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September 08, 2020

Celebrate Labor Day and Essential Workers by Substantially Raising Minimum Wage

The pandemic has shown the flaws in my orthodox conservative economic view.

Fallacy #1. Wages will find their “right” level in a free market

There is an essential asymmetry in the fact that most employers have more than one employee while most employees have only one employer. As corporations grew larger, unions were necessary to counter that asymmetry for industrial workers. Some unions are corrupt; so are some employers. Some unions and employers have conspired against their workers by trading off unrealistic pension promises for current compensation; but unions played an essential role in lifting American industrial workers into the middle class. The whole country benefited.

Without unions, manufacturers would not have been able to pay higher wages because they would be underpriced by competitors paying less. Industry-wide unions meant that paying a higher wage did not lead to a competitive disadvantage against domestic competitors (see below on foreign competition). Cost advantage can be achieved by investing capital to make workers more productive, unless work rules prevent efficiency.

Unions are not a practical answer for most employees of small businesses. Unions have high overhead per bargaining unit; they promote inflexibility; they can hurt the relationship which grows when the boss knows every employee by name and employees identify strongly with the success of the enterprise. But small employers in competitive businesses can’t afford to pay higher wages than the business cattycorner across from them with a similar product because they would have to raise prices and lose business.

A minimum wage allows small businesses to pay a higher wage than they would otherwise without being at a competitive disadvantage. The cost is spread over their customers; there is literally no free Big Mac. However, today the cost of unrealistically low wages is spread over both the working poor and those who pay the taxes which support welfare for the working poor.

The pandemic has shown us the unfairness of paying grocery clerks and other essential workers low wages. We’re very fortunate most of them stayed at work as the rest of us found how unessential and dependent we really are.

Fallacy #2. Trade should always be totally free

Yes, in theory free trade means each county makes what it makes best and all benefit from the cheapest possible goods and best use of their labor. Yes, part of the success of the US is that it is a huge free trade zone itself and the EU has also succeeded partially through free trade. Yes, globalization has pulled whole countries out of poverty. And, yes, protectionism often benefits the inefficient and/or the over-priced.

No, we have learned, it is not a good idea to have a complex supply chain of lowest-cost providers because eventually the weakest links will break and you will have no supplies. Who would imagine that we would not only run out of surgical masks but also the components that go into making them? Who would imagine that, after the initial shock of the pandemic, we still can’t process tests at warp speed because of a lack of reagents? It is necessary to make sure that whole crucial industries don’t migrate to other places (or even worse a complex chain of other places) because such places may decide that they need the ventilators and masks more than we do even though we’re willing to pay more.

We don’t need to do everything domestically. We should take advantage of cheaper supplies from abroad. But we cannot be fully dependent on the cheapest supply from wherever. We do need a level of tariff protection against supply that comes from places with extremely low wages. We export jobs to them; they export poverty to us when they make it impossible to pay a living wage (see above).

As long as there are huge wage disparities worldwide (and these are actually shrinking), we need to make sure US industries don’t fail solely because they pay a living wage. We do NOT want tariff barriers to reward insufficient factory investment or byzantine work rules.

Although we are a nation of immigrants and I hope we will remain so, we don’t want to be dependent on an illegal work force who are the only ones who will accept our lowest wages.   

This Labor Day is a great time to reward our essential workers and to assure, out of respect for those who have chosen to remain at work in our time of need, that work always pays more than not working and that work will buy necessities.

See also: The Perfect is Not Only the Enemy of the Good

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