By Charles H. Green
It used to be that higher wages for hourly workers was only the perennial plank of liberal politicians and activists, and more recently one of the assorted demands issued by the short-lived and disjointed ‘Occupy Wall Street’ movement. But with the clamor of income inequality resonating with more middle class American voters and the Federal Reserve weighing into the debate, higher wages are suddenly on a trajectory that pits Fortune 500 companies against each other in a race to pay higher wages.
Worker wages have long been an issue of contention between employees and employers, with the first public foray into the topic coming in 1349 when King Edward III issued the ‘Ordinance of Labourers,’ which actually set a wage cap rather than a floor. The first attempt of setting a minimum wage for the United States was in 1933 as part of the New Deal era National Industrial Recovery Act, which established $.25 per hour as a minimum standard. This wage was thrown out by the Supreme Court, being declared unconstitutional in 1935.
But when reestablished in 1938 as part of the Fair Labor Standards Act, the minimum wage was upheld by the same court under the ‘Commerce Clause,’ justified to regulate employment conditions. Since then, the minimum wage has been a constant source of political and populist tension, pitting business against labor in an ongoing effort to balance corporate/shareholder profits against wages that provide workers with an acceptable standard of living.
Its not just wages-its income inequality
Since 2009, the federal minimum wage has been set at $7.25, but as of January 1, 2015, 29 states had higher wage standards, including 11 established through recent legislated or ballot initiatives. Without sufficient support in Congress, last year President Obama encouraged the states to move forward on their own accord, and several have done so in an effort to boost the overall wages in their local economies.
The Federal Reserve has entered this debate more loudly than before, with Chair Janet Yellen, telling a recent conference on community development research that “economic inequality has long been of interest within the Federal Reserve System,” she said, citing a 2007 speech by then-Chairman Ben Bernanke on the matter.
As reported by the Wall Street Journal, Yellen said the broader public cares, too. According to a survey, “the gap between rich and poor now ranks as a major concern in the minds of citizens around the world,” she said, adding “in advanced economies still feeling the effects of the Great Recession, people worry that children will grow up to be worse off financially than their parents were.”
The New York Times reported that nearly three-quarters of the people helped by programs geared to the poor are members of a family headed by a worker, as determined through a study by the Berkeley Center for Labor Research and Education at the University of California. As a result, taxpayers are providing not only support for the poor, but also, in effect, a huge subsidy for employers of low-wage workers, from giants like McDonald’s and Walmart to mom-and-pop businesses.
Who are they talking about? NYT’s story told about a home health care worker in Durham, N.C., a McDonald’s cashier in Chicago, a bank teller in New York, and even an adjunct professor in Maywood, Ill. They were all working yet had to rely on public assistance, like food stamps, Medicaid or other safety net programs to help cover basic expenses when their paychecks come up short.
In response to the growing clamor, some of the nation’s most recognizable retailers and franchise companies have either tired of the criticism or unable to hire new workers at their stores. Wal-Mart, McDonalds, Dominoes, Target, and others have announced the decision to voluntarily raise minimum wages for employees.
One small business is even getting into the act, by setting $70,000 as the minimum salary that the company will pay their employees. Gravity Payments president Dan Price will forgo his own $1 million salary in order to gradually provide higher wages to all employees over the next three years.
Price attributed his decision from listening to friends tell stories of how tough it was to make ends meet even on salaries that were still well-above the federal minimum of $7.25 an hour. “They were walking me through the math of making 40 grand a year,” he said, then describing a surprise rent increase or nagging credit card debt.
Minimum wages vs. executive compensation
He wanted to do something to address the issue of inequality, although his proposal “made me really nervous” because he wanted to do it without raising prices for his customers or cutting back on service.
The United States has one of the world’s largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists’ estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.
New York Times columnist Gretchen Morgenson described how high–and opaque–that gap remains, despite recent laws designed to require public companies to publish their executive salaries as a ratio with the company’s median employee cost. In her research with leading compensation consultants, she found that some Fortune 100 CEOs are compensated more than 1,000 times their company’s median salary. In the case of Disney’s CEO Robert Iger, it was 2,238x.
As much as the eye-popping wage gap is, the lack of transparency to company owners continues to plague shareholders who are also left without a real voice in determining executive compensation. Whether this broad gap plays into the perennial efforts of corporate America to fight minimum wage hikes over the last generation is likely the subject of debate.
Many economists argue that the labor market is like the market for anything else, and that the law of supply and demand determines the level of wages. Further, they claim that the ‘invisible hand’ of the market punishes anyone who tries to defy this law. Therefore, using that logic, any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it’s claimed, will reduce employment and create a labor surplus.
Macroeconomics vs. good help
But labor economists question this view. They point out that the labor force–is people. And because workers are people, wages are not, in fact, like the price of butter. How many workers are paid depends as much on the social forces and political power as it does on simple supply and demand.
Case in point, what happens when minimum wages are increased in one state while neighboring states do not? No one has proven that the wage-hiking state loses a large number of jobs, but rather the concensus from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.
As the post-crisis economy improves, workers are gaining clout thanks to an improving labor market, which is reflected in an increasing willingness to quit bad jobs. And although that pressure is far from prevalent at the moment, Walmart has raised wages anyway. Their justification for the move echoes what critics of its low-wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.
What do you think? Comment on this page or write me at Director@SBFI.org.