Labor

If You Want to Attract Workers, Pay Them a Living Wage

Everyone pays in a society that doesn’t share its wealth.

Photo Credit: a katz / Shutterstock

A recent story from Wisconsin suggested that the Badger state was facing an impending employment crisis, due to the inability to recruit young workers: “Wisconsin faces a demographic time bomb as baby boomers flood into retirement in the coming years. While there may not be a labor shortage right now, business leaders and employers are concerned about what the future holds in a state with fewer people of prime working age and a relatively low birth rate.” The article, published in the Milwaukee Journal Sentinel, goes on to suggest that the answer to this problem is attracting new overseas workers to offset the feared demographic time-bomb.

But there is another potential solution: why not simply offer higher wages to attract American workers to make up the shortfall? A number of them have never truly recovered since the 2008 crisis. They have been forced into “involuntary part-time work,” which often deprives them of benefits such as health care, as well as perpetual job insecurity. As a result, these workers have been experiencing eroding living standards for decades. To paraphrase Field of Dreams, pay them and they will come. Give underemployed and unemployed workers an offer of full-time employment with corresponding living wages and benefits, and they’ll fill the vacancies, likely mitigating national income disparities as well.

And whatever one’s thoughts are on the morality of inequality, there is now a substantial body of evidence documenting that as we continue to funnel the bulk of an economy’s gains to the top tier. Ultimately, this is bad for everybody (including the wealthy), as it creates the conditions for future financial crises, as well as exacerbating the moral strains of living in a society that intentionally creates economic hierarchies while simultaneously loading the dice against those existing on the bottom.

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Today, we have an official unemployment rate of 3.8 percent—to be sure, a lot better than the double-digit unemployment experienced in the throes of 2009. Yet wage gains continue to be relatively subdued, despite this number, and the economy continues to feel lousy for so many. Why? Steven Greenhouse points to an answer in his book, The Big Squeeze:

“Since 1979, hourly earnings for 80 percent of American workers (those in private-sector, nonsupervisory jobs) have risen by just 1 percent, after inflation. The average was $17.71 at the end of 2007. For male workers, the average hourly wage actually slid by 5 percent since 1979. Worker productivity, meanwhile, climbed 60 percent. If wages had kept pace with productivity, the average full-time worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s economic pie is growing, but corporations by and large have not given their workers a bigger piece.”

Note that these problems preceded the 2008 crash, when Greenhouse wrote that book. This is a decades-long story. The de-linking of wage gains and productivity was not by happenstance, but instead the intentional product of a structurally low-wage-growth economy, post-1980, increasingly characterized by labor “casualization,” in which employment shifts from a preponderance of full-time and permanent positions to casual and contract positions, consequently meager wage gains, and workers plagued by job insecurity accepting so-called “mini jobs” while increasingly relying on borrowing and debt accumulation to sustain their lifestyles.

Now that we finally appear to be reaching a point where workers may get a larger slice of the economic pie, what happens? There are calls to liberalize our immigration policies, import more skilled workers from abroad, and tighten monetary policy to combat potential wage inflation, even as employers hesitate contemplating an increase in wages, in spite of existing and looming employee shortfalls.

We see this particularly in the debate over the raising of the minimum wage. Opponents of minimum wage legislation make the case that the markets themselves should be allowed to operate freely to set the wage level, the idea being that ultimately supply and demand will magically meet at some “market-determined” price level and thereby ensure that the jobs ultimately get filled.

It is interesting, however, that this market logic never seems to apply when it comes to paying higher wages. Somehow, whenever market conditions necessitate higher wages, our policymakers fret about incipient inflation, which must be suppressed at all costs in order to preserve corporate profitability. At some point, we all attain the inescapable conclusion that the market is not “free,” but an amoral, ahistorical construct, largely driving the interests of the wealthy and powerful. On its own, a market does not, nor cannot, act as a repository for the values that bind communities and direct the population as a whole to higher order considerations. It should therefore be treated as a mechanism, not an end in itself.

As to the immigration issue, which is also often used to explain wage stagnation, there are a host of competing economic narratives. For example, longtime immigration hardliner, economist George Borjas, suggests that an increasing volume of immigration does in fact adversely impact wage levels, particularly in the lower tiers. On the other hand, a study conducted by the Wharton School of Business at the University of Pennsylvania in June 2016 opines that “economic analysis finds little support for the view that inflows of foreign labor have reduced jobs or Americans’ wages.” The study also concluded that immigrants were a net positive in terms of securing “a better educated workforce, greater occupational specialization, better matching of skills with jobs, and higher overall economic productivity.”

So who is right? Part of the difficulty in resolving this contentious social issue stems from the fact that our increasingly globalized economy facilitates global wage arbitrage, which effectively renders the question of national immigration levels moot. As I’ve noted in an earlier publication, globalization and offshoring in effect create an economic effect that approximates an open-borders policy insofar as it creates “synthetic immigration,” which can have the effect of reducing employment and lowering wages as investment is increasingly outsourced abroad. If companies don’t want to pay the prevailing national pay scale, the ease of outsourcing via globalization means that they can invest in a low wage economy to get their products produced. That’s not very different in terms of economic impact from bringing in lots of unskilled immigrants to a country to keep wages low. (In fact, in the post-Civil War confederacy, some planters were enthusiastic about importing Chinese labor to drive down wages in plantation agriculture in the South, until the labor movement finally responded by getting Congress to shut down contract labor in the 1880s.)

And a relatively liberalized trade regime means that there are comparatively limited barriers to having those low-cost goods penetrate the U.S. market. Cheap imports are great for consumers in aggregate, but lousy for wage-earners in the affected industries, if there is no offsetting fiscal activity (say, via a Job Guarantee program) to mitigate the resultant job and income losses domestically. And ultimately government must underwrite the debt accumulated for an economy that is predicated on consumption that a wage-earning sector cannot afford.

So you get more economic insecurity. A recent report published by the Federal Reserve illustrated that “two in five Americans don’t have enough savings to cover a $400 emergency expense, and one in four don’t feel they are ‘at least doing OK’ financially.” One reason that people are struggling to pay the bills is that a smaller share of GDP is going to wages. In that regard, the question of immigration liberalization is a sideshow, a panacea, which distracts from the bigger problem of fixing a relative porous social safety net, and creating an economy delivering good quality wages, which have for decades lagged productivity growth. The link between wage gains and productivity, initially enshrined in the 1950 Treaty of Detroit by the UAW and General Motors, was severed in the late 1970s. As unions came increasingly under attack, a greater proportion of GDP went to corporate profits, rather than wages. The upshot is that workers stopped fully benefiting from rising corporate productivity, even as they have continued to bear many of the risks that come from living in a capitalist economy (in the form of significantly rising costs for medical care, education and corresponding cutbacks in pensions and other social welfare benefits).

This has become increasingly problematic at a time when two vital social services (one of which, health care, being largely private) have costs that for decades have vastly exceeded consumer price inflation. By how much? Since 1980, report market analysts Philippa Dunne and Doug Henwood, the overall price level, as measured by the headline CPI, is up 221 percent. Over that same period, commodities are up 125 percent and services by 331 percent. Medical care, however, is up 577 percent (2.6 times overall inflation). And college tuition is up 1,138 percent (5.2 times the headline rate). In no decade since the 1980s has college tuition been up less than 2.4 times the economy overall inflation; so far in the 2010s, it’s up 3.3 times as much as measured inflation.

Disaggregating the wage gains from the top 5 percent and the remaining 95 percent, Professors Steven Fazzari and Barry Cynamon fill in the picture for us: “[F]rom the early 1980s until the eve of the Great Recession, the bottom 95% maintained high consumption despite their stagnating incomes, postponing demand drag from rising inequality. The result was an ultimately unsustainable, but persistent, increase in household leverage and financial fragility.” However, as the authors observed, when the financial crisis of the Global Financial Crisis (GFC) turned off the credit spigot for much of the bottom 95 percent, “their consumption spending was forced back onto a lower path and has never really recovered.”

Lower wages and increasing stratification mean that the U.S. economy as a whole no longer generates the demand necessary to keep the economy near genuine full employment. In the words of economics professor Bill Mitchell, “It goes without saying that had American workers been paid in accordance with the increasing productivity over the period 1979 to 2007, the reliance on credit to sustain consumption expenditure would have been diminished and economic growth would have been stronger.” What we can conclude from Mitchell’s remarks is the “labor market reforms” of the past 35 years have resulted in fewer decent paying jobs and continued redistribution of national income to profits away from wages, resulting in heightened economic insecurity and an economy that doesn’t grow as quickly as it could were its GDP gains more equitably distributed.

We could make a start on solving this problem today by re-establishing the ideals behind the Treaty of Detroit, paying our workers a living wage, and linking those wages to productivity, as GM did when it originally negotiated this bargain with the UAW. But instead of pushing the costs of pension fund benefits and health care costs on to private businesses (something that would raise the marginal costs of doing business here in the U.S.), let’s go back to Walter Reuther’s original suggestion made during the first Treaty of Detroit negotiations, namely that government provide pensions and health care to all citizens. Perhaps that was a bridge too far back in 1950, but at a time of when most of America’s global competitors provide some version of “Medicare for All,” a renewed embrace of Walter Reuther’s vision for the 21st century would likely move us beyond toxic debates on free trade and immigration.

That would be a win-win for all of us.

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Marshall Auerback is a market analyst and commentator.