We've all heard the economists and "serious people" telling us how awful the minimum wage law is, and how bad it is for the economy. What we haven't heard much is the real world economic consequences of very low wages.
I'm not talking tragic individual tales of people simply not making it (which are normally portrayed by "serious people" as either personal failures or unavoidable "collateral damage" in a capitalist economy).
What I am talking about is what widespread low wages do to a nation's economy.
But first you have to understand what the code words mean.
The first code word you have to understand is "competitive", as in competitive wages.
"Retailing is the most competitive industry out there, and we do pay competitive wages," Duke told Doctoroff, according to Business Insider,The Duke in this quote is CEO Mike Duke of Walmart. Competitive is a good sounding word, but what does it mean in this context?
To understand that all you need to do is look at this article title in Forbes magazine. Taiwan Becomes More Competitive As Wages Go Down.
Simply put "competitive" means "low wages" when you are talking to economists. So now you won't be confused.
When the Serious People get what they want
Supposedly, when a nation becomes "competitive" there are lots of jobs, everyone is working, and life is good.
But is that true?
I work in the Peace Corps in the Dominican Republic, so unlike a lot of people in The States, I keep an eye out for Dominican news. Just a few days ago, the IMF released a report that I found interesting.
International Monetary Fund (IMF) specialists suggest higher wages than the alternative income in the Dominican Republic, to motivate people to join the workforce, and take measures to raise productivity "to make jobs attractive to potential employees."Imagine that! Higher wages to increase the number of people in the workforce. The exact opposite conclusion to what the "serious people" are telling us in The States.
You don't hear much from economists in America about the problem of labor force participation, but you should.
If people are dropping out of the labor force then they aren't increasing the GDP, they aren't paying taxes, they aren't increasing productivity. It's a huge problem. It's even a bigger problem than people counted as unemployed, but something few are talking about.
And why would people be dropping out of the workforce? Could "competitive" wages have something to do with it?
The policy challenge is clear: how to entice those workers into jobs? More specifically, how can their market productivity be increased so that they command higher wages, which would in turn raise incentives for labor force participation?Productivity has long been the measuring stick for efficiency in the labor force, while labor unions have been demonized by economists and "serious people" for being an enemy of productivity. In fact, the opposite is true.
There is a common myth that unions hurt productivity, supposedly because they impose work rules that make their employers less efficient. The evidence from industrial relations studies does not support this myth. A broad study of the economics literature found “a positive association [of unions on productivity] is established for the United States in general and for U.S. manufacturing” in particular (Doucouliagos and Laroche 2003, 1).1 And as the second chart below reveals, international comparisons suggest that high productivity and very high union density are entirely compatible.So unions and their demands for higher wages don't hurt productivity, but they do hurt "competitiveness" (now that you know what "competitive" actually means).
The dramatic drop in unionization in the United States from 1979 to 2005 did not lead to faster productivity growth than in the seven largest European countries with union density greater than 60%. In fact, those countries’ average annual labor productivity growth of 1.7% equaled productivity growth in the United States. Output per hour worked is higher in the Netherlands, France, and Belgium,2 where more than 80% of employees have union contracts (compared to the United States’ 12% unionization).
If Congress is concerned about protecting middle-class incomes, it should pass measures to facilitate union organizing and collective bargaining coverage, including the Employee Free Choice Act. There is no reason to fear that higher rates of unionization will impede efficiency or labor productivity.
I should note here that people in the Dominican Republic without work have one advantage on Americans: there is a sense of community here. People take care of one another. They want to share what little they have.
Thus it is very rare to see homeless people in the DR, even if the homes are just shacks.
There is none of this worship of the "rugged individual" that is so common in America.
If you go further into this report, you find more similarities to the situation in the United States.
In summary, making workers “more productive” by raising education levels may not be a solution, at least in the short to medium term. Moreover, while raising education levels is certainly important, recent increases have not been associated with relatively higher employment levels in high-productivity industries, as better educated workers have been absorbed mostly by low-skill occupations and sectors.The solution to unemployment and "competitive" wages that politicians normally pitch is more job training and education. However, recent college graduates are discovering that they could be trained for jobs that simply don't exist.
About 1.5 million, or 53.6 percent, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years.
There are other similarities in this report as well.
The share of selfemployment in total employment increased from 34 percent in 1991 to about 43 percent in 2011, leading to measured increases in informality under a “productivity-based” definition (Figure 13).I've seen what is known as "self-employed" in the DR (ej. motoconcho drivers), and it pays almost nothing. However, it does help mask just how high the unemployment rate is here.
Speaking of which, it makes one wonder how much of this is true in America.
Finally, there is one other similarity worth noting.
Earnings of high-skill workers grew fast in the late 1990s, but have stagnated since 2003 after a sharp downward adjustment during the banking crisis; a puzzling phenomenon that deserves further future investigationFor those of you who are unfamiliar with the events, Banco Intercontinental went bust in 2003 after the CEOs committed massive fraud. Instead of letting the capitalist system flush things out, all the investors were bailed out at taxpayer expense, and no one of importance ever went to jail. Since then wages in the economy have stagnated despite GDP growth.
Does this sound vaguely familiar to you? It should. The economists and "serious people" suggested the same thing for us.