The student demonstrations at Harvard this past spring, to persuade the university to provide a "living wage" for all of its workers, brought unprecedented publicity to a nationwide grass-roots effort to raise American living standards by raising American paychecks. After a generation in which liberalism has been linked with identity politics, mass immigration, environmentalism, and the defense of middle-class entitlements, the living wage campaign is reviving the moderate Left's dormant interest in the well-being of working people.
The initiative is a response to the gradual decline in the real value of the minimum wage. Today it is a mere $5.15 and hour; in 1968, by contrast, it was $7.67 in current inflation-adjusted dollars. From 1978 to 1989 Congress let the minimum wage's real value erode 31 per cent. According to the Economic Policy Institute (EPI), the shrinkage added 22 per cent to the earnings inequality between men in the top and bottom tenths of the U.S. wage scale, and a whopping 42 per cent in the case of women.
Four hikes in the 1990s to the present $5.15 an hour have not restored the 1960s' standard. An attempt last year to raise the rate to $6.15 was stalled in Congress. But a number of states and cities have adopted their own living wage schemes. Sometimes all of the firms in a jurisdiction are required to pay more than the Federal minimum wage. Another approach conditions the awarding of public contracts or tax abatements on a business' agreement to pay its employees a living wage.
Exactly what constitutes a "living wage" is a matter of minor disagreement among the concept's supporters. For workers to escape the Federal definition of poverty, the minimum wage would have to be $8.20 an hour. Many living wage backers, though, are requesting more modest increases to $6.50 or $7.50. Regional cost of living differences appear to explain the phenomenon: What might be barely adequate in one place could be generous in another.
That has not diminished the enthusiasm expressed for the basic idea by a considerable segment of the general public, organized labor and religious groups. In Washington, however, the living wage movement faces significant resistance from the libertarian and conservative Right. Libertarians, and many conservatives, would have the market set wage rates at their "natural" levels. If that were combine with the open borders advocated by the Wall Street Journal, the average American's earnings might fall to the level found in Mexico or India.
Remarkably, during the debate preceding the last increase in the Federal minimum wage former House Speaker Newt Gingrich warned that this might reduce the ability of the United States to complete with Mexico! Many conservative columnists warned that upping the rate would plunge the nation into recession. Instead, after it went to $5.15 an hour the U.S. enjoyed the longest sustained period of economic expansion in its history. Although the good times were the result of a genuine increase in technological productivity and an irrational surge in the stock market, clearly the boost did not strangle the boom, as the Cassandras of the Right had predicted.
The Right, still wedded in the 21st century to 19th century market fundamentalism, cannot be reasoned with about the minimum wage; it must simply be defeated by a coalition of liberals and centrists. The greatest challenge to the formation of a powerful liberal-centrist bloc in favor of a living wage is the seductive alternative of the earned income tax credit (EITC). Many moderates view it not as a supplement to high wages but as a substitute for them.
Here is how the EITC works. For every dollar a low-income worker earns, up to a ceiling, the Federal government provides a cut in taxes in the form of a tax credit. The tax credit is refundable, meaning that the many working poor who pay no income tax receive money from the government.
There is much to be said for the EITC. To begin with, it doesn't have the political design defects of unpopular welfare programs like the abolished Aid to Families with Dependent Children. Because only working Americans are eligible, it cannot be portrayed as a reward for idleness. It is administered by the Treasury Department through the IRS, so this is one antipoverty program not about to be captured by a special interest group -- as was the food stamp program that now serves the interests of the farm lobby more than those of poor people. Finally, the EITC benefits enough working Americans to avoid being stigmatized as a bone thrown to a tiny minority. All of these reasons explain why many conservatives as well as centrists and liberals have supported the program's expansion in the last quarter century.
It is unlikely that the EITC would have received the enthusiastic support of many pro-business conservatives and moderates, however, if it did not disguise a business subsidy. Sponsored by Louisiana's Senator Russell B. Long, it was enacted in 1975. In the Clinton Administration its greatest champion was Treasury Secretary Lloyd M. Bentsen. That the EITC should appeal to relatively conservative Southern Democrats like Long, Bentsen and Clinton is no coincidence. The weakness of organized labor in the South means that Southern Democratic politicians have often been as dependent as Republicans on the support of business lobbies and investors. The EITC permits them to do something for low-wage workers without threatening their donors in industries that rely on cheap labor.
In effect, it is a double subsidy. By aiding the worker the EITC enables the employer to continue paying far less than is needed to survive at or above the Federal poverty line. The Southern cotton mill owner pays his workers a pittance -- and you and I, fellow taxpayers, cough up an additional "social wage," the EITC. The consumer, who otherwise would have to forgo the good or service or pay more for it, also benefits. Make that a triple subsidy.
In addition, the EITC is probably an interregional corporate welfare program. To my knowledge nobody has studied the issue, but it is a fair guess that the South, with the lowest wages, the lowest levels of employment benefits, and the lowest rate of unionization in the United States, receives a disproportionate share of Federal EITC money.
The bipartisan Southern oligarchy has therefore scored twice, if you think about it. The Southern Bourbon ruling class, having used legislation and violence to smash organized labor early in the 20th century, build low-wage textile and car factories to force those in high-wage regions like New England and the Midwest out of business. Later Southern Democratic politicians in Washington like Long, Bentsen and Clinton arranged for tax-payers in the former mill towns of New England, as well as the Midwest, the Prairie, the Mountain States, and the West Coast, to supplement the inadequate paychecks of exploited Southern workers. A pretty good trick. First you steal their jobs by paying your local workers next to nothing, then you tax them and make them pay a "social wage" to your underpaid employees. No wonder the EITC is the favorite domestic policy of the Democratic Leadership Council's disproportionately Southern membership.
The living wage campaign today faces opposition at the Federal level not only from reactionary opponents of all measures that benefit workers, but from many centrist and conservative Democrats who continue to propose expanding EITC eligibility as an alternative to increasing the minimum wage. Questionable as their motives may be, they make a plausible argument that living wage advocates cannot avoid addressing. It is not sufficient to say, as the pro-labor EPI has, that "the EITC is not a replacement for a minimum-wage increase" on the grounds that, at present, even upping the minimum wage to $6.15 an hour wouldn't permit a typical poor mother who works to reach the poverty line for a family of three. That problem could easily be eliminated by raising the value of the EITC.
In fact, the case for preferring a higher minimum wage cannot be made by appealing to the well-being of the poor worker alone. It must be based on the economic national interest of the United States. This can be defined in terms most freetraders and protectionists, if not one-world libertarians, can agree upon as the promotion of technological productivity within America's borders. But maintaining that high wages are in the national interest requires us to reject one of the most cherished argument of living wage supporters -- the claim that increasing the minimum wage does not cause unemployment. The goal of raising the minimum wage should be precisely to create unemployment in labor-intensive industries.
Let me explain. When wages in an industry increase, there are three possible consequences. The first is that demand disappears and the industry contracts or vanishes. The second is that the employer shifts production to a low-wage country to survive. The third possibility is that employers substitute capital (now relatively less costly) for labor (the cost of which has risen) -- for example, by investing in automation that permits one expensive worker to do what was formerly done by two or three poorly paid workers.
In the context of today's living wage debate, the second possibility -- the expatriation of jobs -- is not very important. For better or worse, almost all of the low-wage manufacturing jobs that could be expatriated from the United States have already been transferred to low-wage nations. The vast majority of potential beneficiaries of a national living wage are in jobs that can only be performed at or near the location of the people who pay for them, such as janitorial services, construction work and health care provision. Unlike a factory worker in Detroit, an orderly in a Florida nursing home cannot be replaced by an orderly in a nursing home in Indonesia.
As for the first possibility, demand for particular goods and services may very well dwindle, if an increase in the minimum wage contributes to a rise in their prices. If the minimum wage were $8.00 an hour, some suburbanites might decide to mow their own lawns or change the diapers of their own babies. As long as new work could be found for unemployed gardeners and nannies, it is difficult to understand why a greater reliance on self-help would be a terrible thing. On the contrary, a higher minimum wage might reverse the growing tendency of middle-class Americans to rely on poor people to do work that their parents and grandparents did for themselves -- an undemocratic development of the past two decades produced by the combination of a declining minimum wage and massive unskilled immigration from Latin America and the Caribbean. Let's have more Ward and June Cleavers and fewer Rhett Butlers and Scarlett O'Haras.
There remains the third possible consequence of a higher minimum wage -- a greater incentive for employers to reduce their labor costs by replacing workers with more sophisticated machinery. Opponents of the living wage tend to regard this with horror. So, apparently, do many supporters of the living wage, to judge from their insistence that higher wages will not mean greater technological unemployment.
Here is a heretical thought: What's wrong with technological unemployment? The substitution of technology for human and animal labor is the basis of the prosperity of advanced societies like the United States. In 1800 almost everybody in the U.S. was a farmer. Today almost nobody is, even though the U.S. produces far more food per capita, thanks to tractors and other devices. Assembly-line workers are also an endangered species, now that four out of five Americans work in the broadly defined service sector jobs. Increasingly, too, many service-sector jobs, like those of receptionists and accountants, are being automated. In every generation, all the way back to when the first industrial revolution produced the first anti-industrial revolution in the form of the machine-smashing English Luddites, there have been predictions of mass unemployment caused by technology. Certainly the transitions have frequently been painful, but the children of displaced workers -- albeit not all of their parents -- have usually obtained more comfortable and often more intellectually demanding employment.
A case can be made, then, that the replacement of labor by machinery as a result of a higher minimum wage (or anything else that increases labor costs) is a positive step, not an evil to be avoided. Orthodox economists are curiously schizophrenic about this issue. On the one hand, they recognize that advances in technological productivity made possible by investment -- as opposed to, say increases in the labor supply or raw materials -- are the major sources of overall growth in modern economies. On the other hand, when they discuss wage rates orthodox economists warn that a higher minimum wage might create an incentive for employers to... gasp, horror!.. invest in more productive technology.
During the boom of the late 1990s, labor shortages in some parts of the U.S. compelled grocery stores to replace semi-skilled cashiers with automatic checkout machines supervised by a technician. From the point of view of grocers and their customers, this was as good as the old system, perhaps better. An increase in the minimum wage would have had the same effect as the temporary labor shortage. That brings us to the key question: Will those who might have been cashiers be able to find work in different sectors of the economy -- or will a new, high minimum wage prevent them from being employed anywhere?
One of the fastest growing sectors in the economy of the U.S. and similar countries, thanks to the rapid graying of the population, is health care. Much of this industry in labor-intensive, and will remain so at least until robots can provide tender loving care. If a higher minimum wage creates technological unemployment where machinery can easily replace humans, there is reason to be optimistic that technologically-unemployed people with limited skills can be vacuumed up by the rapidly multiplying job openings for nurses' aides, hospital orderlies and other health care workers.
What difference does it make for the economy as a whole whether grocery store checkout stations are automated or not? The economic powers of the 21st century will be the "robot powers." Despite all the chatter about globalization, the corporations that dominate world commerce in such fields as automobiles and aerospace remain those that can use their superiority in the vast domestic markets of populous nations like the U.S., Japan and Germany as springboards for expansion into foreign markets. Obviously the home market for national robot industries will be much greater in countries where employers in many traditionally labor-intensive sectors are compelled to invest in ever more sophisticated robots by high wages and tight labor markets.
That is why the majority of us who earn much more than the minimum wage should support the campaign to raise it. As a way of combating poverty, the living wage is neither better nor worse than a generous EITC. But as a means of promoting technological progress in the American economy by encouraging the automation on many labor-intensive industries, the minimum wage is greatly preferable to the EITC. In fact, because it subsidizes primitive enterprises, the EITC may actually retard technological progress in the United States, at least to some degree.
By creating an incentive for employers to replace workers with robots and computers, a living wage would ultimately benefit all Americans, thanks to the spillover impact of technological progress in various industries It is all the more unfortunate, therefore, that most advocates of a living wage continue to make the sophistic argument that higher wages will not produce significant unemployment or encourage employers to replace labor with skilled with capital investments. As long as low-skilled workers can find jobs in innately labor-intensive sectors like health care, the tendency of a higher minimum wage should be treated not as minor side effect but as a major selling point.
The sooner John Henry is replaced by a drill, the better. John Henry's children, and John Henry himself, can do something more rewarding with their lives.
Copyright 2001, The New Leader