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The Tragedy of Lower Wages

By       Message Seymour Patterson     Permalink
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When we think of efficiency in terms of lower costs, keeping wages low is good for business profitability, so is the unregulated disposition of production waste, as is the effort to keep the real minimum wages from moving up. Some of our elective officials are complicit in this strategy to keep wages depressed. How can our representatives keep wages down? Let's consider some ways: (1) they can prolong the recession and thereby keep the unemployment rate high--more people out of work means employers don't have to raise wages, (2) they can shut down the government and furlough public employees--this will keep wages soft, (3) they can tell public unions to take a hike, so no one is left to fight for workers' benefits, (4) and they can refuse the extend unemployment benefits to over a million people--1.3 million to be precise.

The economic argument against extending unemployment benefits largely makes sense, although the argument for extending it also makes economic sense. I'll largely ignore this latter argument (because it failed) and address the former case--namely, not to extend benefits--because in fact Congress allowed long-term unemployment benefits to lapse on December 28, 2013.

When unemployment benefits are extended, the unemployed can put off or hold out longer trying to find a job--any job, so extension of benefits is a disincentive for the unemployed to engage in job search.   And if they aren't looking for work, then by definition they are not in the labor force. On the other hand, not extending unemployment benefits will force people to get off their duff and find a job. However, if this is true, then failing to extend unemployment benefits should accomplish two bizarre things: (1)thrust a million plus people into the labor force and instantly raise the unemployment rate in a soft job market; (2) or everybody finds a job and thus leaves the unemployment rate unchanged. In the first case scenario, if they don't immediately find jobs they add to the jobless rate and further depress wages or at the very least keep wages from rising, which is, of course, good for business profitability. In the second case scenario, nothing changes--people who were receiving unemployment benefits are no longer receiving them, so they enter the labor force, somehow find jobs, and therefore add nothing to the unemployment statistics.Yet, this is not the only problem with lower wages in the USA.

For instance, there was a time in US history when one paycheck was enough to meet all a typical urban family's financial needs. This seemingly idyllic portrait of the American family went the way of the Dodo. Now the typical American family needs two paychecks for food, shelter and clothing. There are certainly many reasons for this metamorphosis in the family working profile, no doubt, but one has to be the concerted strategy to keep wages low.

Then there is the payroll tax that takes a 7.65 percent bite out of wages. Its existence means the typical wage earner with a family has a harder time making ends meet even with two wage earners because of low pretax earnings to start, plus the additional bite of the payroll tax.

We seem to be moving to a third stage in the impact of low wages on American families. There is talk about repealing child-labor laws. Newt Gingrich, for instance, wants children to mop classrooms. Getting rid of some janitorial service personnel, by replacing janitors with kids, will increase unemployment and depress wages. This is a logical inference from the process. Then if wages are low, two members of a family must work to make ends meet, and if wages are kept low then a third member is needed, very likely a child.

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And since the idea of efficiency is to keep wages down, what better way to accomplish this than by opening the gates to unrestricted entry of children legally in to the labor market, after all it would teacher them work ethics. However, this third stage, if we get there, would be a retrograde accomplishment for there was a pre-child-labor-laws era in this country, and it had a terrible history in terms of the way children were treated (abused) in the workplace. Yet, ironically there are now also movements in states like Missouri, Maine, Wisconsin, and South Dakota to weaken or repeal child labor laws. (See: Holly Rosenkrantz) If these efforts succeed, The Fair Labor Standards Act 1938 that established Federal standards for child labor in the workplace will be set aside. Below is a quote from the Child Labor Education Project that depicts working condition for children before The Fair Labor Standards Act of 1938 was passed.

"Forms of child labor, including indentured servitude and child slavery, have existed throughout American history. As industrialization moved workers from farms and home workshops into urban areas and factory work, children were often preferred, because factory owners viewed them as more manageable, cheaper, and less likely to strike. Growing opposition to child labor in the North caused many factories to move to the South. By 1900, states varied considerably in whether they had child labor standards and in their content and degree of enforcement. By then, American children worked in large numbers in mines, glass factories, textiles, agriculture, canneries, home industries, and as newsboys, messengers, bootblacks, and peddlers."

From the preceding quote what stands out is that "children were often preferred, because factory owners viewed them as more manageable, cheaper, and less likely to strike." The passage of the Fair Labor Standards Act changed all this for children, so one has to wonder why anyone wants to revisit such a dark period for children in U.S. history. Maybe there's an inevitable trudge to that place where the past catches up with us, partly maybe the workplace landscape has changed so much that there is no chance that demands to put children to work will cause history to repeat itself. But to be a tad bit Machiavellian in thinking, putting children to work could be part of the effort to keep wages from rising on the one hand, and a way for struggling families to earn enough to cover their expenses, on the other hand. I should not even raise this idea as the possibility of keeping wages down, because it is so cynical to contemplate.

One alarming byproduct of the low-wage trend is the growing income gap between wage earners and profit seekers. I refer you to two charts from Henry Blodget that illustrate this--profits are shown to the rising exponentially (going through the roof) or as Henry Blodget puts it in Chart One "Corporate profits and profit margins are at an all-time high," while wages are seen to be treading water, or again Henry Blodget says, "Wages as a percent of the economy are at an all-time low," Chart Two.

In some quarters this is celebrated--it is seen as good for business because it will inspire the poor to work hard to joined the top one percent--i.e. the super rich. One its face this seems like a reasonable argument. People are responsible for their own success in life and success can be achieved with hard work. Thus, the poor have only themselves to blame for the station in life. There yet another for celebrating the widening income gap--although only the people at the top came to the party. It is this, profit seekers, the people at the top, tend to save and invest, and by doing so, they create jobs that increase national output. The people at the bottom, the wage earners, consume, which does little for long-term economic growth. The implicit point of this distinction is that low wages are needed for economic growth. But policies that cause low wages force more members of the American family into the labor market, and perhaps in time their children. Thus, the repeal of child labor laws will add more Americans to the labor force.

One final point left to ponder: if recessions depress wages and depressed wages lead to economic growth, are recessions good for the economy? Perhaps, they if they are seen as the economy's way to weed out inefficiencies--higher wages? Although people who have seen their wages fall come from a different, opposite, place on this question, I wonder if the people who celebrate the rise in income inequality ever confront this contradiction.

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)

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