Column: Finding new ways to make work pay

Reuters News
Posted: Nov 14, 2013 2:00 PM
Column: Finding new ways to make work pay

By Reihan Salam

One of the scariest notions about America's sluggish labor market recovery is that it doesn't represent an aberration, but rather a new reality in which good jobs are few and far between, particularly for those with limited skills. It is certainly possible that the future will be brighter than we think, and that we will soon enter a new economic Golden Age in which people with low education levels will flourish as employers clamor for their services at ever-higher wages. But if this happy outcome does not come to pass, as the current evidence suggests, the United States and other market democracies will have to come up with a Plan B.

A number of interrelated developments, from automation to organizational innovation to off-shoring, appear to have reduced the willingness of employers to pay middle-income wages to less-skilled workers. That is, the problem is not that there is no wage at which employers will take on less-skilled workers. If this were the case, agriculture and hospitality companies wouldn't be pressing lawmakers for an immigration overhaul that would allow for a large influx of less-skilled workers from abroad.

Rather, the problem we face is that employers are only willing to employ less-skilled workers at very low wages, including wages that the voting public considers unacceptably low. Public support for raising the federal minimum wage, now at $7.25, is overwhelming. A Gallup survey released on Monday finds that 76 percent of voters favor a $9 per hour minimum wage, and one assumes that support for an even higher minimum wage would be almost as robust.

Many will argue that an increase in the minimum wage to $9 will not have a dramatic effect on the number of low-wage employees or on hours worked, and that may well be true. Yet it is possible that job growth might decline in the wake of minimum wage increases, as new research by Jonathan Meer and Jeremy West of Texas A&M University suggests. Nicole M. Coomer of RTI International and Walter J. Wessels of North Carolina State University, meanwhile, have explored the possibility that while increases in the minimum wage don't appear to have a significant impact on total employment levels, they might cause workers to shift from jobs subject to the minimum wage to those that are not subject to the minimum wage. For example, the minimum wage for tipped employees, like restaurant servers, is lower than the standard minimum wage. Regardless, the minimum wage debate won't get resolved any time soon.

What we do know, however, is that in market democracies with high effective minimum wages, whether established by statute or centralized collective bargaining, the lowest-wage employees tend to be more productive than their lowest-wage counterparts in the United States. This implies that as minimum wages increase, employers might become more inclined to substitute capital for labor and that they will be somewhat more reluctant to hold on to employees who can't handle a steep learning curve. Earlier this year, Sarah O'Connor of the Financial Times wrote a brilliant account of Amazon UK's Rugeley fulfillment center, where many employees are drawn from the ranks of the region's long-term unemployed. Workers who can handle the intense workload are made full-time Amazon UK employees. Those who can't are let go, and quickly. What O'Connor doesn't explore is the very real possibility that Amazon UK's personnel policies flow from Britain's hourly minimum wage, which at 6.19 pounds ($9.84) is substantially higher than the U.S. minimum wage. The UK wage essentially mandates a reasonably high level of productivity that young workers, workers with limited English language proficiency, or workers taking on their first jobs a long spell of unemployment might struggle to reach.

The usual way around this dilemma is for policymakers to back wage subsidies and other social supports. If employers aren't willing to pay wages high enough to allow less-skilled workers to achieve an acceptable standard of living, one response is to provide these workers with a suite of benefits, from in-kind transfers like food stamps (or SNAP) and Medicaid, to cash transfers like the earned-income tax credit (EITC). Scott Winship, a scholar at the right-of-center Manhattan Institute, has carefully documented the extent to which transfers have helped increase the incomes of poor families. According to Winship, households at the 20th percentile — those earning higher incomes than one-fifth of U.S. households, but lower incomes than four-fifths of U.S. households — saw their market income increase by a mere 12 percent from 1979 to 2007, but factoring in taxes and transfers saw their incomes increase by 28 percent to 46 percent, depending on how we value publicly-financed health insurance benefits. Though it's certainly possible that without transfers, we might have seen social and economic changes that would have increased market incomes, but it looks as though rising transfers made a huge difference in cushioning low-income households from an unfavorable economic environment.

If the labor market position of less-skilled workers is going to get even worse in the coming decades, we have to think seriously about finding new ways to make work pay. For example, we could try to streamline the various benefits federal and state governments have used to raise incomes at the low end to foster a more work-friendly approach to fighting poverty. Oren Cass, domestic policy director of Mitt Romney's 2012 presidential campaign, recently outlined such an approach in National Review. The basic idea is that while the non-working poor will continue to receive in-kind transfers, channeled through state governments, the working poor will receive cash transfers instead. Low-income households will receive support in either case, but they will receive support with fewer strings attached if they find and hold on to gainful employment. University of Arizona sociologist Lane Kenworthy, author of the forthcoming Social Democratic America, has called for an expanded employment-conditional earnings subsidy that would rise in sync with economic growth. And in Switzerland, a coalition of activists are campaigning for a basic income, an idea that has been championed by left-libertarians, egalitarian socialists, and even a number of pro-market conservatives who see it as a less bureaucratic, more straightforward alternative to the welfare state. This basic income would not be employment-conditional, which raises the danger that it would encourage people to exit the workforce, as Annie Lowrey observes in the New York Times. But some still find the idea compelling.

New York City is embarking on an experiment to figure out the best way to better the lives of the working poor. Right now, the earned income tax credit delivers the biggest benefits to the parents of dependent children, and far smaller benefits to single adults. Paycheck Plus, an initiative of New York City's Center for Economic Opportunity in partnership with the research organization MDRC, will provide low-income single adults without dependent children with a more generous wage subsidy. Though we won't know the results for some time, these efforts will help inform the all-important conversation about the future of the growing number of Americans who find that their paychecks aren't big enough to make ends meet.

(The author is a Reuters Columnist. The opinions expressed are his own)