Oren Levin-Waldman

  • 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

  • 10 Feb 2015 9:47 AM | Deleted user
    We hear a lot of talk these days about how the new “middle class” economics of taxing the wealthy to pay for more programs, and perhaps reduce taxes for middle class Americans, will also reduce income inequality. This argument appears to assume that those at the top of the income distribution are able to keep more of their after-tax income than those at the bottom, or even those in the middle. Obviously, this is not fair. In other words, the problem of income inequality boils down to a problem of after tax income. This focus, however, obscures the real problem, which is that income inequality over the last three decades has increased because wages have been stagnant; not because the wealthy have not been taxed enough.

    The issue is not income inequality, but wage inequality, and the two are not the same. When using income as a measure, that would include wages and other sources of income, whereas wages are solely what are earned in exchange for work. If the low-wage worker is receiving subsidies that effectively boosts that person’s income, the gap between the top and the bottom might not be nearly as wide if we were looking at the gap in wages between the top and the bottom.

    If income inequality is narrowly defined as after-tax income, then taxing those at the top of the distribution will have a limited effect. Because their after tax income will be less, the ratio of the top to bottom will also be less, in which case inequality will be reduced. A few months ago it was reported that with the end of the Bush tax cuts, income inequality declined because the wealthy had less after tax income. But this is not the same as saying that those at the bottom at more.

    Taxing the wealthy in the name of reducing income inequality does no such thing. It merely redistributes. Rather we should be looking at the issue of wage stagnation and look for ways to boost income. A more effective way to reduce inequality is to strengthen institutions like unions and the minimum wage. Our concern from a policy standpoint should be wage inequality.

    Consider that in Europe that inequality is less because of more centralized wage setting institutions. Inequality in states in the U.S. where the minimum wage is more than the federal minimum wage is also less. Why might that be? Because wage inequality decreases when the rate of increase among the bottom is higher relative to the rate of increase among the top. Would it come as a great surprise to learn that wage inequality is also less in those states where union density is higher? Now the impact of unionism on wage inequality today may nor be that strong because unionism has declined considerably over the last three decades. But three decades ago when union membership was higher, the impact of unionism on wage inequality was clear: less wage inequality.

    Perhaps the debate needs to be brought into clearer focus. There is no question that inequality is a social, economic and political problem that needs to be addressed. It needs to be addressed because it speaks to the shrinking middle class, and it also results in the wealthy being able to wield disproportionate power which in turn only leads to more policy favorable to their interests, and not those of the middle class.

    If middle class economics is what our politicians want to talk about, then stop the phony middle class economics, and give us something real. First, focus on wage inequality. The remedy for that is to boost wages, beginning from the bottom through the wage distribution. At a minimum, the minimum wage needs to be raised, and then subsequently indexed. But other labor institutions, like unions, need to be revitalized, and labor laws which have fallen victim to conservative courts, need to resurrected and properly enforced.

    When Republican governors seeking the Republican nomination for President campaign on a platform of having brought the unions to heel, that is perhaps all you really need to know about where they stand with regards to the interests of the middle class. The decimation of unions by denying them the rights to collectively bargain or passing more right-to-work laws only harms the middle class and in the end exacerbates wage inequality.

    While we are strengthening labor market institutions that traditionally maintained the middle class, we need to wholly revamp the tax code, which also not only hinders economic growth but also decreases the after tax income of the middle class, which in turn reduces their demand for aggregate goods and services.

    A simpler code with three or four progressive flat tax rates and no deductions will do more to encourage economic growth than the current code which seems to be more about social engineering than what the code is really supposed to be about: raising revenue. Such reform would broaden the tax base, put more money in many’s pockets, and grow the economy because individuals would have more to spend.

    Eliminating deductions would also address one of the greatest consequences of rising inequality in recent years: greater responsiveness of members of Congress, regardless of their party, to those interests with the greatest amount of money who often seek their wares through favorable tax treatment. It would, in short remove many of the interests from the political process that have successfully skewed policy towards moneyed interests and away from middle class interests.

    Middle class economics involves more than simply levying more taxes on the wealthy to pay for more programs for the poor in the hopes that maybe some in the middle class will benefit. Of course, it also involves more than simply lowering corporate tax rates so that businesses can pocket more profit without raising workers wages and creating more jobs. But then a simpler tax code would address that issue as well.

    What the middle class needs is real commitment to economic development which will create growth and raise wages. Investment in human capital writ large — investing in workers — is certainly needed; not platitudes about free community college. Let’s start by paying workers more, and strengthening institutions to make that happen. Employers will then be rewarding workers for their effort, and be induced to invest in their workers. As more people earn higher wage, we might be able to reduce some of our tax expenditures on social spending, because as people earn more they will no longer need the programs that have effectively been subsidizing lower wages. Now that might be real middle class economics.

    I am available for comment: (914) 629-6351
  • 26 Jan 2015 2:15 PM | Deleted user
    Another State of the Union Address and the middle class is miraculously back in the news. The President wants to lower taxes on the middle class and raise taxes on the wealthy. This, he claims, will redress some of the ill effects of wage stagnation over the years coupled with rising income inequality. The Republicans, of course, all but said that his proposals were dead on arrival. Of course, the President had to know that before he even made these proposals. So why bother? Well to use the middle class as a wedge against the Republicans. To which the Republicans respond that it is his policies and those of the Democratic Party that have hurt the middle class.

    And on and on it goes with the same claims, counter claims, name calling, and stale proposals that have been offered for the last 75 years. The casual observer watching this game of tit-for-tat would rightly conclude that neither side really cares about the middle class, because if they did the two parties would seriously be talking about real tax reform that could truly benefit the middle class because it would promote growth.

    Alas, they aren’t. While the President wants to play the class warfare card with higher taxes on the rich, the Republicans want to simply cut capital gains taxes even further. What the middle class needs is a tax code that is simpler to promote growth along with rising wages. The main problem with a proposal that calls for higher taxes on the wealthy is that they will always find ways to evade paying higher taxes, and the basis for doing so lies in the very tax code that nobody is reforming because moneyed interests have a vested interest in keeping things the way they are. Higher taxes on the wealthy often result in the burden ultimately falling on the middle class because of all the deductions and loopholes that will enable them to avoid paying them.

    Perhaps the President could have started off with something like; “I received the message of the midterm election loud and clear, and I am prepared to work with my Republican colleagues in Congress for serious tax reform that will benefit both the middle class and the economy. Therefore, I propose several flat tax rates like 5 percent, 10 percent, 15 percent, up to a maximum of 20 percent with absolutely no deductions.”

    Republicans have for years been calling for flat rates with no deduction on the grounds that it would foster greater growth. People might have more to spend. The tax code would be about raising revenue; not about affecting both individual and corporate behavior. In other words, the tax code that we currently have has been the main engine for social engineering. And yet, when Republicans propose this, Democrats in Congress refuse to even consider it because it would effectively dis-empower many of the special interests that have supported congressional incumbency.

    Consider for a moment that prior to the new Congress being sworn in earlier this month, the Democratic Chair of the Senate Finance Committee refused to even consider this type of reform because it would actually be more harmful to his constituents on Wall Street who aren’t phased with higher marginal tax rates because they have enough deductions to offset them. So all the language of the rich paying their fair share through higher rates has really been an exercise in obfuscation with the main objective being to protect the interests of the wealthiest Americans.

    So what happened to the middle class? Obviously it is being used as a political football, and a deflating one at that. Many in the middle would be better off with lower rates, albeit without the deductions. Many among the affluent would most likely be about the same. Corporations and the wealthiest may end paying more because they would no longer have deductions. Unlike the typical flat tax proposal which is regressive because there is often only one rate, multiple flat rates would be progressive because they are assigning higher tax rates to higher income brackets. Perhaps the greatest windfall is that it might remove money from politics because there would be less room for interest groups to maneuver.

    So why didn’t the President offer such a proposal? Because that would require working with the opposition than beating them over the head in the hopes of positioning the Democratic Party in 2016. Politics, in other words, is about playing games and creating illusions — who gets what when, and how — not actually accomplishing anything.

    Unfortunately, American politics have become so polarized that good ideas cannot even be entertained because they were proposed by the other side. If the Republicans have a good idea, the Democrats reflexively have to oppose it and vice verse. After all, where would the sport be if they could actually get along in order to truly benefit the middle class they purport to love so much?

    Now let’s return to what the President could have said. Instead of promising to use executive orders and his veto pen to get what he wants, he might have actually sounded more presidential had he said something like: “Let’s make a deal. I’ll support a simpler tax code through multiple flat tax rates and no deductions if you will support an increase in the minimum wage and its indexation thereafter. The economy will prosper because the tax code is simpler and more conducive to growth. A minimum wage through its ripple effects upward through the wage distribution will put more money into the hands of more people. Because of the ripple effects, the middle class will benefit, and their increased purchasing power will lead to increased demand for goods and services in the aggregate, which may lead to job creation. Our politics will be cleaner because we will remove the special interests from them. And because of the grassroots means by which the economy will grow, we will reduce income inequality.”

    It is high time for our public officials who are really supposed to work for us to stop posturing and begin doing something. In case the message was lost, the middle class has been suffering for some time now, and it continues to suffer. What the voters really said in the 2014 midterm election was that they are sick and tired of partisan games and want the two co-equal branches of government to work together to seriously address the nation’s problems. Right now, one of those problems is the declining middle class.

    I am available for comment: (914) 629-6351
  • 22 Jan 2015 6:30 AM | Deleted user

    It has become a staple of the neoclassical economics model that when productivity increases, then so too will wages. Why is this? Because in a competitive market each worker receives the value of his or her marginal product, which is the amount of an increase in say a unit of labor.


    Therefore, workers earn higher wages when their marginal revenue product increases. The marginal revenue product is often the criterion for determining how many more workers to hire because they are able to calculate how much more output can be expected based on how many units are added. But if the marginal revenue product can be increased from the greater efforts of workers without having to increase their number, it then becomes feasible to raise their wages without eating into the profits of the firm.


    Editor's Note: For more, read the original article in the LaborPress.org. He is a regular contributor.


    If wages are supposed to rise with productivity, then why haven't they? By all accounts the economy is improving. In December 2014, total nonfarm payroll employment rose by 252,000, and the unemployment rate dropped to 5.6 percent, which is the lowest it has been since the end of the Great Recession in 2009. At the same time, since the end of the Great Recession, productivity has been increasing, but those productivity gains have not been shared with the workers.


    Is there an attempt to maintain a class based society under the guise of the myth of upward Socio-economic mobility? Is the language of free markets at the end of the day nothing more than a rationalization for a system that distributes income unevenly? After all, if workers are led to believe that by working hard they will be rewarded with higher wages because if nothing else they are justly being compensated for enhancing the productivity of the firm, they are also being led to believe that the system of free markets is one of mutual benefits.


    There are perhaps two messages here. One is that mythology certainly serves its purposes of rationalizing the status quo and keeping the masses in their place. In this vein, the neoclassical model, upon which the free market orthodoxy rests is no different that Marx calling religion the opiate of the masses, because it too served to keep the masses in their place unquestioning the justness of a system that produced unfair distribution. The second message, of course, is that the model, like so many other theoretical constructs cannot be applied in the real world because there are so many extraneous variables that cannot be controlled for.


    The second message usually has a corollary which is that adjustments need to be made, and one of those adjustments is the creation of some type of countervailing force in the market place because employers and employees don’t share equal power. Institutional economists in the late 19th and early 20th centuries recognized that free markets were not neutral and that they did favor those who enjoyed greater market power. Their solution was to support collective bargaining because that would enable workers to negotiate wages and working conditions on a more even par with their employers.


    During the New Deal, the authors of the National Labor Relations Act or what has often been referred to as the Wagner Act, also recognized that the power imbalance between employers and workers not only leads to strife and disruptions in productive enterprise, but instability. They saw this measure as essential to ensuring an equitable distribution of the rewards of the economy.


    Similarly, the authors of the Fair Labor Standards Act, which created the federal minimum wage, saw it as essential for ensuring an equitable distribution of the rewards of the economy, particularly for those who would not be covered by collective bargaining agreements. A wage floor, it was maintained, would also serve the economy in macroeconomic terms in that it would enable workers to maintain their purchasing power, thereby maintaining demand for goods and services in the aggregate.


    At the same time, there would appear to be an assumption that underpins both of these major pieces of legislation, which also returns us to the question of why productivity gains have not been shared among the workers. That is, employers left to their own devices cannot be relied upon to do the right thing. Now if we subscribe to the idea that mythology rationalizes the status quo, then it would be easy to dismiss employers as simply selfish, in which case mythology conveniently masks their selfishness.


    But if we subscribe to the second message that implementation of a theoretical construct in the real world requires adjustments, then it becomes clear that something is missing. Market models in general, and especially going back to Adam Smith assume that individuals are basically selfish. Smith assumed the invisible hand of the market would check selfishness and channel it towards accomplishing the public interest. If there was market failure, as Smith assumed to be the case with monopoly, then regulation would be required.


    A wage floor, then, becomes necessary not only to ensure that workers receive a fair and liveable wage in an environment where they don’t have the market power to negotiate with their employers as equals, but to also ensure a level playing field among employers. Remember the same neoclassical model assumes that firms seek to maximize profits while minimizing costs. If their competition is paying low wages in order to maintain low prices, they similarly are going to lower their labor costs. Therefore, no profit maximizing firm would offer to pay higher wages even if it would bring in higher quality workers for fear that the competition will not do the same and then they will be underbid by their competition. In other words, the absence of a standard — a wage floor here — makes it a foregone conclusion that employers will act on their selfishness.


    Institutions like unions and the minimum wage in the end force employers to do the right thing and what is ultimately in their own best interests. Of course the critic will cry that the employer is being coerced rather than being allowed to come to this conclusion voluntarily. But we have already seen that with the increases in productivity employers won’t do the right thing voluntarily because so far they haven’t been sharing the gains with their workers. Therefore, it seems logical to conclude that perhaps they need a nudge in the form of, at a minimum, a rising wage floor, which will, through interval effects, force up wages through the distribution.


    Otherwise, we might have to conclude that if employers don’t want to share productivity gains with their workers, and they will oppose increases in the minimum wage because it will force them to do so, that they simply want to horde profits at the expense of workers. And yet, they conveniently forget that without workers there would be no profits. If this is true, then market ideology is nothing more than a rationalization that conveniently serves their naked self-interests. That public officials buy into this mythology only means that they too really don’t care for the larger communities they serve. But then again, if by now we haven’t figured that out, then perhaps there is no hope.


    Copyright © 2015 Laborpress. All Rights Reserved.

  • 14 Jan 2015 12:42 PM | Deleted user

    It has become a staple of the neoclassical economics model that when productivity increases, then so too will wages. Why is this? Because in a competitive market each worker receives the value of his or her marginal product, which is the amount of an increase in say a unit of labor. Therefore, workers earn higher wages when their marginal revenue product increases. If the marginal revenue product can be increased from the greater efforts of workers without having to increase their number, it then becomes feasible to raise their wages without eating into the profits of the firm.

    If wages are supposed to rise with productivity, then why haven't they? By all accounts the economy is improving. In December 2014, total nonfarm payroll employment rose by 252,000, and the unemployment rate dropped to 5.6 percent, which is the lowest it has been since the end of the Great Recession in 2009. At the same time, since the end of the Great Recession, productivity has been increasing, but those productivity gains have not been shared with the workers.

    Is there an attempt to maintain a class based society under the guise of the myth of upward Socio-economic mobility? Is the language of free markets at the end of the day nothing more than a rationalization for a system that distributes income unevenly? After all, if workers are led to believe that by working hard they will be rewarded with higher wages because if nothing else they are justly being compensated for enhancing the productivity of the firm, they are also being led to believe that the system of free markets is one of mutual benefits.

    There are perhaps two messages here. One is that mythology certainly serves its purposes of rationalizing the status quo and keeping the masses in their place. In this vein, the neoclassical model, upon which the free market orthodoxy rests is no different that Marx calling religion the opiate of the masses, because it too served to keep the masses in their place unquestioning the justness of a system that produced unfair distribution. The second message, of course, is that the model, like so many other theoretical constructs cannot be applied in the real world because there are so many extraneous variables that cannot be controlled for.

    The second message usually has a corollary which is that adjustments need to be made, and one of those adjustments is the creation of some type of countervailing force in the market place because employers and employees don’t share equal power. Institutional economists in the late 19th and early 20th centuries recognized that free markets were not neutral and that they did favor those who enjoyed greater market power. Their solution was to support collective bargaining because that would enable workers to negotiate wages and working conditions on a more even par with their employers.

    During the New Deal, the authors of the National Labor Relations Act or what has often been referred to as the Wagner Act, also recognized that the power imbalance between employers and workers not only leads to strife and disruptions in productive enterprise, but instability. They saw this measure as essential to ensuring an equitable distribution of the rewards of the economy.

    Similarly, the authors of the Fair Labor Standards Act, which created the federal minimum wage, saw it as essential for ensuring an equitable distribution of the rewards of the economy, particularly for those who would not be covered by collective bargaining agreements. A wage floor, it was maintained, would also serve to maintain aggregate demand for goods and services by affording workers greater purchasing power.

    At the same time, there would appear to be an assumption that underpins both of these major pieces of legislation, which also returns us to the question of why productivity gains have not been shared among the workers. That is, employers left to their own devices cannot be relied upon to do the right thing. Now if we subscribe to the idea that mythology rationalizes the status quo, then it would be easy to dismiss employers as simply selfish, in which case mythology conveniently masks their selfishness.

    But if we subscribe to the second message that implementation of a theoretical construct in the real world requires adjustments, then it becomes clear that something is missing. Market models in general, and especially going back to Adam Smith assume that individuals are basically selfish. Smith assumed the invisible hand of the market would check selfishness and channel it towards accomplishing the public interest. If there was market failure, as Smith assumed to be the case with monopoly, then regulation would be required.

    A wage floor, then, becomes necessary not only to ensure that workers receive a fair and liveable wage in an environment where they don’t have the market power to negotiate with their employers as equals, but to also ensure a level playing field among employers. Remember the same neoclassical model assumes that firms seek to maximize profits while minimizing costs. If their competition is paying low wages in order to maintain low prices, they similarly are going to lower their labor costs. Therefore, no profit maximizing firm would offer to pay higher wages even if it would bring in higher quality workers for fear that the competition will not do the same and then they will be underbid by their competition. In other words, the absence of a standard undefined a wage floor here undefined makes it a foregone conclusion that employers will act on their selfishness.

    Institutions like unions and the minimum wage in the end force employers to do the right thing and what is ultimately in their own best interests. Of course the critic will cry that the employer is being coerced rather than being allowed to come to this conclusion voluntarily. But we have already seen that with the increases in productivity employers won’t do the right thing voluntarily because so far they haven’t been sharing the gains with their workers. Therefore, it seems logical to conclude that perhaps they need a nudge in the form of, at a minimum, a rising wage floor, which will, through interval effects, force up wages through the distribution.

    Otherwise, we might have to conclude that if employers don’t want to share productivity gains with their workers, and they will oppose increases in the minimum wage because it will force them to do so, that they simply want to horde profits at the expense of workers. And yet, they conveniently forget that without workers there would be no profits. If this is true, then market ideology is nothing more than a rationalization that conveniently serves their naked self-interests. That public officials buy into this mythology only means that they too really don’t care for the larger communities they serve. But then again, if by now we haven’t figured that out, then perhaps there is no hope.

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

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