Oren Levin-Waldman

  • 13 Jul 2015 10:30 AM | Deleted user

    The European deal to bail out Greece should not be cause for celebration, rather it should give us pause. Surely, the consequences would be worse if no bailout, but at what cost. In the typical top down approach, Greece must adopt even more austerity measures in exchange for loans, which only means that it is the typical worker who ultimately takes it on the chin. And yet, bailouts in general, like the U.S.’s rescue of the banks and AIG as well as auto manufacturers several years ago raise some serious questions about the meaning of risk in a market economy.

    One of the central tenets of competitive free markets is that investors are entitled to reap the rewards of their investments, and exorbitant ones too, because they assumed risk. Of course, the argument that because they understood that there was a risk means that they have no right to request governmental immunization from risk when those investments go sour is a very compelling one. After all, they can’t have it both ways. Lost in these debates, however, is the risk that workers assume when they simply take a job.

    The current wage labor system assumes that workers receive wages, and perhaps other negotiated benefits, in exchange for their labor. Moreover, it is assumed that they are entitled to no more. That their labor contributed to the success — the profitability — of a firm might have a moral point, is generally taken to be no more. Were it not for the efforts of workers, these companies would not be what they have become, their current need for a bailout notwithstanding.

    The human capital investment of workers has never been likened to the property rights that are enjoyed by the liquid capital investment of shareholders and investors. Many companies seeking bailouts have also been beneficiaries of community investment in the form of tax abatements intended to maintain plants. One of the most famous cases involving a public/private partnership between General Motors in the late 1970s and the City of Detroit is particularly instructive.

    GM had made it known to public officials that they would open two new Cadillac plants and create 6000 new jobs in Detroit if the city would undertake to acquire the land, clear it through the laws of eminent domain, and prepare it for construction. GM specifically wanted to locate its new plants in the Poletown section of the city, an ethnic neighborhood, and GM was also expecting tax abatements. Public officials feeling compelled to create jobs jumped at the chance, secured funding from Michigan and the federal government, and in the end bulldozed an entire community in the name of a public/private partnership aimed at achieving growth, or in the case of Detroit basic economic revitalization. This, of course, raised the question of whether such partnerships were tantamount to contracts whereby the company owed the community more than job creation.

    This very issue came to a fore in a Michigan state court when the community of Ypsilanti sued GM for breach of contract following a restructuring plan that would close 21 plants in the U.S. and Canada, including in Ypsilanti. The state court initially held in favor of the community on the grounds that a contract of sorts existed, especially given that the community offered financial assistance. The Appellate court in Michigan did not recognize this new type of public/private partnership as akin to a binding contract, that it would effectively trump GM’s property rights to dispose of its property as it would see fit. Still, there an implication that the workers made a human capital investment that perhaps was akin to a property right, and that the company would not be what it was were it not for that human capital investment.

    The point of this tale is that the current structure and arrangements of the free market economy would appear to be insufficient given the new global realities. We live in an integrated economy where the decisions of some affect the livelihoods of many. Workers never assumed the type of risk that investors did; after all, they would only be out of their jobs. But the poor investment decisions of the automakers begs the question: should the workers be made to suffer because of the decisions of their employers? If they are to assume that level of risk when they accept a job, should they not also reap some of the profits as well?

    In his classic An Inquiry into the Nature of The Wealth of Nations, Adam Smith observed that the wages of labor are higher for those engaged in unusually dirty work or in particularly dangerous work. Of course, Smith was referring to the type of work that nobody else would do precisely because it was dangerous. And yet, he was also alluding to the concept of risk; that the one who assumes risk is entitled to more. But given the changing nature of the economy, and particularly our evolving conceptions of what constitutes property, one wonders if it isn’t dangerous these days to accept a job, especially in the absence of knowledge about the financial health of, and decisions made by, that employer. Workers, in the end, are making a human capital investment and assuming a measure of risk.

    This, of course, is not to say that bailouts should not occur when in the public interest, but that the public interest, especially when taking into account the social wage and other aspects of social responsibility, should be the criterion. During the 1930s, various public programs and public works projects, along with an array of regulations, were promulgated in order to immunize us for risk. Indeed, the precedent created meant that it would be easier for those in need, including corporations, to request assistance. But now it is time to go further. The workers contribution must be recognized as being integral to the growth of his/her company. While liquid capital investment and limited liability are still hallmarks of a free market economy, human capital investment is just as essential for companies to prosper.

    Ultimately that means that workers in what might emerge as a new form of capitalism will need to have a measure of voice. To trust in corporate leadership as we have for so long is really to assume too much risk, because they aren’t only gambling with their own fortunes, but the fortunes of others. The new capitalism cannot simply be the government as bank of last resort, but must ultimately entail a measure of economic democracy. That is, labor has to have a seat at the table, rather than being viewed as the problem. It also means something else. When we see low-wage workers striking for a $15.00 an hour minimum wage, we need to place this in context of a global economy where CEO pay is on average 500 times the pay of the typical line worker. That high pay will of course be justified on the basis that this CEO assumes risk which the workers do not. But the risk this CEO assumes is with other people’s lives.

    I am available for comment: (914) 629-6351

  • 30 Jun 2015 10:09 AM | Deleted user

    Those who oppose increases in the minimum wage often argue the need for low-wage workers to get the necessary training and education so that they can be in a position to command higher wages. Otherwise, if they are earning low wages it is because they are not worth more, which is to say they offer nothing of any real value to their employers. Or is it the case that low-wage workers really lack the market power to bargain for something better?

    According to the neoclassical model in economics — the model of competitive markets — each worker receives the value of his or her marginal revenue product, which is the amount of increase in the output that results from an increase in say a unit of labor. If adding an additional worker results in a rise in total revenues, the firm’s output will rise as a result. An effective minimum wage, then either results in the layoff of those workers whose value is less than the minimum wage, or in an increase in productivity among low-efficiency workers.

    Also in competitive market where the new and technologically advanced is always replacing the old and obsolete, it is only a foregone conclusion that the wages of the unskilled will be forced down while the wages of the skilled will be driven up, thereby increasing the gap between the two. This view has led to what has been referred to as the “Washington Consensus” that maintains skill-biased technical change to be the source of inequality, stagnating wages for the average worker, and potentially long-term unemployment. This consensus has also maintained that the economy could grow through policies of deregulation and privatization intended to achieve greater efficiency. As for wage stagnation, the emphasis is on training and the upgrading of skills.

    If we parse this a bit, what we are really being told is that the market place really does not fail, or if it appears to it is only because of interventions, like wage floors, that create inefficiency. More fundamentally, if workers aren’t paid enough to support themselves, well then it is their own fault. The market place, after all, affords opportunity and it is up to us to take advantage of this opportunity when we can. If the natural market place is creating a two tiered economy with highly skilled and paid workers at the top and poorly skilled and paid workers at the bottom, then it is up to those at the bottom to improve themselves.

    The onus, in other words, is on the individual worker, not so-called economic forces beyond our control. As tempting as it is to attribute this view to a gross misreading of Adam Smith and his invisible hand — the notion that wealth will trickle down — the foundations of individualism and personal responsibility upon which this neoclassical view rests are deeply ingrained in the American political tradition. In other words, individualism, personal responsibility, and neoclassical economic assumptions are at the core of American identity.

    Of course to acknowledge as much is to also rationalize a status quo that maintains the power of some at the expense of others. If workers are responsible for their skills levels, then employers are not responsible for training and retraining their workers as the introduction of new technologies may require. If the emergence of the two-tiered economy is due to globalization, then an even larger burden is placed on the workers to obtain the necessary skills.

    These assumptions, however, may miss some fundamental points. First of all, wages really aren’t set by so-called natural forces, but by power relations that are asymmetrical. Even Adam Smith was aware of this problem. All our unskilled workers could get training, in which case the bar is raised but wages don’t increase because of the oversupply of newly trained workers. Second of all, the call for worker training misses the specific requirements that employers might have. Employers should be training their workers according to their own specific needs.

    And yet, employers have little incentive to train their workers if we as a society tell them that it is they the workers who need to obtain the necessary training. Moreover, employers don’t need to feel guilty about paying low wages because they know their workers will receive the necessary subsidies from taxpayers.

    There is nothing wrong with individualism and personal responsibility, but there is when these terms are used to rationalize a set of relationships that preserve the power of some at the expense of others and have the effect of denying true opportunity to all. The focus on training programs coming out of the Washington Consensus has proven to be little more than a charade that diverts attention from what we really need: the creation of jobs that pay decent wages.

    What the American economy truly needs is a commitment to the high-road — an economy where the emphasis is on high wages and investment in human capital — rather than the current low-road — low wages and no investment in human capital — which has long underpinned the Washington Consensus that effectively places the onus on the workers.

    It may be convenient to place the blame for our economic problems on others, and no doubt the pursuit of the low-road has enabled corporations to enrich themselves off the backs of their workers. The real question that we need to ask is just what has been the result of this economic strategy? Wage stagnation and growing income inequality? Is this a record that we as a nation should take pride in? When politicians taut the growth of the economy despite continued wage stagnation and rising income inequality, they are either oblivious or worse they just couldn’t care less.

    Our response to globalization and the growth of the low-skilled labor market should not be fewer regulations, but an active wage policy that serves to bolster the middle class so that it can continue to demand goods and services in the aggregate. The minimum wage and establishing an automatic adjustment mechanism would obviously be a good place to start. More fundamentally, however, we need to rethink our values as a society.

    Where we really need to begin is with the neoclassical model and its implications for policy which has conveniently been used to rationalize putative policies of doing nothing and maintaining inequitable power relations. Those who religiously hold to the model conveniently forget, or maybe not so conveniently, that economics is merely about explaining behavior; not about determining public policy.

    I am available for comment: (914) 629-6351

  • 01 Jun 2015 6:32 PM | Deleted user

    Recently Warren Buffet took to the pages of The Wall Street Journal and suggested that a better way to help the poor would be through the Earned Income Tax Credit (EITC); not an increase in the minimum wage. And yet, this is the same Warren Buffet who argues that tax rates for the wealthy should be increased because it is unfair that he as a multi-billionaire should be paying the same effective tax rates as his secretary. Is this a contradiction?

    Arguably the higher taxes that Buffet wants the wealthy to pay could perhaps be used to fund the EITC or its expansion. And yet, this version of progressivism is riddled with the type of hypocrisy that fuels what I referred to a few weeks ago as the New Welfare State-Service Sector Complex.

    The EITC, on the books since 1975, has effectively become a negative income tax for those earning around the minimum wage. In 2014, a family with one qualifying child would get a maximum credit of $3,305 while somebody with no qualifying children would get a credit of $496. One with two children the credit received $5,460, and with three children it was $6,143.

    A family gets the maximum credit if the earned income is between the minimum wage and some percentage above that. The effect of an EITC for say a single mother with three children earning the federal minimum wage is to have an income of $21,223, of which 28.9 percent is being paid by the government. As one’s income moves up the scale the EITC then begins to phase out. The same single mother with three children would be eligible for an EITC until her income reaches $46,997, and $52, 427 if she were married and filing jointly.

    Conservatives love this because it effectively rewards work without forcing employers to pay higher wages which they claim will have employment consequences for low-wage workers, especially those lacking in skills. But conservatives are the first to scream moral hazard when social programs are expanded. Public assistance, they claim, diminishes the incentive for workers to work and unemployment insurance results in unemployed workers being slow to search for new jobs.

    Moral hazard, however, cuts the other way too. With the EITC employers have no real incentive to pay their workers more because they know that their employees are effectively being subsidized by government. Meanwhile, employers like Walmart are known to help their workers sign up for the EITC. As for the progressivism of the wealthy paying higher tax rates? Buffet surely knows that very few will actually pay more in taxes because they can take advantage of enough tax deductions and loopholes to avoid paying their taxes.

    What about the bromide that low-wage workers aren’t worth more than the minimum wages they are currently getting, and to be required to pay them more is to spend more money without getting any real value in return? Here critics may actually have a point, but not for the reasons they typically claim. Their claim is that they simply lack skills or a level of education that would justify paying them a higher wage.

    Recall the efficiency argument that a minimum wage is really about getting workers to invest more of their effort into their jobs and thus increasing productivity. But what incentive does a low wage worker earning the minimum wage have to put more effort in for the employer if a good 40 percent of that person’s wages are coming from the government? Are they really not worth higher wages, or is it simply a nice rationalization of an existing status quo predicated on low wages that are effectively subsidized by taxpayers?

    When Warren Buffet talks about the EITC being preferable to the minimum wage, he is effectively saying that a low-wage strategy bolstered by public subsidies is really a sound economic policy. In other words, paying low wages is perfectly fine because low-wage workers can make up the difference through public subsidies. And because the wealthy, even with higher tax rates, will nonetheless find ways to evade paying taxes, the burden of paying these subsidies will fall on the middle class.

    This ought to give us pause. Why should we want a low-wage economy? Shouldn’t the ideal be a high wage economy? The standard economic model that claims that there are disemployment effects to an increase in the minimum wage, and more so for the poor who are disproportionately low-skilled workers, also maintains the Buffet argument to be the epitome of rationality. But wouldn’t it be more rational to pay workers enough that they don’t need these subsidies and then reduce these subsidies and the taxes that support them accordingly?

    The real fallacy in Buffet’s argument is the assumption that the minimum wage is really about the poor. The minimum wage is really about labor-management relations and ultimately shoring up the middle class. As I have said in this space many times before, those earning the statutory minimum wage is not as important as those earning around the minimum wage. If the minimum wage is a reference point for the larger low-wage labor market, then the effects of an increase are considerably larger.

    The Congressional Budget Office acknowledged as much last year when it said that even if 500,000 jobs were potentially lost due to an increase in the minimum wage to $10.10 an hour, the economy as a whole would still be better off. More than 16 million workers would see their pay go up and their higher wages would enable them to spend more in the economy, which over time would result in growth. The 16 million who would earn more is obviously more than those who earn the statutory minimum wage, and includes those earning in wage ranges above who would see their wages rise too.

    All this brings us back to Buffet’s apparent contradiction between higher tax rates for the wealthy and a preference for the EITC over the minimum wage. Or is it really a contradiction? Perhaps the real question is just whose interests does Warren Buffet speak for? Certainly not the low-wage worker, and probably not even the middle class. He represents the interests of corporate America that enjoys higher profits through the payment of low wages that are effectively subsidized by the American taxpayer. A preference for the EITC merely speaks to the rising social costs imposed by low-wage employers.

    I am available for comment: (914) 629-6351

  • 05 May 2015 12:51 PM | Deleted user

    The nation has been witness to more and more day long strikes for a minimum wage of $15.00 an hour. The Economic Policy Institute in Washington is calling for a $12.00 hour minimum by 2020 as an essential means of raising America’s pay. Of course, by 2020 the value of the federal minimum wage will have only eroded more. Still, that there are more and more calls for a higher minimum wage suggests an issue that politicians in the next national election really cannot afford to ignore.

    These calls for higher wages would appear to be a logical response to several different forces. The first is that wages in America, especially for the middle class, have been stagnant for more than three decades. The second is that median household income has declined. The third is that there has been growing wage inequality with more wealth being concentrated at the top. The fourth has been the disappearance of the manufacturing sector, which was a source of middle class jobs. Replacing these jobs has been the low-wage service sector. The fifth has been that the minimum wage labor market has grown in size and is no longer defined by teenagers or so-called secondary earners.

    Critics have long pointed to the fact that the minimum wage is really not an effective anti-poverty measure because most minimum wage workers are in families that aren’t poor and those who are tend to be out of the labor force. And yet, herein lies the crux of the problem when it comes to the current minimum wage debate.

    When talking about the minimum wage a distinction has to be made between low-wage workers and those living in poverty. Here the critics are right. A minimum wage isn't going to help those in poverty, and it is for this reason that the anti- poverty focus of those arguing for minimum wage increases is problematic and misplaced.

    The minimum wage historically was never viewed as an anti-poverty issue, but as a labor management issue. Of course, it was intended to assist low-skilled workers who either weren’t members of a union or lacked the bargaining power that more skilled workers had. We conveniently forget that the better paid manufacturing sector, before being unionized, also was considered to be unskilled work at one time.

    The issue isn’t that low-wage workers lack skill; it is that they lack bargaining power, and as a labor-management issue the minimum wage was intended to correct for the asymmetrical power imbalances in the labor market. In the early days of the minimum wage critics would talk about how the minimum wage violates a worker’s ability to negotiate his or her pay and working conditions. What ability? The only market power that workers had was to either accept or reject the low wages they were being offered. Even Adam Smith recognized that employers had the market power to collude in order to suppress wages.

    Again, the question is why? Here the answer is simple. Free marketeers argue that wage rates are set by market forces that are allegedly natural. But they are really set by power dynamics that appear to masquerade as natural forces. In the language of economics employers are wants traders while workers are needs traders. An employer does not need to hire workers, but can hold off until the price of labor drops to the point that they are willing to purchase it. A worker, however, does not have that luxury and because he or she needs to eat is forced to accept whatever wage is offered. The claim that workers are not worth a wage higher than the current minimum is merely a rationalization of a set of power dynamics that result in workers getting low wages while the companies that pay them hoard massive profits at their expense.

    In my last column, I noted that paying workers costs the nation $152.8 billion in public support for working families. As much as consumers enjoy purchasing cheap goods, they are nonetheless paying for those cheap goods through higher taxes to provide those supports. In short, all of us are subsidizing the profits of companies at the expense of workers.

    Meanwhile, more and more studies, including from the Congressional Budget Office, note that raising the minimum wage would be a tremendous boost to the economy because it would benefit more workers than simply those who earn the statutory minimum wage. I have also been making that argument for several years now by pointing to the wage contour effects. Here is where it is critical that we recognize that the minimum wage is more about workers’ wages and really has little to do with poverty. Yes, it will assist those in poverty to the extent that a rising tide lifts all boats. But that isn’t the point.

    We should assume that employers have long recognized the wage contour effects of the minimum wage. Otherwise, why would an issue that only affects 2 percent of the labor market evoke such strong emotion and often be such a contentious issue of political debate? One would think that if it really is such an insignificant segment of the labor market, nobody would care. But it is always so heated. Clearly, it affects a larger segment of the labor market.

    Most polls show that 65-70 percent of Americans favor raising the minimum wage. Is this a statistic that politicians on either side of the political aisle can really afford to ignore? And yet, to couch this issue as just another type of anti-poverty issue ultimately undermines the importance of the issue, not least of which because our American culture of individualism and equality of opportunity has long stigmatized the poor.

    Politicians who claim to speak in the name of the middle class need to begin with the minimum wage and explain why it will through wage contour effects boost the incomes of the middle class, arrest wage stagnation, reduce the wage gap between the top and the bottom, and ultimately drive the economy through the increased aggregate demand for goods and services that greater purchasing power affords,.

    It really should be a no-brainer that the issue is non-partisan. The Democrat that continues to only talk about the minimum wage as an anti-poverty measure has to be assumed to be the typical limousine liberal who perhaps doesn’t really care about the middle class. Or at least it would be fair to say that this person has no real understanding of the middle class. But the Republican who continues to offer up the same bromides that a higher minimum wage will cost jobs or it raises prices in the face of data showing the huge social costs, only demonstrates that his or her true allegiance is to corporate America. Now you will know whom not to vote for.

    I am available for comment: (914) 629-6351

  • 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.


    http://www.routledge.com/books/details/9780415779715/#reviews

    http://www.routledge.com/books/details/9780415779715/#reviews


    Oren Levin-Waldman is professor of public policy in the School for Public Affairs at Metropolitan College of New York (olevin-waldman@metropolitan.edu ) and author of several books on wage policy. They include the just published: Wage Policy, Income Distribution and Democratic Theory (http://www.routledge.com/books/details/9780415779715/#reviews); 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 http://www.employmentpolicy.org/people/oren-levin-waldman.

  • 08 Apr 2015 1:20 PM | Deleted user
    When President Eisenhower left office he admonished the nation about the rising military industrial complex. This was the regime in which vast amounts of public money spent on military projects would flow to major corporations producing the military’s weapons systems and generate billions in corporate profits. Of course, it also created millions of jobs in the private sector and did much to sustain the American middle class.

    One might ask the obvious question: why if jobs are created and the middle class is being sustained, is this really a problem? The answer lies in understanding the concept of regime theory and untangling the thorny knot of iron triangles in the legislative process.

    A regime is often defined as a set of relationships between private and public actors intended to achieve a public purpose or distribute public goods. With the military industrial complex the nation’s defense is, of course, the public purpose, but private interests also derive benefit. These relationships that constitute the regime also form iron triangles. An iron triangle is a relationship between an interest group, a government agency, and a congressional committee. Each essentially lobbies the other for mutual benefit.

    The interest group lobbies the congressional committee for appropriations for say a weapons system. The interest group can be any number of defense contractors that stand to get a contract to build a piece of that system if Congress approves it. The same defense contractor then lobbies the Pentagon for the contract, even if it only gets to build a piece of it. The Pentagon, of course lobbies Congress for the appropriations so that it can build the system. It also measures its power in Washington by the size of its budget; so the more money appropriated to it, the more power it has.

    Meanwhile, members of Congress want to please interest groups because their members vote and make contributions to their campaigns; so they lobby the Pentagon to award contracts to certain groups. Pentagon officials then want to please those in the defense contracting industry because in time they may want to trade in their government jobs for considerably more lucrative opportunities in corporate America.

    The result of all this are impenetrable triangles that make it difficult for those who are not insiders to even gain voice, let alone introduce new ideas that could potentially be even more in the public interest. Iron triangles, in short, which also grow out of regimes, distort democracy. That ultimately is why we need to be wary of the military industrial complex.

    This complex still exists, but in recent years we are seeing the emergence of another dangerous complex, albeit for different reasons. With the decline of middle class jobs in manufacturing, the rise of the low-wage service sector economy, stagnant wages, and increased government spending on food stamps and other subsidies to the working poor and lower middle class families, we are seeing the emergence of what can only be defined as the welfare state-service sector complex.

    Obviously a nation as wealthy as ours has a moral responsibility to feed its citizens. But it doesn’t follow from that a specific type of policy, such as public subsidies financed through redistributive taxation, be pursued. On the contrary, government could just as easily meet its obligation to not allow citizens to starve by ensuring greater growth with a simpler tax code and higher wages through a wage policy in concert with the standard fiscal and monetary tools. In other words, policies aimed at encouraging high wage jobs that would make workers less dependent on the state for subsidies would also fulfill our moral obligation not to allow our citizens to starve.

    It is one thing to talk about how government programs — the welfare state — expanded to meet people’s needs because of market failure — the idea that the market place failed to produce sufficient opportunity for people. But when we as a nation take pride in the welfare state as an essential ingredient in the growth of a low-wage economy we are signaling perhaps a new level of moral bankruptcy in domestic policy.

    We as a nation have bought into the standard model in conjunction with greater globalism that whatever jobs are created, no matter how low the wages, are a good thing. It lowers unemployment. We have even convinced ourselves that it is better to create low wage jobs than no jobs at all. Hence the opposition to the minimum wage and labor unions because they are seen as the source of wage rigidity, and it is wage rigidity that leads to unemployment, especially in today’s global market place.

    This thinking, however, misses the point. When workers can fall back on the welfare state to subsidize their low wages, we are only encouraging employers to pay low wages. We are in effect subsidizing corporate profits by enabling businesses to pay low wages. In the early part of the Twentieth Century when minimum wages were first being introduced, such employers were referred to as parasitic industries. Now public officials court them to create jobs. But the real problem is that this new welfare state-service sector complex undermines a core American value which has been central to our identity: personal autonomy and independence.

    The America Republic is founded on the principle of human agency — that individuals are free to choose for themselves how they want to live their lives and then chart a course for doing so. This is what the words “life, liberty, and the pursuit of happiness” in the Declaration of Independence mean. If because we earn low wages we are dependent on the state, we no longer have that personal autonomy to live independent lives.

    Nobel Laureate economist and philosopher Amartya sen has defined poverty not merely as the absence of income, but as the deprivation of capabilities. These capabilities include personal autonomy. Moreover, without personal autonomy, democracy can’t survive because that autonomy is one of democracy’s essential ingredients. Democracy requires that individuals be autonomous so that they can participate responsibly in the public square.

    It would seem that we should be just as wary today of the welfare state-service sector complex as we should of the military-industrial complex because at the end of the day both are a threat to American values. The welfare state-service sector is nothing to be proud of.

    I am available for comment: (914) 629-6351
  • 26 Mar 2015 11:10 AM | Mike Lillich (Administrator)

    A perfect time to discuss the future of work


    Every day brings a new story about the current state of work and the need to improve it.  

    On the local level Mayor Marty Walsh and City Councilor Michelle Wu just proposed a paid parental leave plan for city employees that they hope will be a model for other employers. Nationally, politicians and analysts from left, right, and center are now recognizing the need to do something about income inequality and stagnant wages. Even Walmart and other retailers are getting into the act by announcing plans to raise their minimum wage to $9 an hour.  Increasing numbers of editorial writers are noting that the decline of unions is bad for the economy and society and are looking for ways to restore workers’ long lost bargaining power.  


    I’ve been concerned about these issues for a long time. That’s why I’ve decided to start a conversation of what needs to be done by launching a MITX “MOOC” on The American Dream for the Next Generation. 


    Why focus on the next generation?  The sad reality is us baby boomers are leaving them an economic and political mess that they will have to fix. Despite a falling unemployment rate we still lack sufficient high quality jobs to absorb the growing labor force. Too many technical school and college graduates are starting off in jobs that don’t use the skills they worked so hard to obtain.   Starting out underemployed results in missed opportunities to continue building ones human capital through on the job learning, depresses earnings, and forces many to put off starting families of their own.  


    Unfortunately, the gridlock in Washington means the solutions will have to come from somewhere else. But the good news is there is plenty of innovation to build on outside of Washington in local governments, innovative employers, and newly emerging worker advocacy groups. We will sample these by, among other things:


    • Revisiting the lessons learned from the Market Basket saga of last summer that showed how to build and sustain successful businesses that also provide good jobs and great customer service.

    • Exploring how crowdsourcing and “hackathons” are being used to brainstorm start-ups that address big social problems and create new jobs.

    • Helping students develop their own career plans and urge them to pursue and take up the growing number of life-long-learning opportunities available on-line and through community colleges.

    • Encouraging development of new “apps” to differentiate between employers that provide good and bad jobs.

    To learn from past successes and failures we will take a quick historical tour of how work has evolved over the ages and ask how generations before us responded to a similar crisis following the Great Depression by updating employment policies and institutions that then produced three decades of rising productivity, wages,  and an expanding middle class. In our final exercise we will put all these ideas to work in an exercise aimed at negotiating what employment relationships should look like in the future.  Perhaps we can show how the next generation leaders are prepared to break the Washington gridlock.


    Working together, I believe we can shape the future of work in ways that address today’s challenges.  Join us and contribute your ideas or just see what young people around the world think needs to be done.  You can sign up here.  https://www.edx.org/course/american-dream-next-generation-mitx-15-662x#.VO3oDPnF9il. 


    Or, just stay tuned. As the course unfolds I’ll summarize what our students are telling us about their dreams for the future and what they are prepared to do to realize them.


  • 23 Mar 2015 12:54 PM | Deleted user

    Because the federal government has failed to raise the minimum wage, many states have been taking the lead. There are a couple of issues here. The first concerns the failure of the federal government to be the great equalizer of disparities between the states, a role it has assumed since the Great Depression. And the second is that even following increases, it has failed to maintain value most of the time.

    The principal reason a federal minimum wage was needed was because states free to set their own rates meant that, if states even set them at all, there would be disparities between the states. A federal minimum wage would at least create a uniform floor. Because there were wide regional disparities in wage rates, this was of critical importance. Wage rates and standards of living were much higher in the industrial North than in the more agrarian South.

    Southern states initially opposed the federal minimum wage because they feared it would force wages up in a region where the standard of living was lower. They also opposed it because they viewed it as another example of northern carpetbagging. Meanwhile, northern states desired a minimum floor because they wanted to remove the incentive for northern factories to relocate down South where wage rates were lower. But they also viewed the minimum wage as tool for economic development in the South. Because wage rates were so low a uniform standard would be needed. For a period of time, that uniform standard appeared to work.

    Consider that in 1968 the federal minimum wage of $1.60 an hour was really $10.75 an hour in 2015 dollars. Although in 1969 the value of the minimum wage fell to $10.19 an hour in 2015 dollars, it was still at 113.8 percent of the federal poverty level. Put another way, the minimum wage was at its highest value in 1968 and has never been worth as much since.

    The second major problem with the federal minimum wage is that it requires an act of Congress every time it is to be adjusted. Unlike some European countries, increases in the minimum wage are not automatic. To have a minimum wage that enables individuals to support a family above the poverty line would require some mechanism for automatically adjusting the wage on an annual basis. Automatic adjustment could be accomplished through indexation, which would effectively take the politics out of the minimum wage.

    Past calls for indexation have focused either on some percentage of average annual hourly earnings or the Consumer Price Index (CPI) as a basis for indexation. Calls in the past for tying the minimum wage to a percentage of average annual hourly earnings have often focused on a rate of around 50 percent of the average annual hourly earning in manufacturing. The virtue of this approach is, of course, the historical precedent, because the minimum wage did hover around 50 percent of average annual hourly earnings for much of the history of the minimum wage program. Were the minimum wage to be set at that level based on the average for 2012 of $24.47, the minimum wage would be $ $12.23, as opposed to its current level of $7.25. Subsequently, whatever percentage the average annual wage increases by, the minimum wage increases by the same percentage.

    The CPI is often favored because other programs, especially federal entitlements, are already tied to it. This has the obvious benefit of raising wages by whatever percentage increase there is in the CPI. The CPI, however, may overstate the rate of inflation and not accurately reflect market-caused price increases. An index that increases wages at a rate greater than (or even different from) the actual inflation rate will exacerbate inflationary pressures.

    An argument can be made for a productivity based index on both moral grounds and the standard model. According to the standard model, when productivity increases it is because of the marginal value each worker added to the enterprise. By theory, increases in productivity should justify increases in wages without any risk of inflation. Remember that the standard model holds that increasing the minimum wage will either lead to lower employment or higher productivity. Since the end of the Great Recession in 2009 productivity has increased, but those gains have not been shared among the workers. Tying the minimum wage to productivity would ensure that those productivity gains are shared among the workers. This approach assumes that as productivity increases, and to the extent those increases yield higher wages in general, they can also be the basis for increases in the statutory minimum wage. A minimum wage that rises with increases in productivity would have its appeal both economically and politically.

    One approach to a productivity index might be to create it on the basis of the median wage of the lowest wage workers, who would in effect be regarded as low-skilled workers, many of whom work in retail sales, the low-wage service sector (cashiers, gas hands, etc. ) and the fast food industry. Then on the basis of changes made to the median of the lowest-wage sector, similar adjustments would be made to the statutory minimum wage. Whatever percentage increase there was in the putative minimum wage would simply be applied to the statutory minimum wage.

    According to data from the Current Population Survey, the median wage of full-time workers below the 50th percentile was $3.74 in 1982 and it was $12.02 in 2012. Over the course of three decades median wages rose 221.4 percent. Had that same percentage increase been applied to the statutory minimum wage (then $3.35), it would have been $10.77 in 2012. The point is that it would have risen through incremental steps rather than the divisive politics that tend to characterize the current minimum wage regime. With incremental steps, employers can at least plan.

    Many of the states have come to the conclusion that if the federal government is not going to raise the minimum wage and then index it, they will have to take on that responsibility themselves. As of the end of February 2015, 29 states, including the District of Columbia, have minimum wages that are higher than the federal minimum wage. Sixteen of those 29 states have some mechanism for automatic adjustment On one level, that states are taking the lead only proves Justice Brandeis’s classic defense of federalism that states are laboratories of democracy whereby state policy can serve as a model for federal policy. But on another level, it demonstrates that the federal government can no longer be counted on to take the lead and be the great equalizer.

    I am available for comment: (914) 629-6351

  • 10 Mar 2015 8:37 AM | Deleted user

    In its March report, the department of labor announced that 295,000 jobs were created and unemployment dropped to 5.5 percent. If we listen to the Administration, we should herald this as a great achievement. And yet, these numbers are quite misleading. The 5.5 percent only measures those who are “officially” unemployed — those who have actively been looking in the last four weeks. It does not account for the “real” unemployment figures, which would include those who gave up. That figure is about 11 percent.

    The larger problem, however, is that these figures speak to a fundamental problem in American policymaking — what could otherwise be described as the passive approach to job creation. Serious job creation should rest on three pillars: monetary policy, fiscal policy, and wage policy. Congress has long neglected wage policy, often paying lip service to the need for higher wages while caving into business interests who claim it will lower employment. Similarly Congress cannot usually obtain the requisite consensus to adopt the right fiscal stimuli. Therefore, it effectively farms out job creation to the Federal Reserve Board. The Fed lowers interest rates or engages in quantitative easing in the hopes that investors will create jobs.

    When you get right down to it this is really political cowardice. Because Congress is afraid to make hard choices, the unelected and unaccountable Fed makes them for us. But it is also too much of a top-down approach. It may well generate economic growth in that lower interest rates enable investors to invest more. That, however, is not the same as economic development with investment in real people.

    Real job creation requires more of a bottom-up or grassroots approach. People need to be able to demand more goods and services in the aggregate, and they can only do this if their wages are rising. The March jobs report offers us a very incomplete picture. Arguably, it is better than an unofficial unemployment rate of 8 percent in which case the real unemployment rate would be at least 16 percent if not higher. But what it doesn’t tell us is how many of those jobs created are actually full-time as opposed to part-time. Somebody who takes a part-time job will no longer be counted in the unemployment figures even if that person is still looking for full-time work.

    The other problem with the jobs report is that wage growth has been sluggish. It increased slightly, but not enough to make a big dent. Productivity since the end of the Great Recession has been up, but those gains were not shared with the workers in the form of higher wages. If Congress was really serious about job creation and the needs of the middle class rather than just paying lip service to it, it would ask what other policies could be pursued as a compliment to monetary policy. In other words, it would become more active rather than passive. That it has pursued this passive approach for so long suggests that job creation that leads to economic development is not now, nor has it ever really been a priority.

    First of all, institutions matter. Wage growth has been sluggish because of the absence of institutions. Labor unions traditionally boosted the wages of their members and there were spillover effects in the uncovered sectors. Unions also got their members out to vote and provided a key constituency for the types of policies that would be beneficial to the middle class. With union membership in decline, that constituency is all but gone.

    Among the policies it supported was the minimum wage. At the peak of union strength the minimum wage reached 113.8 percent of the poverty level in 1969. Before the first phase of the three phase minimum wage increase beginning in 2007, the minimum wage was below 70 percent of the poverty level. Following the third phase in 2009, the minimum wage had reached 88.2 percent of the poverty level. By 2012, however, it was down to 82.5 percent of the poverty level.

    Institutions that boost wages give their workers increased purchasing power, which enables them to demand more goods and services in the aggregate. It is increased demand for goods and services that ultimately creates jobs; not simply lowering interest rates. If there is no demand for goods and services in the aggregate because low wages don’t allow for workers to make purchases, it does not matter how low the interest rates are. Jobs simply will not be created because no additional workers are needed.

    In previous columns, I have argued that the minimum wage has wage contour effects. An increase in the minimum wage leads to increase in wages in intervals above the minimum wage throughout the wage distribution. In other words, the minimum wage has positive benefits for the middle class. That it might eat into the profits of some is no reason to hold the middle class hostage. We all pay for the low wages those employers pay their workers in the form of subsidies to those workers precisely because their wages are low. If we were to pay higher wages, then we might be able to reduce some taxes because some of the subsidies — which are really subsidizing profits — would no longer be needed.

    Second of all, a fiscal approach is needed that will reduce taxes in a way that puts more money into everybody’s pockets; not just those at the top. The problem with the trickle down approach, whereby the wealthy get the bulk of a tax cut, is that it suffers from the same fallacious assumptions as monetary policy. There is no guarantee that these cuts will be used to invest in job creation as opposed to growth in the stock market. Instead, rates need to come down for everybody. Two or three flat tax rates with no deductions will broaden the tax base and leave many in the middle with more to spend for goods and services.

    Until Congress undertakes to seriously address how serious fiscal and wage policy can work in tandem with the Fed’s use of monetary policy, we will be doing nothing more than taking a passive approach to job creation. Moreover, the dismal March jobs report makes it clear that our approach to job creation is nothing more than passive.

    Perhaps it is unfair to expect too much from our Congress. Maybe it isn’t their fault that they are really beholden to special interests and care not a wit about the middle class. After all, it is not as though any serious contender for the Presidency — whom we will be hearing from soon enough — has attempted to demonstrate that these three approaches need to work together. But then again, it is easier to be passive and allow another institution — the Fed — to take responsibility.

    I am available for comment: (914) 629-6351

  • 24 Feb 2015 12:19 PM | Deleted user

    The minimum wage debate in recent years has been so technical that what often gets lost is that the real difference between the various positions is one of degree and focus. Is it possible that opponents and proponents of the minimum wage are really saying the same thing about the effects? While this would appear to be counterintuitive, when we actually parse through the different positions, we find that they really are not that different.

    Consider that opponents focus on teenagers. The standard argument since the 1980s has been that a 10 percent increase in the minimum wage results in a 1-3 percent reduction in employment among teenagers. Among adults, however, the employment consequences are much less, and almost inconsequential. If the essence of the argument against the minimum wage is that employers would rather pay the higher wage to adults over their children, is that necessarily undesirable?

    From a policy standpoint, we as a society should want adults to earn wages sufficient to support themselves and their families. Or perhaps we should ask is this really the best that opponents can come up with? To date, minimum wage increases have not had any real adverse employment consequences for the simple reason that the minimum wage is so far below an equilibrium wage that it could not possibly have an effect. Even the standard model recognizes this. The standard model predicts a reduction in employment when the minimum is higher than equilibrium — the point where the supply of labor intersects the demand for labor.

    But let’s consider the critics’ defense of no employment effects due to the minimum being below a market clearing wage. Is that not in effect conceding that the wage is too low? Critics will no doubt trumpet Walmart’s announcement last week that it will raise its workers’ minimum wage to $10.00 on the grounds that it cannot find decent workers. This they argue is a prime example of supply and demand. When the supply of quality workers is low and the demand is high, then the wage has to rise to the point where supply equals demand. Because the market is doing what it is supposed to, there is no need for an increase in the minimum wage.

    Would if it were true if Walmart was effectively setting wage rates for the entire low-wage sector of the economy. Walmart has disproportionate market power and has been sufficiently profitable that it can absorb a higher wage bill. It is also likely that Walmart is also one of those companies that has seen productivity increases since the end of the Great Recession, but has not passed on those gains to the workers in the form of a higher wage. Even by raising their minimum to $10.00 an hour, it will still be paying below the market clearing wage which most likely hovers around $15.00 an hour.

    Even if Walmart had not increased the wage on its own but was forced to through an increase in the minimum wage, there would likely not be a reduction in employment. On the contrary, by increasing the minimum wage to $10.00 an hour, we are likely to see the monopsony effect. This is when employment actually increases because those employers employing the largest numbers of low-wage workers increase their wages. More workers will be attracted to the market because of a higher wage’s supply side effects.

    Now if an increase in the minimum wage leads to lower employment because of supply side effects — more workers attracted to the market who are now chasing the same number of jobs — is that not same as what Walmart is attempting to accomplish on its own? Of course, the critic will respond that Walmart’s decision is voluntary whereas a legislated minimum wage is coercive. But I have also noted in previous columns that in the absence of a legislated floor employers will not reward effort through higher wages for fear that they cannot compete with others paying lower wages.

    Now let’s consider the argument that it really benefits the non- poor. Critics argue that most minimum wage workers aren’t primary earners, but secondary ones. By secondary, they mean spouses or teenagers. Since these workers are allegedly in households above the poverty line, a minimum wage as an anti-poverty measure is poorly targeted. There are a couple of ways to look at this. First of all, that few minimum wage earners are primary earners only illustrates the point that proponents of the minimum wage make which is that the minimum wage is too low to support anybody. Second of all, that most minimum wage earners may be secondary does not mean that their incomes aren’t essential to the maintenance of their households. But the real issue here is often lost.

    The minimum wage was never intended to be an anti-poverty issue, but a labor market issue intended to give workers voice in labor-management relations where workers otherwise lacked voice. The minimum wage was needed because the asymmetrical power relations between workers and their employers prevented them from negotiating better wages. In other words, wages weren’t set according to natural forces, but by the market power enjoyed by employers which workers lacked. That is why the legal sanction given to collective bargaining through the NLRA was such a watershed event. It effectively granted workers power through the legitimation of unions. The so-called argument of natural market forces is no more than a rationalization of the power imbalance between workers and employers in the market place.

    If it really helps the non- poor, might that not be the same as saying it benefits the middle class? In previous columns I have argued that the minimum wage is important because of the labor market it reflects. Those earning the statutory minimum wage are not important, rather those earning around the minimum wage — what we would call the “effective” minimum wage — are. Moreover, because the minimum wage has what we would call wage contour or interval effects, an increase in the statutory minimum wage will lead to workers in those intervals above the minimum wage also receiving wage increases as well. Again, critics might be asked if the minimum wage ultimately benefits the middle class, why is this necessarily a bad thing.

    There is, of course, common ground here. The standard model that predicts lower employment also predicts increased productivity and efficiency. Those who argue the benefits of the minimum wage won’t deny that technology might be substituted for labor or that some of the workers aren’t worth the new wage. They would counter that employers should then invest in the human capital of their workers. Instead of creating straw men by focusing on the effects in inconsequential segments of the labor market, we really need to be focused on the type of society we really want to create.

    I am available for comment: (914) 629-6351

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