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Does America need a raise?

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When full-time workers need to turn to government assistance to make ends meet, it would profit everyone to give the minimum wage a boost.  

By Charles M. A. Clark, a professor of economics and senior fellow at the Vincentian Center for Church and Society at St. John's University in New York.

[Sounding Boards are one person's take on a many-sided subject and do not necessarily reflect the opinions of U.S. Catholic, its editors, or the Claretians.]

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At this year’s State of the Union Address, President Barack Obama stated that “America needs a raise” and he proposed that Congress increase the federal minimum wage from $7.25 to $10.10 per hour. On the surface, President Obama’s push to raise the minimum wage appears to be directed towards a small portion of the working population. But the real target is the dramatic rise in income and wealth inequality in America, which has essentially divided the country into two societies. And much of the president’s case for raising the minimum wage comes directly from the Catholic Church’s own “just wage” doctrine.

The negative reaction from some against raising the minimum wage is based on protecting the economic and political gains of the rich, which have come at the expense of the poor and middle class, and their argument that raising the minimum wage will cause inflation or unemployment is based more on ideology than evidence. The $26.7 billion in bonuses paid by Wall Street firms to 165,000 employees in 2013 illustrates the general redistribution of income away from workers and toward the financial elite. As the Institute for Policy Studies recently noted, this largesse is greater than the total yearly compensation of all full-time minimum wage workers combined—the income of those nearly 1.1 million workers totaled $15.1 billion in 2013, just over half of what the Wall Street executives received in bonuses.

Distributing this money to the already overpaid creates one-third less economic growth and job creation than distributing it to lower paid workers, but the more fundamental issue is why Wall Street has $26.7 billion to pay out in bonuses. No doubt the practitioners of “casino capitalism” would paraphrase John Houseman from the classic 1970s Smith Barney commercial: “We make money the old-fashioned way … we earn it.” In an ironic sort of way, they would be right, because the “old-fashioned way” of creating wealth is the use of force and fraud. Whether it’s the Roman Empire or the British Empire, Viking raiders or corporate raiders; Conquistadors or Russian Oligarchs, slave traders or stock manipulators, force and fraud have been a main part of how people or countries got rich.

The modern way to create wealth is to increase productivity, expand and improve physical capital, improve management efficiency, and most importantly, increase the education and skill level of workers. When mutually beneficial trade is the model of economic activity, both wages and profits go up, as the economic pie is expanding. This is what happened from the end of World War II until the swing to the right with Ronald Reagan and Margaret Thatcher. Since then nearly all of the gains in income have gone to the top 1 percent, with the bottom 80 percent having rising debt instead of rising wages.

This creation of a society of extreme inequality is due primarily to two changes in the economy: rewriting the rules regulating finance to benefit speculators and fraudsters; and the removal of supports for low income workers. Besides out and out theft that is rampant on Wall Street (barely a week goes by that we don’t see a headline on illegal activity by the major firms), finance increases its share of income by increasing the amount of economic activity that passes through their hands, allowing them to take a cut each time. Housing, health care, higher education, building roads and bridges, even basic food commodities are all merely means to the higher end of commissions and capital gains. And all these activities can be more efficiently produced and distributed without Wall Street involvement.

The second major factor increasing income inequality has been the withdrawal of support of low and moderate income workers. Contrary to the dominate ideology, which argues that incomes are based on productivity, most wages are determined by the relative bargaining power of workers versus employers. If workers bargain as one, such as they do if they have a union, then they can force the firm to share some of the surplus created by technological change with them. Minimum wage laws—along with other forms of social protection like a strong social safety net, universal education, and a commitment to full employment—will also support the bargaining power of workers.

The obvious inequality in bargaining power between workers who have little income security and employers is so great that almost every developed country has some form of minimum wage law to prevent the extreme exploitation of the poor. We see around the world that when there are no social protections, or when certain groups are excluded from them (as with undocumented in America) forced labor and other forms of slavery appear. Allowing the minimum wage to decline in real terms (not adjusting it for inflation), hostility towards unions, weakening the safety net, artificially keeping unemployment high, and neglecting the issue of immigration reform have all weakened the bargaining power of low income workers, thus allowing employers to impose exploitative wages and working conditions.

Often this merely shifts the cost onto the local or national government. Walmart founder Sam Walton is the quintessential example of this strategy, as he is reportedly known for saying, “I pay low wages. I can take advantage of that. We're going to be successful, but the basis is a very low-wage, low-benefit model of employment.” The result is that the retail giant had $17 billion in net income in 2013, but many Walmart workers receive government assistance—proof that Walmart is paying less than subsistence wages, with taxpayers making up the difference. Walmart has been able to spin taxpayer money into Walton family gold. Another example of earning it the old fashioned way.

The main argument for subsidies and tax breaks (welfare) for very rich is that they are “the makers” and “job creators” and us common folk need them to be in control of society’s productive assets. As Aristotle put it, “From the hour of their birth some are made for subjection, others for rule.” Behind the paternalism in the rhetoric, “trickle-down” economics is essentially blackmail. If the rich do not get what they want, everyone suffers. Pope Francis has correctly noted that trickle-down economics has never promoted “greater justice and inclusiveness.” This should not surprise us, as blackmail rarely works out well for those being blackmailed.

However, trickle-down economics has not been a very successful economic growth policy either, because it is inefficient and wasteful. As famed Harvard economist John Kenneth Galbraith once noted, trickle-down economics is based on the horse and sparrow model, that is if you feed a horse enough oats, some will pass thru the horse to the road, providing food for the sparrows. So if the goal is to help the poor, we should just give them the money.

Catholic social thought and its preferential option for the poor also offers strong support for increasing the minimum wage. The Catholic claim that workers deserve a just wage as a matter of justice, and not as charity, is based on the argument that wages should provide sufficient resources for meeting the material and spiritual needs of workers and their families. It is this teaching that the U.S. Catholic bishops have pointed to in their recent efforts to call on Congress to raise the federal minimum wage. Surprisingly, or maybe not so surprisingly, prominent Catholic politicians like Congressman Paul Ryan and Senator Marco Rubio have voiced strong opposition to raising the minimum wage. Both feel that government intervention into the wages of the poor will be harmful to the economy, creating inflation and unemployment, and ultimately harming those it is intended to help.

While the church has always rejected the argument that people should be treated like commodities, prudential judgment does require us to look at the inflation and unemployment arguments against the minimum wage. Minimum wage increases could, in some circumstances, cause inflation, but only if wages go up faster than productivity. If the minimum wage had kept pace with labor productivity it would be more than $20 an hour today, double what the president is proposing. Also, if our economy was at full employment the extra purchasing power in the hands of low income workers might cause inflation, but we have high unemployment and the risk is towards deflation, not inflation.  

Furthermore, the evidence doesn’t show that increasing the minimum wage leads to higher unemployment. In fact, the opposite is true: the number of new jobs created by increasing the purchasing power of low-paid workers, which in turn increases spending levels, outnumber the jobs that might be lost by employers deciding to lay off workers because labor is more expensive.

Increasing the minimum wage is nowhere near enough to combat 30 years of rising income inequality, much less the even greater wealth inequality. A real commitment to job creation is needed, especially targeted at the long-term unemployed. And we have to recognize that part of the increase in income and wealth inequality is due to fraud, and one effective way to reduce the fraud-created income and wealth inequality is to go after the fraudsters, take the money back, and put them in jail.

The last dramatic rise in inequality that nearly destroyed America hit its peak in the 1920s. It took the trauma of the Great Depression and World War II to reverse that dangerously unbalanced economy and society. Let us hope a little common sense and evidence-based economic policies, starting with a federal minimum wage increase, can provide for a less painful correction.