Sunday, September 28, 2014

In favor of a sustainable living wage

Right now we're living through a time of massive imbalance in the global labor market. The number of people who are available for work outsourced from around the globe has exploded and continues to grow larger. This is happening because poor economic policies are in retreat in the developing world and pro-globalization policy adoption remains high, continually feeding more and more people from India, China, and smaller developing nations into the global labor market as they walk down the path of converting their farmer/peasant heavy populations to first world levels. This massive imbalance has created a market signal reducing salaries below living wage levels at the bottom end of the labor market. Until that signal resolves in increased demand for labor, it leaves more people stuck in dead-end rural situations, urban workforces constantly in emergency mode, trying to scrape by, and lower standards of living for virtually everybody who is a worker all over the world.

There is a way to create a living wage consistent with free market principles. I call it the sustainable living wage. It's based on the idea that increasing the demand for labor and reducing the supply of labor both cause a natural rise in wages that need not be artificially mandated by legislation, and is not subject to evasion by paying people a lower wage "under the table". In a sustainable living wage environment, workers have better things to do than play black market games with skinflint employers. Down the road, somebody else is paying better.

A living wage based on forcing, by law, employers to raise wages beyond the market clearing price will, over time, always lead to substituting capital for labor and other methods of getting around the law such as falsely reporting working time and hiring "under the table". It also promotes acceptance of inflation in the employing class as that erodes the economic penalty of minimum wages. Inflation is probably the worst economic blow that an otherwise normal government can strike against the poor while calculating that it won't get called out for it.

A sustainable living wage, in order to be sustainable, must not create these perverse labor substitution incentives for employers which is what too often happens with traditional efforts to raise a minimum wage to a living wage. In the real world either the rise is so small as to be ineffective at its stated goals or it prompts employers to take a look at substituting capital for labor. When this substitution effect happens, a minimum wage practically acts as an indirect legal subsidy for machinery manufacturers, throwing more work their way and tossing lower end workers out of a job. These indirect subsidies are social injustice writ large.

The other side of the coin is reducing the supply of labor. This is about increasing the supply of people who make some or all their money as capitalists. It also implies moving from a small number of very wealthy investors to a large number of relatively well off people as the capital source for businesses. It means taking some money and succeeding in actively investing it for a profit to the point where it can substitute for some of your labor income, allowing you to shift from full time membership in the laboring class to being a part time capitalist, part time worker and eventually full time capitalist.

Necessarily, this also means reducing labor force participation in a good way. Economic prognosticators are going to need a better metric to not only capture whether labor force participation is changing but why it is changing. The person that reduces their hours from full to part time because they're making up the difference and more in loan interest they're lending out to others right now looks the same as the person that has their hours reduced by their employer because they want to avoid costly benefit obligations. That's a very small chunk of the labor force right now in the upper middle class. It will grow in the future.