemes or other government "nudges" that encourage a relative leveling of income. The other alternative is broad cultural change away from consumerism and materialism, but such a change would likely be very slow. (And besides - how do you change a culture?)

In a final interesting example, the State of Utah found it was cheaper to provide free housing and a social worker to homeless people than it was to pay to incarcerate and provide healthcare associated with their homelessness. In other words, in some cases, it makes sense just to give the poor benefits because it's cheaper than paying to put them in jail and pay their hospital bills, even if the homeless are unable or unwilling to work.

And so, to summarize and conclude - in light of the overwhelming amount of research condemning inequality, as well as the example of the formation of labor unions as a response to the unregulated, free-market set wages during the industrial revolution, as well as industries where labor unions might actually hurt society, I must advocate for a minimum wage. It should be set high enough to be a living wage (one that provides at least subsistence/paycheck-to-paycheck living), but not so high as to encourage people to stay at that income level. I also think social benefits should be tied to one's efforts to contribute, meaning unemployment benefits should be granted to those actively looking for work. However, as stated above, it might make sense just to take care of the poor, even if they don't want to or aren't mentally or physically able to work.