Date: Sat, 31 Oct 1998 22:20:48 -0500 From: Robert Pollin <pollin at econs.umass.edu> Subject: Living Wage Book
In the category of shameless self-promotion, I am sending along news of my new New Press book with Stephanie Luce, The Living Wage: Building A Fair Economy. This includes a bit of advertising blurb, and, as an attachment, Paul Krugman's trashing of the book in the September Washington Monthly, and my response to Krugman, part of which is in the November Washington Monthly.
I have also posted my debate with Krugman at the Amazon.com site for the book, which, by the way, is: <http://www.amazon.com/exec/obidos/ASIN/1565844092/qid%3D909885927/002-280903 8- 5154619>.
Regards, Bob Pollin
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THE LIVING WAGE: BUILDING A FAIR ECONOMY, THE NEW PRESS, 1998.
"Of all the books I've read on making this country what it ought to be, this is the best." -- Robert Heilbroner, Norman Thomas Professor Emeritus of Economics, New School for Social Research
A Fight for Economic Justice
Living standard and working conditions for U.S. workers have been under attack for a generation. To challenge this, the living wage movement has spread rapidly throughout the country over the past four years. The Living Wage is the first book to lay out the economic and political background for the movement, and to analyze the effects of implementing living wage laws--for businesses, governments, and working people.
"An excellent, informative, and highly readable analysis of the living wage campaigns." -- Senator Edward M. Kennedy
"This insightful study seeks out and exposes every clay foot in the standard economic arguments against legislating a decent and livable wage for workers." -- John Sweeney, President, AFL-CIO
"This book does a terrific job of explaining how the living wage would work--and how it is already working in the public sector of some of our major cities." -- Nancy Folbre, Professor of Economics, University of Massachusetts-Amherst
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Moral Economics: What the Campaign For a Living Wage is Really About
Review of Living Wage: Building a Fair Economy by Robert Pollin and Stephanie Luce New Press, 1998
Review by Paul Krugman for Washington Monthly, September 1998
Economics textbooks enthuse about virtues of a price system. In a market economy, nobody needs to order people to economize on a scarce commodity or make extra efforts to produce it: Scarcity leads to a high price, and sheer self-interest does the rest. Conversely, nobody needs special persuasion to take advantage of an underemployed resource: Abundance will make it cheap, and again self-interest will take it from there.
And yet there is a problem with markets: They are absolutely and relentlessly amoral. Labor, in a market system, is just another commodity; the wage a man or woman can command has nothing to do with how much he or she needs to make to support a family or to feel part of the broader society. Some conservatives have managed to convince themselves that this poses no moral dilemma, that whatever is, is just. And one supposes that there are still unrepentant socialists who believe that one can do away with market determination of incomes altogether. But after a century marked by both the Great Depression -- which basically ended unalloyed faith in markets -- and the fall of communism, most people support some version of the welfare state: a system that is based on markets, but in which the government tries to prevent too unequal a distribution of income.
But how is that to be accomplished? The standard economist's solution, which is also the main way the U.S. welfare state operates, involves "after-market" intervention: Let the markets rip, but then use progressive taxes and redistributive transfers to make the end result fairer. However, many liberals have always felt that this solution is unsatisfactory. Instead, they want to increase "market" wages, notably through support of collective bargaining, and through the imposition of minimum wage standards.
The "living wage" movement, which has attracted considerable support in several major U.S. cities, is a variant on this tradition. As described in Robert Pollin and Stephanie Luce's new book The Living Wage, it essentially involves putting a floor on wages not through a conventional minimum wage law, but by requiring minimum wage standards of firms that do business with a local government. Aside from novel enforcement issues (I know this lawyer who will explain to you about creating dummy companies for the contract work, leaving the rest of the business unregulated), this is basically a distinction without a difference: The living wage movement is simply a move to raise minimum wages through local action.
So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages "do," in fact, reduce employment, but that the effects are small and swamped by other forces.
What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda -- for arguing that living wages "can play an important role in reversing the 25-year decline in wages experienced by most working people in America"(as this book's back cover has it). Clearly these advocates very much want to believe that the price of labor -- unlike that of gasoline, or Manhattan apartments -- can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.
For example, the authors argue at length that because only a fraction of the work force in the firms affected by living wage proposals will be affected, total costs will be increased by only 1 or 2 percent -- and that as a result, not only will there be no significant reduction in employment, but the extra cost will be absorbed out of profits rather than passed on in higher prices. This latter claim is wishful thinking of the first order: Since when do we think that cost increases are not passed on to customers if they are small enough? And the idea that employment "of the affected workers' "will not suffer because the affected wages are only a small part of costs is a non sequitur at best. Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket's total sales -- but do you really think that milk would be just as available as before?
They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist's reply is, if paying higher wages is such a good idea, why aren't companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage "compared with other companies" -- and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish. What makes this an odd oversight is that the book contains a lengthy and rather well-done critique of attempts by local governments to create jobs through investment incentives, arguing that they mainly end up in a zero-sum poaching war; how could the authors have failed to notice the parallel?
But while there is much that is silly in their book, Pollin and Luce are diligent and
honest -- and as a result the book carries lessons and implications they may not have intended. The most interesting section is their estimates of the impact of living-wage proposals on the budgets of hypothetical families -- estimates that perhaps give us the clue to what all this is really about.
Consider, for example, the effects of "Plan Y" (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income from $10,860 to $14,500 -- and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit, and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions in these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income; the rest is taken away as benefits decline.
Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which -- Card/Krueger notwithstanding -- must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?
One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution off-budget. And this may be a smart move if you believe that America should do more for its working poor, but that if it comes down to spending money on-budget it won't. Indeed, this is a popular view among economists who favor national minimum-wage increases: They will admit to their colleagues that such increases are not the best way to help the poor, but argue that it is the only politically feasible option.
But I suspect there is another, deeper issue here -- namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don't want people to "have" a decent income, they want them to "earn" it, not be dependent on demeaning handouts. Indeed, Pollin and Luce proudly display their estimates of the increase in the share of disposable income that is earned, not granted.
In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price -- determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.
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Living Wage Laws Make Economic Sense: Response to Paul Krugman
By Robert Pollin Professor of Economics and Co-Director, Political Economy Research Institute University of Massachusetts-Amherst
In his review (September 1998) of The Living Wage: Building A Fair Economy, my new book with Stephanie Luce, Paul Krugman seeks to discredit the arguments we make in behalf of living wage legislation. There is much at stake here. Some form of living wage legislation has been passed in 20 cities over the past four years, and is now being considered in another 50 or so municipalities. The living wage movement thus represents the most widespread grassroots effort at reversing the sharp 25-year decline in minimum wages, to a level today, $5.15 an hour, that is fully 30 percent below its peak of $7.37 (in 1997 dollars) in 1968. But Krugman claims that our book contains "much that is silly" and, more generally, the living wage movement is "doomed to fail", because neither we authors nor the broad living wage movement can get our economics right. In fact, Krugman's review demonstrates the opposite of what he intends. If we allow that Krugman's arguments represent the strongest case that living wage opponents can muster, then living wage supporters can move forward in confidence that economic logic--if not always political power--is on their side. I have room here to only briefly address Krugman's main arguments.
1. Will city government budgets necessarily bear the full cost of wage and benefit increases due to living wage legislation?
Our research showed that most firms holding municipal government contracts, and thus falling under the terms of a living wage ordinance, would face a negligible increase in their total costs (on the order of one percent) once they comply with the living wage laws. We therefore argued that most affected firms could readily absorb these small costs rather than passing them on to city budgets through winning more expensive contracts. This is a crucial point, because it implies, for example, that workers in Los Angeles could get a total of $50 million in annual wage increases but that the city's budget need increase by only a small fraction of that total. Krugman, however, calls this "wishful thinking of the highest order," stating that firms will always pass along their added costs to customers, even when they are small. Of course firms will try to pass on these costs. But whether they succeed will depend on the competitive environment in which they operate. If firms are bidding competitively for city contracts, city governments need not cave in to business demands for better contract terms to cover their living wage costs. The firms can either absorb a one percent cost increase to win a city contract or relinquish the contract to a competitor. It is notable that in both Baltimore and Los Angeles, studies show that the passage of the living wage ordinance has had no significant impact on post-living wage contract bidding patterns.
2. Will living wage ordinances, like all minimum wage laws, only produce unemployment among low-wage worker?
Krugman rehashes what he terms the standard Econ 101 argument that when you raise the price of anything (like low-wage labor), demand must fall (businesses hire fewer low-wage workers). But even Krugman acknowledges, if only as an aside, the qualifying feature of this law, which is that it holds only when all else is assumed constant. In fact, in the real world, all else is rarely constant. Most important, the impact on jobs of fluctuations in the demand for goods and services produced in the region will overwhelm any effect stemming from a municipal living wage law. As we argue in the book, when demand for goods and services is strong, unemployment will be low among low-wage workers, regardless of whether cities have municipal living wage laws. By the same token, jobs will dry up when demand for products is falling, as during a recession, regardless of whether a city has passed a municipal living wage law.
But what if, holding overall demand for jobs constant, businesses decide to replace the low-wage workers they have with other workers they deem are more qualified for the higher pay? Even under such a worst-case scenario, there would be no net loss of job opportunities, since the laid off workers could still fill the jobs opened up by the workers who took their living wage jobs. This certainly would hold under the living wage laws we are examining, where, for better or worse, these laws affect only a tiny fraction of the available low-wage jobs. In Los Angeles County, for example, the living wage law will bring raises to 7-10,000 workers at most, while there are 2.4 million people earning less than the $7.25 living wage minimum.
3. Firms will not experience productivity-enhancing gains in morale through paying living wages, since all firms will be paying these wages.
Krugman makes this argument against us, but his reasoning is haphazard. First, Krugman misses the fact noted above that the living wage ordinances now on the books will affect only a small pocket of firms. Workers in these firms will indeed enjoy privileged conditions. Even by Krugman's logic, therefore, the raises these workers receive will create incentives for them to raise their productivity through, for example, reducing turnover and absenteeism. But there is a more fundamental point. Krugman is claiming that workers respond positively to being treated well on the job only if they think they are being treated better than workers at other job sites. There may be an element of truth to this, but only to the extent that one accepts, with Krugman, a narrow, ego-centric view of what motivates people at work. Do workers respond positively to genuine acts of respect and solidarity--like paying decent wages and benefits and maintaining a healthy workplace--on their own terms, or do they dismiss such acts as long as their perception is that other workers at other jobs are also treated in the same favorable manner? Research to date cannot provide a definitive answer. At best then, Krugram is badly overreaching, especially given that, in any case, living wage workers are relatively better off than their counterparts at other firms.
4. Why not let the market rip, allowing income disparities to arise where they may, but then alleviate these disparities through government transfer payments?
In making such an argument, Krugman dismisses the distinction we draw between a dollar of income earned by a working person and a dollar received through a government program to support the poor. What came through clearly in the protracted debate in the U.S. over welfare reform was that, given the choice, the vast majority of people in this country would much prefer to work for a decent wage than to receive government transfer payments. Krugman would deny people their preference, since, in his view, the market could not rip with sufficient force when a living wage is legally mandated. But taxing market winners to cover transfer payments to market losers also distorts market outcomes. Krugman never explains why interfering with the market through government transfers is, overall, more just and efficient than allowing people to earn a living wage. In this context, we must keep in mind how, in the absence of a living wage minimum, government transfers to the poor benefit businesses. They do so because they allow businesses to pay sub-poverty wages while shifting onto the public the costs of alleviating the hardships of even those families which include full-time workers.
5. Krugman concludes, "The amorality of the market economy is part of its essence, and cannot be legislated away."
Economists from Adam Smith onward have recognized that market economies--dominated as they are by greed and competition--can survive over a sustained period of time only if they are buttressed by social institutions that also support our inclinations toward solidarity and reciprocity (Russia today being a good example of how well market economies perform absent such institutions). If we really took Krugman seriously here, his logic would mean not only abolishing municipal living wage ordinances but to similarly eliminate minimum wage, child labor and even slave labor laws. What are these if not a series of attempts--successful in fact, as far as they have gone--at "legislating away" the market's inherent amorality? True, Krugman's logic would still provide government transfer payments to the losers in these amoral market situations. This means, for example, that slaves could still be guaranteed adequate sustenance through food stamps, if not from their owners.
When the national minimum wage was at its peak of $7.37 in 1968, it had become a reasonably effective vehicle for eliminating poverty among people who worked full-time while trying to raise a family. It is unfortunate that, over the past generation, the country has abandoned this achievement even though our economy is now 50 percent more productive than in 1968, and that economists such as Krugman so loosely invoke "economic laws" to justify our dramatic steps backward.