The True Cost of the Low-Wage Economy

22 Apr 2015 2:11 PM | Deleted user

Last week low-wage workers took to the streets to strike for a $15.00 an hour minimum wage. Employers will no doubt see this as an effort by low-wage workers to make a claim of entitlement for a specified wage without returning some value. Others will of course claim that paying a higher wage is a matter of social justice amidst stagnant middle class wages and rising wage inequality. Paying a higher minimum wage is really not about either. It is about achieving greater efficiency.

At the same time low-wage workers were striking for a higher wage, the Center for Labor Research and Education at the University of California at Berkeley came out with a study that low wages are costing American taxpayers $152.8 billion a year in public support for working families. In other words, the cost of paying workers low-wages so that consumers can purchase cheap goods at places like Walmart is being passed onto the public ultimately in the form of higher taxes. All of us are in effect subsidizing corporate profits.

Economics is really about behavior and how people in the market place, whether they be individuals or firms, respond to incentives and disincentives. Critics of various social policies like public assistance often claim it leads to moral hazard. Individuals who receive public support have no incentive to work if the wages they earn from low-wage work would be lower than the value of all the public assistance they could receive. Similarly, unemployed workers have no incentive to look for new jobs while they are receiving unemployment insurance. Both are cases of moral hazard, they argue, which leads to economic inefficiency.

In the first example, the critic would argue that the elimination of public assistance would force rational people to go into the labor market and accept whatever jobs are available. The same would be true with the elimination of unemployment insurance. In the case of the latter, the purpose of unemployment insurance is to enable workers to better match their skills with available jobs, which in the end would be economically more efficient. In the case of the former, a higher wage that enables people to support themselves would attract people into the labor market instead of relying on public assistance.

When it comes to moral hazard, it really does cut both ways. Arguably the presence of public supports encourages employers to pay low-wages without any feelings of guilt. On the contrary, the employer assumes that low wages are acceptable because his or her employees can rely on public support. The current design of the unemployment insurance system actually encourages layoffs instead of finding ways to retain workers until the business cycle picks up. A more effective unemployment insurance system would have some kind of partial insurance, similar to many countries in Europe, where employees during a slowdown are furloughed for a couple days a week and during those days on furlough they receive partial unemployment insurance.

The study on the $152.8 billion a year cost to society noted that a minimum wage of $15.00 an hour is the point at which we would most likely begin to see the need for public supports go down. I have argued in this space many times before that it would be more efficient to pay workers higher wages that enable them to support themselves and then reduce taxes because we would be able to spend less on social provision.

Still, some of our politicians argue that the solution to the travails of the middle class is to soak the rich as though that will end income inequality and restore the middle class. In some circles it has become accepted wisdom that unless you believe in this approach, you cannot be considered a true progressive. One wonders if this is the progressivism of the middle class or the elites that claim to speak in the name of the middle class.

Progressivism has always been an elite ideology whereby so-called experts claim to speak on behalf of the poor and downtrodden on the basis of their superior wisdom. Of course, progressives support a higher minimum wage, but they often fail to grasp the true significance of it. In arguing that it will help the working poor, they forget that the minimum wage was really always a labor-management issue that would shore up the middle class and benefit the economy through its macroeconomic effects.

A higher minimum wage for low-wage workers is going to ripple up the wage distribution because those earning above it will also have to get raises, as will those earning above them and so on. As workers receive more in wages, they will spend more. This is what drives the economy. As their wages rise at a higher percentage rate relative to those at the top of the distribution, the gap between the top and the bottom of the distribution will be narrowed, in which case wage inequality will be less.

Something is amiss when society effectively subsidizes corporate profits to the tune of $152.8 billion a year. The answer isn’t to soak the rich and create more supports, but to raise wages and ultimately have a simpler tax code. If a $15.00 an hour minimum is the point where we would begin to decrease these costs, then that must be the starting point. Of course, this means that corporations like Walmart and McDonalds that announced that they would be raising their minimum wages would still be paying their workers too little to be truly self-sufficient.

It has long been understood that public programs are the result of market failure. Because workers cannot earn enough to support themselves, or because the market fails to generate sufficient opportunities for workers to support themselves, these programs are needed. But it would appear that the more public support we offer, it is only a foregone conclusion that there will actually be deliberate market failure, whereby we are encouraging employers to generate jobs where workers cannot support themselves. By most accounts, this is actually backwards.

Unless we really raise the minimum wage to a point where it will make real difference in the lives of low-wage workers, we as a society will continue to encourage moral hazard on the part of employers. Our goal as a society should be to take the high-road where we pay higher wages and encourage employers to continuously train their workers to become more productive. It should not be the low-road where wages are low and the welfare state becomes the moral justification for low wages.

Oren Levin-Waldman is professor of public policy in the School for Public Affairs at Metropolitan College of New York ( ) and author of several books on wage policy. They include the just published: Wage Policy, Income Distribution and Democratic Theory (; The Political Economy of the Living Wage: A Study of Four Cities (M.E. Sharpe 2005); and The Case of the Minimum Wage: Competing Policy Models (SUNY Press 2001). He is a researcher for the Employment Policy Research Network (EPRN), and some of his work can be found at

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