Moving past the low-wage social contract

Reuters News
Posted: Sep 11, 2013 12:40 AM
Moving past the low-wage social contract

By Josh Freedman

Two weeks ago, thousands of fast-food workers in 60 cities around the country organized protests to demand higher wages. Many are paid the federal minimum wage — which translates into a maximum annual salary of roughly $15,000 per year, almost always without benefits. These workers live in poverty and cannot afford basic services like healthcare for their families or child care.

Yet these more than four million fast-food workers are not alone. More jobs are being created in low-wage industries, ranging from retail sales to child care to home health assistance. This current low wage plight is also nothing new. In fact, over the last few decades we have embraced what Michael Lind and I call the "Low-Wage Social Contract," in which public policy has accepted and abetted the spread of low wages.

Instead of trying to raise wages, policymakers have tried to help low-wage workers through refundable tax credits and wage subsidies that lower the burden on workers. We have also encouraged employers to pay low wages so that they can charge lower prices. In theory, proponents of the low-wage social contract argue, low wages could be a good thing if low prices and low taxes make all consumers better off.

This low-wage social contract, however, has failed to live up to its theoretical promise. The best solution is to instead embrace a social contract based on the combination of higher wages and large, universal public programs.

While there are many options for reform, this combination is the only mechanism that promotes economic growth, tackles the increasing costs of important quality-of-life services and alleviates growing inequality.

The low-wage social contract has failed for three key reasons. First, basic services like healthcare, education and child care have become more important. While simple consumer goods (like a burger you might find at McDonald's or clothes at Walmart) have become cheaper, the prices of healthcare, education and child care have surged. Tuition has increased four times as fast as inflation over the last 35 years, while medical expenses have grown more than twice as fast.

The low-wage contract is partially responsible, because the various government subsidies to help keep families afloat have likely contributed to making these services even more expensive. Medical expenses now put more people into poverty than tax credits can lift them out of it.

Second, the low-wage contract has increased inequality and limited the aggregate demand that keeps the economy running. As Robert Kuttner and other scholars have pointed out, the rise of low-wage service jobs has worsened inequality and increased the divide between the haves and the have-nots.

Similarly, workers who do not earn enough money to consume cannot buy the goods and services made by other workers. To keep aggregate demand high, policies have encouraged borrowing and taking on debt — a development that was at the root of the 2007 financial crisis.

Third, the gains from low wages and higher productivity have not actually flowed to low prices for consumers. Profits are rising and productivity in many some sectors is increasing while wages are falling — meaning that the gains from the low-wage social contract are not being recycled back to either workers or consumers.

Rather than helping low wage workers, the low-wage contract simply makes the richest better off at the expense of the poorest.

Increasing means-tested benefits or tax expenditures will not be enough to fix the problems of the low-wage social contract. Nor would the opposite — a system of very high wages and very high prices that is often associated with Scandinavian countries like Sweden — be able to work with the extreme levels of inequality that now exist in the United States.

Instead, the best option is to embrace a strategy designed to raise wages part of the way, while lowering the cost of social services through universal programs funded by progressive taxation.

This strategy, which we call the Middle-Income Social Contract, would make it possible for a full-time service worker to afford middle-income goods and services. Child care in the form of universal public preschool, for example, would be directly provided to all.

With this arrangement, families will not have to spend all of their money — and even go into debt — to afford a middle-class standard of living. And we would finally address the upward price spiral in health and education. At the same time, higher wages for middle-income workers will help drive demand in a "middle-out" economy that politicians keep talking about.

Fixing the economy will involve tossing the low-wage social contract into the trash next to those fast food wrappers. But scrapping the low-wage model in favor of a middle-income contract is an important step. It is the best bet for replacing the unequal, imbalanced and sluggish economic system with one that actually works for most Americans.