Opinion

Free Market Cures for Wage Stagnation

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Posted: Apr 06, 2018 11:00 AM
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Free Market Cures for Wage Stagnation

As the GOP prepares to enter a daunting midterm election season, they seem prepared to use the Tax Cuts and Jobs Act as their main selling point. On its face, focusing on the economy seems like a winning issue for the Republicans: the latest nationwide jobs report shows a seemingly roaring economy, with 313,000 jobs added in February alone, and an unemployment rate at a ten-year low of 4.1 percent. However, real wage growth has been slow, lagging well behind overall economic growth. This pattern is an extension of a trend of relatively stagnant wages over the past 40 years. Some of the reasons often cited for this trend are that the revolution in information technology has led to productivity gains mostly for people with higher levels of education or, alternatively, the decline in private sector union membership.

Another explanation for stagnant wages is increasing market power for a dwindling number of corporations: the fewer corporations there are competing for labor, the more able they will be to negotiate down wages. In the book “The Captured Economy,” Niskanen Center scholar Brink Lindsey and Johns Hopkins professor Steven Teles argue that “regressive regulation”––or regulation supported by established corporate interests in order to drive out competitors––has contributed to this phenomenon. As regressive regulation limits the number of corporations, it means the fewer larger remaining corporations can bid down wages. 

The progressive proposal for increasing wages in a labor market in which a few corporations have dominant market power is to raise the minimum wage. Unfortunately, minimum wage increases exacerbate the problem of the concentration of market power for big corporations. According to a Harvard study released this past April, minimum wage increases lead to smaller businesses closing down, hence hurting people trying to start enterprises and advantaging wealthier, more established players. Not to mention that the minimum wage hurts the poorest members of society trying to enter the labor market. Minimum wage hikes are not the way to increase low-income wages, but free marketers need to present their own remedies.

The solution to the high level of market power of a handful of companies is to empower small businesses to enter the market. And government regulation disproportionately harms small businesses: according to a Lafayette University study, the regulatory burden per worker is 28 percent higher for companies with fewer than 500 workers than for companies with more than 500 workers. Specific, targeted reform directed at regulations that have especially high fixed costs and create barriers to entry would go a long way in empowering workers and new entrepreneurs. 

Occupational licensing laws are an excellent example of a regulation that depresses the wages of low-income people by imposing high fixed costs, and they have exploded over the past half-century. In 1950, only five percent of jobs were subject to licensing requirements. Now, that figure is closer to 30 percent. According to conservative think tank Goldwater Institute, occupational licensing requirements seriously depress low-income entrepreneurship, hence both holding more people in poverty and preventing the entry of new, small firms. Education requirements for many jobs, meanwhile, unnecessarily increase the wage premium for education, and non-portable licenses mean a less mobile workforce. Occupational licensing laws cost $203 billion annually in lost GDP, with most of that burden falling on low-income households, while not providing many discernible benefits to consumers. Repealing these regulations would both directly increase the wages of low-income workers while also easing the process for firm entry into the market. 

Furthermore, the Dodd-Frank Act is another package of regulations that has seriously weakened small businesses. The burden of the regulatory rules in Dodd-Frank has disproportionately hurt community banks, and while community banks only form 20 percent of all banking in the United States, they are responsible for 50 percent of small business loans. Therefore, as community banks die off––almost 20 percent of them have shuttered since Dodd-Frank’s implementation––would-be small business founders lose access to capital. This loss of access to capital perpetuates the problem of the shrinking number of businesses in the market as a whole. Therefore, repealing Dodd-Frank would enable for more firm entry and a more dynamic labor market, addressing the decline in business formation partially responsible for wage stagnation.

Increased competition in the labor market for workers is a viable solution to slow wage growth that conservatives must champion. Free marketers cannot afford to surrender the issue of wage stagnation to progressives championing more government intervention, and present their own liberty-minded solutions to raise the wages and living standards of low-income workers. 

Alex Muresianu is a freshman at Tufts University studying economics, and a Young Voices Advocate. He is a contributor for Lone Conservative, and writes on his own blog, Alex’s Thoughts.