Don’t Pay For Make Work; Make Work Pay
If you want to understand why I’m happy to write for TAC, just read Ron Unz’s brief for a dramatic rise in the minimum wage. He’s been making this argument in these pages for some time now, and I hope he continues to beat this particular drum.
I hope so for reasons of principle and for practical reasons. In principle, any kind of “one-nation” conservatism has to care about inequality as such, and particularly about the weakness of labor’s bargaining power in most of contemporary America. Right-wing individualism is often conflated with a conservative approach to governance in contemporary American politics, but that conflation is a profound error. As a practical matter, I’m convinced that wage stagnation is the deep reason for the financial crisis. The Bush-era answer to stagnating wages was cheaper credit. That papered over the problem for a while, but it teed America up for a terrible crash. (Harper’s Canada, having dodged that crisis, may be heading for a similar crisis of their own now.) Avoiding a repeat requires fixing the structural drivers of widening inequality, and particularly means raising wages at the low end of the scale. In that context, a legislated rise in the minimum wage should absolutely be on the table for discussion.
That doesn’t mean I don’t see potential problems with Unz’s argument. Ultimately, the only way a hike in the minimum wage “works” is if it creates incentives to increase labor productivity. In the absence of such incentives, it may be rational for an individual employer maximally to exploit his bargaining-power advantage even if it’s to the detriment of the economic collectivity. That’s the way things work in slave economies, and it’s the way Marx assumed capitalism would evolve.
A mandated increase in wages could produce those incentives in various ways. If it led to an overall rise in prices, that could drive out competitors who followed a model of competing entirely on price, and skimping on quality. Or industries could respond by increasing automation, which would reduce head-count but would increase productivity per worker-hour. Or some jobs could move overseas – which could also increase efficiency, particularly if those were jobs that would otherwise be filled by low-skilled immigrants. That would also improve efficiency if it costs less to move capital than to move labor. All else being equal, those effects would increase unemployment in the short term while improving economic performance over the longer term – but under current conditions, where overall demand is low, an increase in the minimum wage would amount to redistribution to those most-likely to consume, which would mean an increase in demand, so I’m not sure you wouldn’t actually see a net drop in unemployment overall.
But some sectors will find it harder to increase productivity than others – or will have weaker incentives to do so. One sector that could be particularly problematic is health-care. From orderlies to receptionists to janitors to home health-care aids, there are an awful lot of low-wage employees in the health-care sector. But so much of health-care spending is socialized that the incentives to innovate in response to a mandated rise in wages are not as operative. The initial impact of a hike in the minimum wage would likely be a spike in health-care inflation, which would, given the way Medicare and Medicaid work, lead to an immediate spike in Federal spending, and an increase in the structural deficit.
That’s not necessarily an argument not to raise the minimum wage – but it’s an argument that a hike in the minimum wage would be more effective if combined with efforts to improve productivity in the sector, which, given how enmeshed the government already is, will require government initiatives.
And that’s an argument that can be generalized beyond health-care. Although America has relatively weak unions, and a highly mobile labor force, we don’t exactly have a hands-off policy toward business regulation. Indeed, as we have gotten more tax-phobic, we’ve become more and more inclined to achieve our social goals through regulation of the private sector, and through a “socialism in one contract” approach by those unions that are relatively strong (such as public-sector unions). Regulatory reform could work hand-in-hand with a hike in the minimum wage: the latter providing the incentive to innovate to maintain profitability, the former increasing the scope of opportunity to do so.
These kinds of reforms are going to be particularly important to the small-business sector. Large businesses are going to be in a better position than small ones to rationalize their operations in response to a significant change in labor costs, both because they are likely to have more flexibility in financing during the transition and simply because they will have more moving parts to play with. A hike in the minimum wage would disproportionately impact small businesses. It would make sense to couple it with a pro-labor reform that would disproportionately benefit small businesses – such as a permanent cut in the employer portion of the payroll tax (offset by an increase in taxes on consumption, such as a VAT or carbon tax).
Moving to another part of Unz’s argument, Unz points out a number of problems with the traditional “more education” prescription for solving the problem of stagnating wages. And he’s right that a rise in wages for relatively low-skilled labor would reduce incentives to marginal students to go to a four-year college, which would help relieve some of the upward pressure on education costs. But a rise in the minimum wage will also produce incentives for businesses to reduce the use of unskilled labor, which will produce higher demand for opportunities to rise from “unskilled” to “semi-skilled.” This is the sort of thing that community colleges focus on, and expanding the number of slots for associates degrees would be valuable. But it would also be valuable to push back against credentialism at this level as well, to open up space to acquire – and demonstrate – useful skills without having to participate in a formal degree program. There should be more scope to demonstrate specific competencies simply by passing a test, and then let a thousand test-prep flowers bloom.
My larger point is this. Wage stagnation is a serious economic and social problem with far-reaching consequences. You don’t get to say “I don’t care about that problem” because your ideology doesn’t have a ready-made answer. That applies to free-market-oriented conservatives and client-service-oriented neo-liberals alike, because solving the problem is going to require solutions from the “left” and “right” side of the policy box, and these solutions may be more complementary than contradictory. Using government power to increase the negotiating leverage of labor in the market is more likely to increase wages without taking those gains back through inflation if business owners have more freedom to respond creatively to an increase in labor costs. Giving business more freedom to respond creatively to an increase in labor costs is more likely to result in gains to labor, rather than just increased rents for capital and the businesses that service capital, if the government acts to increase labor’s negotiating leverage in the market.