Prof. Oren Levin-Waldman Will Delve Into This Issue on the Westchester On the Level Broadcast Scheduled for Wednesday, January 16, 2019th @ 10am EST
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It has long been a staple of neoclassical economics that firms should maximize their profits while minimizing their costs. Among the costs that can be minimized because they are not considered fixed, are labor costs. Only if adding an additional unit of labor adds to the marginal productivity of the firm, can a raise in workers’ wages be justified. Of course, if workers have the type of skills that employers need, they be in a position to command higher wages. Otherwise, employers ought to seek to pay as low a wage as possible, especially if that is the difference between being competitive and not.
Therefore, we all understand that low-skilled workers earn considerably less than do skilled workers, and that an oversupply of low-skilled workers will push wages down at the bottom and an under supply of skilled workers will push wages up at the top. And yet something is missing here. This so-called objective statement of how employers behave in the marketplace is supposedly value-neutral. That workers should get paid a decent wage so that they can support their families is, of course, a value judgment.
On one level, there is an implicit value of efficiency. The more output for less inputs is said to be efficient. On another level, efficiency is hollow if we are talking about the type of society we would like to create. Is it really a social objective to be a highly efficient economy that can produce cheap goods by a workforce that doesn’t earn enough to subsist? Those who espouse unfettered markets often like to cite Adam Smith as though it was their bible. And yet, Smith towards the end of The Wealth of Nations appears to reject the pure efficiency argument.
Smith actually suggests that the wages workers earn, especially relative to those of other countries, reflect the wealth and overall strength of the economy. A nation that pays its workers poorly may in part be symptomatic of a nation that either stands still or is in decline. The neoclassical economist might respond to this by saying if economic growth results in rising wages for those at the bottom, the economy is clearly not in decline. But what about a growing economy that continues to pay its workers poorly because an oversupply of unskilled workers coupled with the relative power of employers allows it to do so?
Smith would appear to be making a statement about what type of society we would like to be. In other words, what are our values? For Smith, the goal was to achieve opulence, which was the term he used for prosperity. A society in which workers were paid well would certainly be a prosperous one. But if that is the social objective, then society should want its workers to be paid well so that everybody will believe it is prosperous. Isn’t the appearance of prosperity just as important?
It is hard to imagine that Smith would consider it good if there were great extremes between the top and the bottom of the distribution. On the contrary, a society in which the top of the distribution seeks to suppress the wages of those at the bottom so that the top can hoard its wealth must be an economy that is standing still.
As a society that wants to maintain a strong and viable economy, it ultimately behooves us to choose a path that ensures that those at the bottom of the distribution earn higher wages which are indeed liveable. For those who tout Smith as the father of free markets, it is easy to miss this point because they conveniently forget that Smith wasn’t really an economist, but a moral philosopher. His concern was what made for a good moral society.
Although he did believe that the invisible hand of competition would achieve these objectives in an ideal world, he also understood that market failures would require government intervention to correct those failures. And while he certainly did not favor workers colluding with one another to drive up wages, he did understand why they would be forced to resort to it because of their lack of relative market power.
Smith was well aware that employers would naturally collude with one another to drive down wages. Therefore, he understood that workers would similarly be forced to join collectives — the forerunners to unions in order to drive them up. Where, then, does this leave us?
Currently, official employment is the lowest it has been in years, but wages at the bottom and in the middle have remained stagnant. Although workers got a boost in after-tax income due to tax cuts, there hasn’t been the great increase in wages that pundits promised. Although, there have been modest increases in wages, inequality in the U.S. relative to other OECD countries remains high.
The only real solution to this is to strengthen labor market institutions. The wages of blue-collar workers have been stagnant because labor unions have been in decline. The wages of low-skilled service workers have remained low because the federal minimum wage has not been increased since 2009. That we have pursued public policies that have hastened the decline of unions and have prevented increases in the minimum wage also unfortunately says something about the kind of society we are and really want to be.
It says that we really aspire to be nothing more than a low-wage economy, or what some have referred to as the low road. To not pay workers livable wages ultimately forces the rest of us to subsidize these workers. To continue to pay workers unlivable wages only results in identity politics because political actors are striving to deflect attention from voters’ real concerns.
It will be recalled that Trump won the 2016 election because the masses felt displaced due to policies pursued by elites, whether they were liberal Democrats or mainstream Republicans. Not only did they feel displaced, but they felt ignored. Simply put, elites don’t feel the need to listen to the masses, whom one politician referred to as “deplorables.”
Although the elites on economic policy conveniently hide behind the neoclassical model as though it should dictate policy rather than explain behavior, the reality is that neoclassical economics is a theoretical construct of elites, by elites and for elites. In fact, all ideologies are about empowering elites, albeit different ones than those that have been governing.
As it stands now, in our low-wage economy, the elites are effectively saying that it is in the best interests for workers to receive low wages so that the economy can be more efficient. Never mind that this is a rationalization for a particular distribution of income, wealth and power. Since there is nothing natural about the workings of the market place, it is time for us as a society to assess what our values are and what institutions are necessary to achieve them.
Restoring the Middle Class through Wage / Oren M. Levin-Waldman / Palgrave MacMillan
This book makes the case for minimum wage as a way to improve well-being of middle-income workers, reduce income inequality, and enhance democracy….
Minimum Wage: A Reference Handbook / ABC – CLIO
The Minimum Wage: A Reference Handbook By Oren M. Levin-Waldman. As of 2014, the minimum wage in Seattle is $15 an hour — double the federal minimum wage.
“Wage Policy, Income Distribution, and Democratic Theory” By Oren M. Levin-Waldman