Reducing inequality: boosting incomes in the bottom half

by lane on April 16, 2009

So far in this series of posts on reducing income inequality in America I’ve said that it would be good if there were less inequality, that greater unionization might help but probably isn’t in the cards (even if EFCA becomes law), that more and better education would be a good thing but isn’t likely to make much of a dent in the inequality problem, and that curtailing globalization is a bad choice for progressives even if it would help a lot. So what should we do?

Recall that there are two key components of the rise in inequality: slow income growth in the lower half (or two-thirds) of the distribution and soaring incomes at the top. Let’s start with the first of these two. I think a key component of an effective and politically feasible strategy is an enhanced statutory minimum wage and Earned Income Tax Credit (EITC).

This year the minimum wage will increase to $7.25 per hour. I’d like to see it raised again in 2010, to $8.00. A more important change is to index the minimum wage to inflation. As the following chart shows, since the late 1970s the minimum wage has been allowed to languish for lengthy periods with no increase, resulting in large declines in its inflation-adjusted value. With increases in 2007, 2008, and 2009, it will be at a reasonably high level compared to the past three decades, though still below its late-1960s peak. Raising it to $8.00/hour and keeping it at that value would be a significant step in the right direction.

Is $8.00 an hour high enough? It’s difficult to tell. Two considerations make me inclined to prioritize locking in something like that level rather than aiming for a larger increase right away. The first is jobs. Opponents of raising the minimum wage often contend that any increase will produce employment declines. Our experience with past increases suggests little support for this notion, but it’s equally wrong to presume there won’t be an adverse employment effect no matter how high the minimum wage. Surely there is some level that is too high. This argues for incremental upward adjustment from a stable floor. Second, proponents of a sizable increase in the minimum often point out how inadequate it is given the cost of living in certain parts of the country. That’s quite true, but it’s probably better addressed by state and local governments stepping in with their own higher statutory minimums, as a growing number have done over the past decade.

An expanded Earned Income Tax Credit would be similarly helpful for low- and middle-income Americans. The EITC is a terrific policy: it boosts the incomes of low-earning households, it encourages employment, it has low administrative costs, it creates minimal stigma for recipients, and it’s indexed to inflation. Currently the maximum value of the credit is about $5,000, available to households with two children and with earnings between $12,500 and $19,500. It then declines steadily until it reaches zero at around $43,000 in earnings. For households with one child the credit is lower, and for those with no children it is quite small. A chart showing the current level and structure of the credit is available from the Tax Policy Center.

I’d like to see the EITC look something more like this:

This EITC would extend well into what most of us think of as the middle class. It wouldn’t provide a lot of to those with earnings above $50,000, but it would help. Phasing out the credit more rapidly (making the slope of the line on the right side steeper) risks creating work disincentives. Moreover, there’s a potential political advantage to including those with higher incomes. When the middle class uses the same programs as the poor, it tends to be more supportive of those programs; the “us” versus “them” mentality that weakens support for social policy is likely to have less political bite. This EITC expansion would not be cheap. I’ll say a bit about how to pay for it in a future post.

With these changes in the minimum wage and the Earned Income Tax Credit, a single adult working full-time year-round at minimum wage would have an income—earnings plus EITC —of approximately $19,000, compared to 15,500 under current policy. A family of four with two minimum wage earners would have an income of about $38,500, compared to $32,500 currently. That’s not a full solution to the inequality challenge, but it’s a good start.

{ 30 comments }

1

mpowell 04.16.09 at 2:37 pm

I agree with these sentiments on the minimum wage. Just establishing that the default should be an annual increase indexed by inflation would be nice. I also like coupling this with an increase in the EITC. I am not too worried about single adults needing to make more than 20K a year (if we can also provide healthcare). But for parents with kids, we need to provide more assistance. In those cases, it is not the parents I am worried about so much as the kids. The number of kids who are raised below the poverty line today is ridiculous. We need to set tax policy and minimum wage policy so that this is much less likely.

2

MH 04.16.09 at 3:10 pm

“Phasing out the credit more rapidly (making the slope of the line on the right side steeper) risks creating work disincentives.”

Of course, not phasing out the credit will also produce disincentives for labor force participation for the lower earner in two-income families. From the graff, it looks a family with two children and a primary earner making a little under $40k (which is close to the median household income where I’m from) will get an extra five thousand or so. Given all of the other cost associated with having two workers in the same family (especially with younger children) and you are going to be bribing some people out of their job.

I’m not opposed to that, but I think it should be mentioned.

3

Henri Vieuxtemps 04.16.09 at 3:17 pm

I don’t like the EITC at all. Why should the taxpayers subsidize (and therefore encourage) companies that refuse to pay living wages? Unless the EITC is paid by the companies that employ the recipients, it doesn’t make any sense at all; more harm than good.

4

MH 04.16.09 at 3:26 pm

Part of the point for the EITC is that it takes family size into consideration, which you wouldn’t want to have employeers do unless you wanted them to go back to paying a higher wage for married men with kids solely because they were married with kids.

5

Pete 04.16.09 at 3:39 pm

… but you *are* paying an effective higher wage to married men with kids if they have a higher EITC.

6

Henri Vieuxtemps 04.16.09 at 3:42 pm

Frankly, I don’t see a good reason to subsidize large families either.

7

ejh 04.16.09 at 3:50 pm

Recall that there are two key components of the rise in inequality: slow income growth in the lower half (or two-thirds) of the distribution and soaring incomes at the top.

Ah – I hate to nit-pick but when you say that when incomes at the top go up a lot and lower incomes don’t, inequality increases, isn’t that actually a statement of the bleedin’ obvious?

8

sd 04.16.09 at 4:26 pm

You wrote:

“Moreover, there’s a potential political advantage to including those with higher incomes. When the middle class uses the same programs as the poor, it tends to be more supportive of those programs; the “us” versus “them” mentality that weakens support for social policy is likely to have less political bite. “

And this is why those of us with a libertarian/conservative bent are deeply distrustful of the social “safety net.” You are more less blatantly arguing that its proper for the government to take money from some (high income) people and give it to other (middle income) people NOT because they have any sort of need which requires humanitarian aid, but because doing so is a politically effective bribe.

Look, we all (ALL) favor some politically unpopular ideas. Thats a natural consequence of living in a society in which the two major political parties carve up the “populist” positions on various issues. And so we could all think of schemes to couple our politically unpopular ideas with direct payments to the middle class. But that ain’t good government. Its gaming the system.

9

sd 04.16.09 at 4:32 pm

Henri wrote:

“I don’t like the EITC at all. Why should the taxpayers subsidize (and therefore encourage) companies that refuse to pay living wages? Unless the EITC is paid by the companies that employ the recipients, it doesn’t make any sense at all; more harm than good.”

Because some categories of labor are inherently more economically productive than others and therefore the burden of any minimum wage will fall unequally on different industries. Raising the minimum wage to $10 an hour will destroy McDonald’s business but have no effect on Google’s business. But the world needs both hamburgers and search engines.

I for one favor a complete elimination of the minimum wage but a greatly expanded EITC. If society has an obligation to the poor (and I certainly believe it does), then that is an obligation of society – all of us – and the cost should be born by all of us. Taxpayers aren’t “subsidizing” employers with low wage workforces via the EITC. Those same employers, in a world without any government intervention in the economy, would pay their workers less than they pay now. In reality, employers with low wage workforces subsidize the rest of society, which currently bears less of the social welfare burden than it should.

10

sd 04.16.09 at 4:33 pm

Henri wrote:

“Frankly, I don’t see a good reason to subsidize large families either.”

Because the 4th child born in a large family is a human being, with all of the inherent worth, dignity and rights that you have Henri.

11

Miracle Max 04.16.09 at 4:56 pm

Don’t phase it out. Integrate it with the Child Tax Credit and Dependent Exemptions. Not mentioned here, the complexity of the eligibility rules, due partly to the existence of multiple credits, gives rise to compliance problems. (Advertisement for myself.)

http://www.epi.org/pages/sfc/

12

Jeff R. 04.16.09 at 4:59 pm

First, California’s minimum wage isn’t all that far off from $10/hr, and we somehow manage to keep our McDonaldses staffed. Heck, In-and-Out posters claim they’re paying more than $9…

More largely, isn’t the minimum wage really a red herring? I mean, there are about five times as many crappy jobs that hire only part-time and bypass that law, and about half of both sets of crappy jobs are held by teenagers who don’t have to pay for their own rent, food, or clothing, so the set of people who would really be helped by increasing the minimum wage (even if one makes the assumption that it can be increased as much as you want without destroying any jobs at all) is a pretty small subset of what you’d need to do to reverse the inequality trends. Like trying to cut down a tree with a scalpel…

13

Stuart 04.16.09 at 5:28 pm

Frankly, I don’t see a good reason to subsidize large families either.

The problem is that if you don’t, then you have to find lots more foster homes for all the kids that you then end up taking from the parents who are caught not providing sufficient food/clothing/shelter etc. for them. It is one of those problems that there really isn’t a good solution that covers all situations (especially when any of the rates/benefits are set at a national level, as then in low cost of living parts of a country breeding more kids can pay the bills on its own).

14

CJColucci 04.16.09 at 5:29 pm

I’ve often wondered if the research in the ’80s and ’90s showing no employment effect from increases in the minimum wage took into account that, in real terms, even the increased minimum wage was quite low. I remember in the 1960s hearing the example of the disappearance of grocery store bag boys as proof that the minimum wage killed low-wage jobs. They’ve been back (along with bag girls) for quite a while now, but the minimum wage is still, in real terms, lower than it was when the “bag boys” disappeared.

15

StevenAttewell 04.16.09 at 5:40 pm

SD:

Eliminating the minimum wage in favor of an expanded EITC has been tried before – it’s called Speenhamland. It didn’t work very well.

And has people have noted, increasing the minimum wage has been shown to have (depending on the study), no effect, \ a small positive effect or a small negative effect on employment. Bringing the minimum wage up to what it was in the 1970s (relatively speaking) and indexing it is not going to wreck the labor market. After all, McDonalds doesn’t employ 100% of those making minimum wage but does have a lot of customers who make minimum wage, and an increase in the minimum wage would likely mean a lot more people who can eat out a couple more times a week, increasing their revenues. This is why retailers are generally in favor of higher minimum wage laws and similar legislation, because it’s actually a net improvement for them.

Regarding universal benefits – there are reasons beyond the political for supporting universal vs. targetted benefits. First, there is the ideological case – I believe that everybody should have certain benefits (health care, education, a job at living wages, a home, and a dignified retirement) both as citizens of a commonwealth and as members of the human race. Second, there is the preventative case – the non-poor can become poor quite easily (and this doesn’t even cover the issue of the so-called “missing class,” those between 250% of poverty who aren’t poor but are economically insecure), and losing things like health care, employment, and housing can very easily cause huge dips in your income level. The work of Jacob Hacker is quite instructive on this – the current “social question” is not just about high and rising economic inequality, it’s also about high and rising economic insecurity and volatility.

Jeff R:
Most minimum wage earners are not teenagers. About 2/3rds of minimum wage workers are 20 years or older (http://www.bls.gov/cps/minwage2008tbls.htm#1); the usual statistic on minimum wage workers tends to be obscured by the difference between grouping 16-25, and 16-19. Now it’s true that the part-time issue is a problem, but that’s more a call for extending the scope of the minimum wage as well as its level.

—————————————————————————————————-

Personally speaking, I’m generally in favor of increasing both the minimum wage and the EITC. However, I do think it’s important to attach the “funding” for the EITC to taxes on businesses – if we’re going to socialize the costs of a de-facto guaranteed minimum income, we have to ensure that employers pay their fair share of the cost, otherwise we’re just creating Speenhamland-like incentives to keep wages low.

I’d also argue that the EITC shouldn’t be made to discriminate against the childless – single-income single adult households are also economically insecure, because sickness, disability, unemployment, etc. take out 100% of the household’s income. Furthermore, I would argue that it’s important for pro-family policy reasons to make sure that single people can afford to become parents, especially so that single young men have the resources to step up and become providers for their kids.

Ultimately, the goal has to be a guaranteed living wage for all workers.

16

Henri Vieuxtemps 04.16.09 at 5:55 pm

If the minimum wage of $10 an hour destroys McDonald’s business, then McDonald’s business is out of business. Sort of like the abolition of slavery put the cotton plantations business out of business. And what’s the problem? C’est la vie.

As far as the 4th child in a low income family – I’m sure there are many different ways to preserve child’s dignity. And, while doing it, to address the apparent thoughtlessness of his or her parents.

17

sd 04.16.09 at 7:04 pm

Henri

Driving businesses that employee low skilled labor out of business is, broadly speaking, not an especially smart poverty reduction program. Or perhaps you’re suggesting that those people who would lose their jobs if McDonalds went out of business could easily get higher paying jobs at investment banks and think tanks. Why they don’t do that anyway today is puzzling.

18

Matt 04.16.09 at 7:32 pm

Henri and Steven:

I think it’s important to note that the EITC does not subsidize companies that refuse to pay a living wage – because (theoretically, at least) the difference is made up in their corporate taxes. I doubt that farmers under the Speenhamland system were subject to comparable tax rates. It is quite conceivable that, in certain sectors, too high a minimum wage would act as a tax on employment. It would be far more efficient to let markets determine wage rates and then use an expanded EITC to take car of all those who fall beneath the pre-determined social minimum.

19

MarkUp 04.16.09 at 7:41 pm

”Why they don’t do that anyway today is puzzling.”

Considering the state of the economy….

MickyD’s won’t go out of business and would likely merge with some online/distance learning program churning out new MBA’s as all their employees would become assistant managers. For every hour of extra time they’d get a 20 minute Ed. credit. No telling yet how big the subsidy McD’s get’s for flippin’ students.

20

StevenAttewell 04.16.09 at 8:43 pm

Matt:
The problem is the difference between theory and practice – corporate taxes haven’t increased recently; in fact, they’ve been declining for quite some time now (http://www.irs.gov/pub/irs-soi/02corate.pdf). Indeed, given that lower wages mean lower payroll taxes, I’d imagine that low-wage employers, all other things being equal, in fact also gain a tax advantage over high-wage employers.

The actual scale of the Speenhamland parish taxes is hard to identify, but the effect isn’t – wages fell below subsistence, and poverty did not decrease, despite the subsidy. E.P Thompson might have figures that would allow for a comparison, but Idon’t know for sure.

As for the market argument, I’m strongly of the opinion that wage rates, especially at the low end of the market, are not set purely by market forces. Political, social, and cultural power have a huge impact, and even economists such as Adam Smith have noted an inherent inequality between employers and employees, such that:

… the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same…It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate…Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people.

Given this, I believe that the minimum wage actually works to make markets more efficient, by bringing wages closer to where they would be according to supply and demand, and by ensuring a steady and increasing consumer purchasing power to keep up with the increasing production of an expanding economy.

21

Henri Vieuxtemps 04.16.09 at 9:03 pm

Right. Also, it seems quite unseemly that someone should put out 5 days/week of honest hard manual labor, get paid a pittance and rely on some handouts calculated by politicians.

Is there a direct relation between the EITC and the amount of taxes paid by the corporations that employ the recipients? I don’t think so. I don’t know, but it seems likely that more federal dollars are spent for the benefit of corporations than corporate taxes collected. What then?

22

sd 04.16.09 at 10:33 pm

Henri wrote:

“Right. Also, it seems quite unseemly that someone should put out 5 days/week of honest hard manual labor, get paid a pittance and rely on some handouts calculated by politicians.”

That’s what the minimum wage is – a handout calculated by politicans. The vast, vast majority of jobs already pay well above the minimum wage. So the market for labor seems to have no problem paying people above what the government dictates as a minimum – provided that the fair market value of that labor is higher than the minimum wage. The labor market may not be perfectly efficient, but it doesn’t drive all wages down to zero. So if a job won’t pay above minimum wage we have two possibilities:

1) Somehow the labor market, which seems to pay many people far in excess of minimum wage, is somehow uniquely inefficient and oppressive in certain occupations, regardless of the specific employer or location. In other words, that flipping hamburgers generates more value per hour than minimum wage but that somehow McDonalds, Burger King, Wendy’s, and every independent diner in the world somehow has coercise power to deny their workers the market value of their labor, and that they’ve been able to collude to maintain this power without being caught by the government for decades, despite the fact that they bitterly compete against one another and operate out of thousands of locations the managers of which would each need to be in on the con game to perpetuate the system.

or

2) The labor in certain occupations is less productive than the minimum wage, and thus would command wages less than the minimum wage in the absence of the minimum.

If #2 is true, which, it seems to me, you’d need to be pretty bone headed to deny, then certain jobs are “worth” less than a living wage. If we agree that nobody who is willing to work should be paid less than a living wage, then we must decide who is responsible for making up the difference. You say that owners of businesses that, by their very nature, employ labor that is low skilled and low productivity, should bear this burden while the rest of society gets off scot free. I say that if we have a basic human responsibility to our less fortunate brothers and systems then we ought to pony up and chip in to solve the problem.

23

Michael McDonnell 04.16.09 at 10:39 pm

Wealth Gap Is Increasing, Study Shows
The rich really are getting richer and the poor are getting poorer, a new University of Michigan study shows. Rising inequality isn’t new. The gap between rich and poor started growing before Ronald Reagan took office, and it continued to widen through the Clinton years. But what is happening under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth — and they know it. – http://www.sciencedaily.com/releases/2007/08/070807171936.htm

How many Bachelor’s or Master’s educated end up robbing 7-11′s or carjack? I am for enforced education through college/trade school and enforced school in prisons. If criminals are going to use my taxes to live off of I demand they get educated at the same time, so they have a better chance of making it without crime and additional costs to taxpayers.

24

gordon 04.16.09 at 11:45 pm

And then of course there’s the theory that inequality has a lot to do with asset bubbles.

25

StevenAttewell 04.17.09 at 1:03 am

SD:

Or there’s the possibility that low-wage laborers in a labor market full of desperate people have little bargaining power compared to their employers, who are thus able to beat down the price they pay for labor below the actual value of that labor, and make a profit off the difference. And that what minimum wage laws do is force a redistribution of the labor value of those employees’ work.

26

sd 04.17.09 at 6:16 am

StevenAtwell:

But that doesn’t make any sense. Let’s say (for the sake of argument), that the minimum wage is $6 an hour, and that McDonalds pays $6 an hour while UPS pays $12 an hour.

Clearly the minimun wage effects the pay of workers at McDonalds. They are paid exactly the minimum wage, and its probably safe to assume that McDonalds would pay them less if they could get away with it. But the minimum wage does not effect the pay of workers at UPS. they make twice the minimum wage, so the minimum wage is irrelevant to them.

Now, why is it that McDonalds pays workers $6 (and presumably would pay less if they could)? Let’s list the possible answers, based on your argument:

1) Applicants to McDonalds are desperate. Perhaps. But any more desperate than applicants to UPS? Hardly. UPS receives dozens, sometimes hundreds of applicants for every opening it has. McDonalds locations frequently run under-staffed, actively recruit workers through the friends and family of current workers, and never stop hiring.
2) McDonalds employees have little bargaining power relative to their employer. Perhaps, but they probably have more bargaining power than employees of UPS. Workers at McDonalds can find similar work with a couple of dozen national fast food chains plus any number of independent low end eating and drinking establishments. Workers at UPS can find similar work at FedEx, and that’s about it.
3) Fast food restaurants are able to beat down the price they pay for labor below the value of the labor. This is a curious statement. The economic “value” of something is a function of the price it will earn in an open market. It is true that the labor that an employee offers to McDonalds is worth more to McDonalds than the wages that the company pays to the employee. But that’s the case, more or less, for every single job in the economy. Companies that pay workers in excess of the value they generate go out of business. Given that nobody holds a gun to any McDonalds employee’s head, we can also safely assume that the wages that McDonalds employees take home with them are worth more to them than the time they spend on the job. Otherwise they would quit.
4) Fast food restaurants are able to collude to drive down wages to lower levels than they would otherwise be. Reiterating my earlier argument, this is really, really far-fetched. Colluding in any market but especially labor markets is a felony. Corporate executives go to jail for this type of thing. And there are whole departments of the federal government dedicated to finding and prosecuting companies for this behavior, not to mention 50 state attorneys general, each of whom would love nothing more than to pad their political resume by taking down a big high profile employer for unfair labor practices. And yet, despite all this there has never been a major wage fixing action against the industry. Add in the fact that fast food providers compete aggressively against one another in every other aspect of their business and you really need to take a HUGE leap of faith to buy this argument.

Now, let’s consider one more possibility:

5) In an unregulated market McDonalds would pay less than $6 an hour ($4 for example) because that’s the wage at which the supply of labor for them would balance against their demand for labor.

None of this has any bearing on whether society has an obligation to help those whose skillsets do not allow them to earn a living wage in an open economy. As I have said many many times on this thread I believe that society does have such an obligation and so I support expanding the EITC greatly.

What I do not think is that we best help the under-skilled by, in essence, placing an extra tax on companies that employ a lot of under-skilled people. In fact, that strikes me as flat out looney. And I have to wonder about the mindset of people who think that the under-skilled should be taken care of, but that they should be taken care of by OTHER people, thankyouverymuch.

27

Henri Vieuxtemps 04.17.09 at 8:02 am

Sd, you’re talking about the labor supply/demand equilibrium, but this equilibrium is based on physical needs of human beings; IOW, someone would agree to work for $4/hr only because the alternative is starvation.

Clearly, you don’t like the implications (i.e.: the laissez-faire equilibrium would force a considerable number of people to do hard labor at the edge of starvation), so you propose that everybody should chip in and help them out.

Fine, but this changes the equilibrium too. In this new equilibrium, why wouldn’t the McD offer a $2/hr wage instead of $4/hr? The worker is subsidized anyway, she doesn’t care; McD wants to cut its labor costs, increase profits. You will have a ripple-effect of businesses cutting wages to take advantage of EITC, until you you reach a new equilibrium with lower wages, higher taxes, and people not caring about their work (because they are paid regardless); something like a Soviet-style state-capitalism economy.

The minimum wage, OTOH, causes the opposite ripple-effect; wages go up not only for the minimum wage recipients, but above them as well. All the market incentives are still in tact. Frankly, I don’t understand why this approach should bother you; it doesn’t affect the market mechanism at all, all it does is replacing the physiological “below this wage people starve” limit with “below this wage people can’t live comfortably enough” limit.

28

StevenAttewell 04.17.09 at 8:29 am

SD:

You’re wrong that the minimum wage doesn’t affect people who earn more than the minimum wage. Economists who’ve done empirical research into minimum wage law changes have shown that a ripple effect occurs – whereby if the minimum wage was $X and is now $X+2, then people who used to earn X+2 go up to X+4, and the people who made X+4 go up to X+6, and so on. Obviously, it’s not a 100% effect – it peters out once you get far enough away from the original level, and it’s not like everyone goes up by the same level, but it’s not accurate to say that there’s no effect beyond those earning minimum wage.

McDonald’s actually isn’t the best example, because they generally pay a bit above minimum wage ($8/hr I think is their national average), but let’s use it for the sake of argument. Now McDonald’s applicants are likely to be more desperate than UPS applicants – because UPS applicants can at least use some elements of skill, such as physical strength needed to move boxes, a driver’s license for drivers, and so on; McDonalds applicants are totally replacable hands.

2. I agree about bargaining power.

3. Here’s how you beat down a wage below market level – employers tactitly agree to not pay more than a certain level, even if normally comparable labor would earn more. Employers use their unequal level of economic power to artificially force wages to a certain level below where they would be if employers were freely competing to hire freely bargaining workers. Despite the economist’s argument that this should never ever happen, historically it does happen – take the historical wage discrimination between black and white workers in the same occupations, or the wage discrimination that currently occurs when women are paid less than men for doing the same work.
While theoretically this can’t happen, the theory assumes prefect information and perfect mobility on the part of the employee – in the real world, lack of information, spatial mismatch, risk aversions to potential unemployment, and other factors create a situation much more similar to monopsony, which can reduce wages below their normal market level.

4. See above. For examples of wage discrimination in fast food, see the case of Yum Brands (Taco Bell, KFC), Burger King, and McDonalds, and the Florida Tomato Growers Association in dealing with the Coalition of Immokalee Workers, or Doyel et al. v. McDonald’s Corp, and similar cases. For more, see Labour Relations in the GlobalFast-Food Industry by Tony Royle, and Brian Towers.

5. Another possibility is that Wal-Mart pays its workers an average of $8.23 an hour and CostCo an average of $17 an hour, even though the workers and work is almost identical, because Wal-Mart is able and willing to use its labor market power to dictate wages. And as has been seen in Braun v. Wal-Mart Inc and dozens of other cases, many employers are willing to run the risks of lawsuits and criminal investigations to shave off extra profits.

If any of this is the case, it’s not fair to conclude that the source of low wages is inadequate skills and simple supply and demand. In which case, employers who oppress their workers should have to pay fair wages.

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Matt 04.17.09 at 11:41 pm

Henri’s point about employers lowering their wages below the value of the labor (because they know that the EITC will always kick in the difference) is easily solved by treating the EITC simply as a wage subsidy. Let technocrats determine the industry-specific natural wage equilibrium and let that act as a virtual minimum wage. This effective minimum wage would be continually adjusted for inflation. And it would allow low-wage firms to lower their prices (thereby helping the poor) , by spreading the cost of paying workers a living wage throughout all of society.

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Henri Vieuxtemps 04.18.09 at 9:39 am

Matt, what about the spectrum of wages between this virtual minimum wage and the EITC wage?
Suppose your model finds that the bottom laissez-faire wage should be $4/hr, and political process sets the EITC wage to $10/hr. If I am a business manager, why would it make sense for me to pay someone $6 or $8/hr or even $10/hr?

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