The Long Battle For A Living Wage Goes On

By Pavlina Tcherneva
(cross posted from ineteconomics.org)

This week workers in fast food restaurants across the country gathered to protest the minimum wage in the United States, which currently is a paltry $7.25, and to fight for a better standard of living. The battle for a living wage for the nation’s poorest workers is set against the backdrop of mass unemployment and the highest level of economic inequality in the U.S. in almost a century.

The first minimum wage laws in the U.S. were the result of a state-by-state effort in the Progressive era to secure a floor to a decent life to employed women and youth. The first of these was enacted in Massachusetts in 1912 and eventually led to the 1938 Fair Labor Standards Act, which instituted a minimum wage at the federal level.

The objective was fairness, economics opportunity, stability, and social cohesion. The problem was the unequal power between labor and capital—a rationale that even early neoclassical economists embraced on the grounds that it constrained labor’s bargaining power and reduced morale, productivity, and wellbeing.

The solution was to set the “rules of the game” so that working women could support their families and young workers would not fall prey to discriminatory practices of their employers. In the absence of such rules, economists thought, the market mechanism wouldn’t work. Firms simply could not be counted on to self-regulate or reinforce these rules. The minimum wage movement required legislation.

The Supreme Court initially resisted and ruled that the state laws were unconstitutional, but states and organized labor prevailed, and by the time the New Deal rolled around, the Supreme Court had changed its mind. It had begun to work with a much broader definition of “the public interest” and supported various state legislations to protect the “welfare of its citizens.” It was understood that the wellbeing of workers served an important public purpose.

American economists – neoclassical and institutionalists alike – all supported the movement, the legislation, and the rationale. This wonderful excursion in the history of the minimum wage movement and the history of economic thought by Robert Prasch (1999) shows that economists in the U.S. were virtually unanimous in their support. The objections largely came from the British, notably from Professor Pigou, until another British economist, John Maynard Keynes, disproved his argument. Not only were the assumptions behind the labor market mechanism unfounded in Pigou’s analysis, but the notion that the minimum wage caused unemployment was also theoretically and empirically flawed. As Keynes, explained, reducing wages as a macroeconomic policy was a “method socially disastrous in the process and socially unjust in the result.”

A federally mandated minimum wage was not enough to secure fairness, economic opportunity, stability, and social cohesion. The missing piece was a policy for full employment – one that guaranteed jobs for all who wished to work. That came later with the work of John Maynard Keynes, John Pierson, William Beveridge, and others. All advanced specific policies for full employment that aimed to secure decent work at decent pay to anyone who was ready, willing, and able, regardless of whether the economy was reeling from a Great Depression or enjoying relative prosperity. The right to work was codified by the international community in the 1948 Universal Declaration of Human Rights and found a special place in Martin Luther King, Jr.’s “I Have a Dream” speech during the 1963 March on Washington for Jobs and Freedom.

The New Deal put full employment front and center on the policy agenda. Though it did not deliver a long-term job guarantee program, it boldly and successfully experimented with direct employment policies. The war mobilization delivered true full employment, but Keynes insisted that public policy could and ought to achieve the same in peacetime.

In 1949, the minimum wage nearly doubled at a time when the economy was as close to true full employment as it has ever been, and when direct job creation was the policy of choice to deal with unemployment. Full employment and high wages ushered in the Golden Age of the American economy.

Today we have neither. Mainstream economists have successfully convinced themselves and policy makers that true full employment is impossible and that the minimum wage is the root of all evil.

Jobs for all (via a Full Employment Program through Social Entrepreneurship, a Green Jobs Corp, or a Job Guarantee) and a doubling of the minimum wage is what the economy needs today. Keynes made the case, Martin Luther King, Jr. made the case, and the international community made the case.

Sometimes the good old ideas are the best new ideas.

Follow me on Twitter at @ptcherneva

14 responses to “The Long Battle For A Living Wage Goes On

  1. –Sometimes the good old ideas are the best new ideas–

    Nicely said. The truth is that man’s needs and desires are as old as the man himself. His needs are not created rather are discovered and new means are employed to satisfy those needs. The basic material remains the same.

  2. financial matters

    Very timely post. An excellent anti-austerity and pro-stimulatory policy.

  3. It seems as though where this argument looses traction is in situations where poorly paid public sector workers, teachers, firefighters and police, etc. are making little more then the proposed increase which would equate to around 32k per year. Or even entry level medical positions such as nursing start only a few dollars an hour more then a fast food employee with no education.

    • @joe

      Then the solution there is to raise the salaries of mid-level professionals to the levels they deserve for their service, not to reduce unskilled labor to abject slavery.

      It’s the aggressive anti-government stance of the Right, not the livable wage campaign, that should be held accountable for that situation.

      • I agree with what your point. But this seems to be the dominate push back along with the myth that a higher minimum wage is a job killer.

    • The city of Seatac may be voting on a $15 minimum wage this Fall.

      “The initiative would also require employers to pay sick leave to employees.

      “As with any business, people get paid according to their skill sets and their business,’’ Ostrander said. “This is going to impact the entire employee base because you are going to have to put everyone up to a higher wage.’’

      http://seattletimes.com/html/localnews/2021696652_minwageseatacxml.html

      • Seatac update: http://seattletimes.com/html/localnews/2022905775_seatacprop1xml.html

        “Six weeks after the new hourly minimum standard took effect at some hotels and parking lots in SeaTac, proponents and opponents alike say any evidence to gauge its impact is still anecdotal.

        At the Clarion Hotel off International Boulevard, a sit-down restaurant has been shuttered, though it might soon be replaced by a less-labor-intensive cafe. The nearby Cedarbrook Lodge, by contrast, is undergoing a $16 million expansion.”

        A 14 oz NY Steak at the Cedarbrook is $48. Maybe someone with experience waiting tables can estimate an average tip income at the Cedarbrook. I’m guessing it would be a lot more than $15 an hour.

        Economists quoted said that it took 2.5 years for the dust to settle after the 1998 increase, so it’s way too early to tell yet. The most current available census data for Seatac is from 2011.

        The anecdotal responses of businesses include price increases, reducing hours, and managers assuming the duties of absent workers (due to paid sick days as well as reduced hours). Businesses affected by the law complain about their smaller, exempt competitors having an unfair advantage. And, of course, the workers who got the raise and kept their jobs are delighted. About 4000 workers at the airport who would have been covered are not, due to a legal dispute that is said to be headed for the state supreme court. Only about 1600 are covered by the law.

        One bit of data that’s a bit more than just anecdotal is that employers in Seatac, those sympathetic to the law and those opposed to it, unanimously say they are being flooded with job applicants, many from outside the city, and many with higher skills and more experience than typical minimum-wage workers. They’re happy to have their pick of a much better crop of job applicants. The prognosis for entry-level Seatac residents may not be so good.

  4. If the JG wage doubles , then the wages for a whole range of positions will need to rise too.

  5. Pingback: Pavlina Tcherneva: The Long Battle For A Living Wage Goes On « naked capitalism

  6. Regarding the 1949 minimum wage, the increase for $.40 to $.75 went into effect in January, 1950 according to the Labor Department (http://www.dol.gov/whd/minwage/chart.htm). It was labeled 1949 in the article you link to, but that just says President Truman proposed the increase in 1949.

    Also note that average US unemployment during 1949 averaged 5.9%, peaking at 7.9%. I wouldn’t call that full employment.

  7. There is a system which would in theory be better than minimum wages, as follows.

    Let employers pay whatever they want: even $1/hr. And have the state bring take-home pay up to the socially acceptable level via in-work benefits. That would bring large numbers of very unproductive jobs into being, which is arguably better than nothing. But the problem is that that destroys low paid employees’ incentive to seek more productive work.

    So one would need to have the state do much of the job searching: i.e. give the state the power to allocate people to jobs. (State run employment agencies, “Job Centres”, already do this to a limited extent in the UK)

    You can criticise the above system, but we’re already half way there, in that (at least in the UK) there are a whole raft of in-work benefits.

    The above system would be bureaucratically expensive, but then having bureaucrats allocate resources is by definition bureaucratically expensive compared to having the market allocate resources.

  8. “give the state the power to allocate people to jobs”

    How does that fit in with the UN’s “human right” of everyone to the “job of their choice” ?

    There are two often competing forces acting to set the wage for any particular job. One is the desire of people to have that job, and the other is the amount of money that a particular person can contribute to the corporate effort. If it’s a highly desirable job, firms don’t have to pay as much as for a miserable job. If it’s an employee that can give the firm a large competitive advantage by doing that job exceptionally well, that employee can demand a very high wage for that job. Beyond those two are many local factors that impact the ability or willingness of employees to work, or employers to hire. Only when workers and employers are able to negotiate their own terms can the market clear. When wages are set by dictates outside the market, there will always be imbalances (unless, of course, the State assigns you to a job regardless of your desires or the employer’s). Perhaps more “equity”, by some estimation, but imbalances.

    JG sets a floor for most jobs, but allows the possibility of lower wages for more desirable jobs. It allows the market to clear at full employment.

  9. I expected a more thorough look at minimum wage and refutation of it’s detractors. Particularly, while the increase in consumption as a result (doubling wages meaning a 1-2% increase in costs, contrary to opponents arguments), it would create a demand for more money, while we’re already present w/ a shortage- one of the key arguments I’ve heard made on this site. In order to increase minimum wage, we’d need to increase the monetary supply as well, though I believe reducing the workweek would offset the demand while being a viable solution as well. Such a move would work best hand-in-hand w/ Firestone’s P2M plan.

    • The effects of small minimum wage increases enacted in the past have been no more than noise in any statistics that could be studied. The city of Seatac will vote in November on raising the minimum wage from $9.19 to $15 an hour, effective Jan 1, 2014. If the initiative succeeds, they will become the first good evidence of whether large increases are good or bad for minimum wage workers and the economy in general.