Minimum Wages are Fuel that Drives the Economy

With momentum building to raise the federal minimum wage from $7.25 to $15.00, the ritualized debate about the wisdom of that move has begun once again. The posturing and framing come instantly to those who’ve been through the process in the past. For those who are new, they watch, adopt that same faulty frame, and quickly line up behind whichever faction their tribe demands. The outcome ends up depending on the strength of the tribes rather than the merits of any of the arguments. Unfortunately, for the people of our nation and our economy, the results historically have been poor, and the accumulating impact of those successive failures has become disastrous.

The traditional framing begins by noting the struggle to live on inadequate wages and the steadily growing gap between frozen wages and rising living costs. It goes on to note the additional and growing gap between wages and productivity, decrying the unfairness of that reality. From this perspective, raising the minimum wage is all about reducing poverty. These are human pains, articulated by those with empathy for those trapped in that pain. Their argument is centered on those human concerns and rely on our shared concern towards others for their strength.

That side is traditionally opposed by those who may or may not share those feelings, but who feel such concerns must be set aside to focus instead on the needs of our economy. Their claims assert that businesses, particularly small businesses, simply cannot afford the higher wages. They will be forced out of business or to raise prices to levels making their goods or services unaffordable. They also worry about regional variances and that setting a minimum wage at the level needed to live in New York City is ridiculous for rural Mississippi. They also believe the life struggles imposed by low wages are a necessary and valuable incentive for people to build their skills, to “pay their dues” to drive personal growth and development. Finally, they argue, those low wages are the direct result of the forces of the free market and are, therefore, an accurate reflection of the true value of the work being done. It’s an argument centered on economic concerns and relies for its strength on our shared desire for a healthy, vibrant economy.

Lurking under all of this is a conceptual framework that shapes how we think about social governance. That framework relies on a set of ideologies that are deeply embedded in history and on a particular ideology that rose to power in the late 1970s and has driven the beliefs and policies of both parties for the last 40–50 years. That deeply flawed ideology, known as neoliberalism, has caused untold damage to this country. It’s one of the root causes of our successive failure to properly understand and address minimum wages for the last half century. It’s time to step out of that rabbit hole and rediscover the vitally important role a healthy, living and steadily growing minimum wage is to our entire society and its economy.

Let’s begin with one of the foundational beliefs of most economists, certainly for those wedded to the prevailing neoliberal faith. This belief is that all economic transactions are voluntary and driven solely by the value both parties see in the deal. Quite specifically, they believe that differential power between parties plays no role in the process. It’s a silly belief, worse in some ways than those who continue to cherish a vision of a flat earth. At least the flat earthers have a set of localized observations that could validate their cause. The belief that all economic transactions happen in the absence of power differentials has no such fig leaf. As I spell out in detail in my book The Fifth Paradigm all economic transactions have three fundamental elements, people, power and value. It is the presence of value, not the absence of power that makes economic transactions a distinct mode of social governance.

There are many transactions that happen in situations where the power imbalance is small, and the value dimension is decisive, however, power is always a factor. As I spell out further in the book, wage and employment terms are transactions that are almost always driven by the power dimension, not the value dimension. There are a few exceptions — Tom Brady and Lady GaGa come to mind — but, not many. The easiest way to get comfortable with this fact is that when unions are introduced to the bargaining process, thereby balancing the power dimension, wages almost always go up.

So, when an employer’s or industry’s power differential enabler them to set wages below what’s required to live, we have a fundamentally flawed economy. Our capital allocations, investment decisions, productivity incentives and overall portfolio of businesses is simply wrong, because a core element of the equation is being determined by power not value. We don’t have a “value based” economy we have a “power based” economy. Every economist knows that’s a bad thing, even the neoliberals. They just assume it out of existence rather than confront its reality and the necessity of using public policies to address the problem.

This is much more than a minimum wage issue. All income based on work, as opposed to capital, is affected to one degree or another. Our median wages are too low as well. From the mid 1940s up until the mid 1970s wages tracked productivity growth almost exactly which is a sign of a healthy, well-functioning economy. Once that stopped, our economy began operating on distorted labor costs and began allocating capital and productivity investments accordingly. It began to systematically operate in a way that was socially and economically destructive. After 40–50 years of that sustained malfunction we now live in a horribly distorted society.

As an aside, Karl Marx was so convinced this problem was and is intractable he felt capitalism itself was doomed to fail. The fact that we found a set of capitalist rules that worked for 30 years is proof he was wrong. Don’t get me wrong, there were a lot of bad aspects of that set of policies particularly when it comes to women, people of color, and environmental externalities, but we did get at least part of the equation working properly for a time.

Addressing the full scope of the wage problem reaches far beyond our minimum wage debate but setting the minimum wage to a living wage provides a foundation for all the other initiatives we need. The living wage concept is important. We want a society in which anyone with a job can afford to live off those wages. While I have some sympathy for arguments about high school students in summer jobs or similar niche situations we really don’t want a lot of businesses that are unable to generate enough value to pay people enough to live. Students may end up with lower total incomes through part-time work instead of full time, but the work they do needs to be valued at a level commensurate with a living wage.

Which brings us to the next part of the discussion. What constitutes “full-time” work? Before the introduction of revised labor laws and unions in the 1930s many, if not most, people worked 60–70 hours a week. We introduced the 40-hour work week deliberately to put more people to work. And, that formula worked extremely well for a time. But our economy has evolved substantially over the last 80–90 years and, for reasons spelled out in The Fifth Paradigm, it’s time we revised the work week as well. I won’t dwell on those details in this short article but suffice it to say we need to be moving to a 32 and then 24-hour work week as part of our overall economic strategy, including, but not limited to the minimum wage. In other words, if $15/hr and 40 hrs/week leads to a living wage that comes to $600/week as our target minimum. For a 32-hour work week that means $18.75/hr and for a 24-hour work week it means $25/hour.

There’s also room for debate on whether $600/week is truly a living wage for New York City and whether it’s far more than needed as a living wage in rural Mississippi. I have not done extensive study on that particular aspect of the formula, but suspect it’s probably roughly correct as a national target, while being too low for NYC and too high for Mississippi. Ideally, this aspect should be calculated based on local economic conditions. However, I also harbor a deep suspicion that the reason costs of living are so low in rural Mississippi is because living standards are too low and their whole economy is even more badly distorted by power imbalances than other regions of the country. For my purposes, I’ll leave this as a question to be sorted out through proper analysis of the data. The target needs to be a living wage on a 24 hour work week.

Now that we’ve established that set of principles lets go back to the typical questions people raise on this topic. We’ll start with whether businesses can afford these costs. The simple answer to that is that any business that can’t afford these costs isn’t a business we want in our economy. They’re wasting capital and either need to create enough value to pay people, invest in automation to reduce their labor dependencies or go out of business. If they need to raise prices their ability to do so will be determined by the value they create. If it’s enough to absorb the price increase, then that’s fine. If not, then they need a different strategy.

The next objection is that this will just force businesses to invest in automation to reduce the number of people they have working for them. In the traditional frame, that seems like a bad thing, but in this frame its exactly what we want. Inadequate wages lead to inadequate capital investments in productivity improvements. We want those investments and the productivity that results. That’s how we continuously raise the standard of living for everyone. That’s how a well-functioning economy operates. Our artificially low wages have not only hurt our workforce they’ve hindered our ability to sustain improvements to the economy.

But, wont that lead to fewer jobs? In a word, NO! Each individual business will use fewer workers per unit of output, but the economy as a whole grows and grows more efficiently in the process. This has consistently been true and, for reasons spelled out in The Fifth Pardaigm, is actually even more likely in our current state of economic evolution than it has been in the past. A well-functioning economy responds to increased demand by producing increased output. There is no force available through any policy that can do more to drive that increased demand than putting money in the hands of people who will spend it, producing investment opportunities for those who want to capture that spending.

As for those who believe people must struggle to survive to be incented to improve, I doubt any of them have ever really struggled. Real poverty is bone-crushing. There is little in life more debilitating than not having enough resources to even survive. The coping mechanisms most people resort to are far more damaging to our society than any conceivable reduction in incentives to grow and improve. And, frankly, there are many avenues of personal growth and improvement other than economic ones and there’s no reason our society should solely focus on enabling one over another. In a free society, people are free to make their own choices in their “pursuit of happiness.”

I’ll close this article with an observation about the $600/week unemployment supplement implemented this past year. While I doubt any of the writers of that policy intended to, they created an incredible test case for the economic power unleashed by ensuring working America earned a living wage. While there were lots of implementation issues, the results have been clear and overwhelming. It was probably one of the greatest public policy successes since the 1930s or the introduction of Medicare. It worked and it was powerful enough to offset the economic devastation of the pandemic.

Finally, one of the more poisonous aspects of our failed neoliberal paradigm is a belief in “trickle down” economics. Give the top 1% enough additional money and some of that will “trickle down” to the rest of society. It’s kind of crazy. The entire design of the economy is to take money from the bottom of the pyramid and systematically accumulate it at higher levels. That’s how capitalism is “supposed” to work. Our economy is designed to “trickle up” not down and the best way to power it forward is to grow the resources at the bottom to fuel that process. When we pay every working American a living wage, on a 24-hour work week we provide the raw demand to make our capitalist, trickle-up economy work.