Living Wage vs. Helping People Live

W.W. at the Democracy in America writes a blog entry on living wage laws (I've noticed that there is an awful lot more ignorant wingnutty comments over the past year or so, though early posters are generally still good. This has been making me less desirous of spending time there, however).

The progressive impulse to make employers rather than the government ensure workers a decent standard of living seems to me to be based in these sorts of considerations. Yet I cannot see how forcing Walmart, or employers generally, to guarantee minimum incomes helps. There is, no doubt, a great deal of dignity in work, and there is also a certain indignity in receiving government transfers. Hiding transfers inside paychecks is therefore an excellent strategy for rewarding work while getting people what they need in a way that makes them feel good about it. That's a great reason to support wage subsidies. However, forcing employers to directly bear the economic burden of the subsidy is mostly just a strategy for reducing the supply of paychecks, which would benefit neither the dignity nor economic security of the American worker.

On the whole I agree with W.W. but with a couple of important caveats.

First of all, for market wages to really be market wages power considerations have to be eliminated.* In the early days of our economy the relative small size of employers and the relative strength of municipalities could achieve this. Later in our history, unions achieved much the same thing. Today, however, we have atomistic individuals trying to bargain with large, centralized corporations. This is an easy recipe for exploitation of the weaker individual party by the organized, stronger party.

In the American situation this has tended to lead to liberals being forced to support statist intervention, without other intermediate bodies to push back against corporate power we are left with the state. Hardly ideal, often too broad in application, and always slow the reality is its the only tool left to provide a countervailing force against more powerful firms. A regeneration of unions would, of course, provide an alternative but for whatever reason too many people see unions as a market distortion rather than a necessary countervailing force to firms that would lead to more efficient outcomes.

A second caveat is that, as Adam Smith observed about Scottish Highlanders,** there are groups who do not depend upon wages for survival that will drive wages below what their natural clearing rate would be. Groups such as teenagers and the elderly who can depend respectively on either their parents or old-age pensions often choose to work for below market wages for reasons peculiar to these sub-groups. These marginal workers tend to drive wages below what would be demanded by workers if these groups were not present.*** [Update: To clarify, most labor markets are composed of individuals whose primary income come from markets. At the very low end of the wage spectrum, however, individuals dependent on markets for their incomes are competing with individuals whose primary income is non-market, whether household production like the Scottish highlanders or based on family ties or social guarantees like teenagers or the elderly. Imagine if you had to compete in your job with someone who worked simply to buy video games and had their house, food, and other living expenses taken care of for them. Would you like to be involved in that competitive wage negotiation?]

With these two caveats in mind, however, I do agree that insofar as state power is being used to address these inequities it is better to do so through general taxation than it is through employer mandates. After all, there are a lot of negative externalities to having lots of poverty ridden people in the population and we all benefit from addressing their poverty. Subsidies would also serve to address the problem of people working for pocket money rather than a roof over their head and food in their bellies.****

However, I think the idea of a fair price has a lot more gut appeal than does the idea of a guaranteed minimum income or other policy interventions that could turn the residents of our trailer parks into bourgeois.***** So I don't see W.W.'s or my favored interventions gaining much traction, especially when the necessary taxation for these policies is taken into account. A better policy lever to pull would be interventions like universal healthcare and other universal insurance schemes to get benefits off employer's books. After that our businesses will be in a much better position to pay for the likely inevitable higher minimum wage laws.

*Economists have a terrible tendency to handwave away power. While I'm aware they deal with it tangentially through issues like transaction costs and in some studies bargaining, power plays a deeply influential role in our economic interactions and economists really need to come to terms with this if they want to be scientific and based on observation rather than philosophical and based on abstract reasoning.

**I think it was Scots. Though for some reason my memory is also thinking his example had something to do with the Caucuses and Russians. I'm probably conflating two different books, but I know Smith mentioned this phenomenon and am simply too lazy to look up the exact reference.

***Without the presence of a pool of workers not dependent on their wages for survival workers would naturally tend to bid up wages over time as their not making ends meet and the pressures force their productivity to decline. With a pool of workers not being driven to distraction by poor living conditions, however, wages can remain artificially low and the employees with inadequate living conditions can be called lazy rather than miserable.

****On the whole I do think the evidence also shows that people work harder for their pocket money than they do for the bread in their bellies. Someone working to eat will generally want to stop working once they have enough to live off of, having so few prospects to earn real resources there is little incentive to work past this point. Provide them with enough resources to get by, however, and people find that there are actually goals they can work towards rather than immediate needs they have to satisfy. Social advancement is an infinite treadmill but the human stomach can only fit so much.

*****While it is a respectable intellectual standpoint to not like the bourgeois I think there is a powerful state interest in encouraging people to think and act like the bourgeois.