A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States.

Author: J.E. King

Works Cited King, J. E. “A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States.” Review of Political Economy, vol. 22, no. 1, Jan. 2010, pp. 161–164. EBSCOhost, doi:10.1080/09538250903090291.

Bob Pollin has been a stalwart of the Living Wage movement in the United States for many years. This excellent volume, co-authored with three of his principal collaborators, is a progress report on the state of the movement in the early years of the new century.

The case for a living wage, defined loosely as a wage that 'can allow for a minimally decent level of dignity' for low-paid workers and their families (p. 9), goes back more than a century, to the Progressive Era in the United States (Ryan, [ 6]), which was also the age of New Liberalism in Britain (Hobson, [ 1], Chapter XIII). As Pollin relates in the Introduction, the modern living wage movement in the US began in Baltimore in 1994, after a quarter of a century in which the real value of the federal minimum wage had fallen substantially and the gap between the high-paid and the low-paid had widened accordingly. Over the next 15 years legislatures in 29 states and the District of Columbia approved minimum wages in excess of the (miserly) federal minimum, in addition to similar initiatives in 140 cities. The municipal living wage measures have been enforced through what, in pre-Thatcher Britain, used to be called 'contract compliance'—minimum wage clauses inserted into the contracts of all firms supplying goods or services to the local authority. Pollin and his colleagues at the Political Economy Research Institute (PERI) at the University of Massachusetts–Amherst have been actively involved in many of these campaigns.

The book has 14 chapters. In Part 1 there is a brief introduction (Chapter 1), a slightly longer chapter setting out the case for the Living Wages in terms of its economic logic and the moral imperative that drives its proponents (Chapter 2), and a 1998 controversy with Paul Krugman reprinted from the columns of the Washington Monthly, which I shall return to shortly (Chapter 3). Part 2, which deals with 'Impacts on Business', presents three case studies: the abortive attempt to introduce a living wage in pre-Katrina New Orleans, which was ruled unconstitutional by the state's supreme court (Chapter 4, partly reprinted from an article published in the Journal of Economic Issues in 2002); a report on the more successful campaign in Santa Fe (Chapter 5, hitherto unpublished); and the brief Chapter 6, from a 2006 PERI research report, on the stimulative impact of Arizona's increase in the minimum wage. Part 3 is devoted to 'Benefits to Workers and Families' and presents the results of case studies from Santa Monica (Chapters 7 and 8) and Arizona (Chapter 9). These chapters draw on material from a 2002 Review of Radical Political Economics article, and two more PERI research reports, respectively. Part 4 has a single chapter, consisting of extracts from a 2005 book by Brenner & Luce on the effects of Living Wage laws in Boston, Hartford and New Haven. The book concludes with the four chapters in Part 5, under the heading 'Technical Studies and Debates'. Here Wicks-Lim writes on the 'ripple effects' of Living Wage legislation on workers not directly affected by it, summarising her Amherst PhD thesis (Chapter 11). In Chapters 12 and 13 the authors draw on previously published studies of Santa Fe and Florida to continue their discussion of the employment effects of minimum wage laws, engaging with one Aaron Yelowitz, who was called as an expert witness by opponents of the Living Wage in Santa Fe. The book ends (Chapter 14) with a comment on a paper by David Neumark & Scott Adams, published in 2003 in the Journal of Human Resources (JHR), on the effectiveness of Living Wage ordinances in reducing poverty; I infer that this was submitted to the JHR but rejected for publication. There is no concluding chapter to give an overview of the book and its contents and to weigh the prospects for the Living Wage movement. In view of the diversity in style and content of the material that the book presents, this is unfortunate.

The central conclusions do, however, emerge very clearly. On the whole, the living wage measures that are assessed here did give rise to significant improvements in the standard of living of many low-paid workers. The advantages of the wage increases did not accrue principally to the children of middle-class parents, nor were they significantly clawed back by the state through reductions in means-tested social welfare benefits. Moreover, they came about with only minimal losses in employment, and with small to minor price increases paid by the consumers of the goods and services supplied by low-paid workers. There were also productivity increases in many of the firms affected by living wage increases: higher wages did boost the morale of low-paid employees and encouraged them to work harder and/or more effectively. To this extent the living wage experience offers some support to the efficiency wage hypothesis. However, productivity did not increase sufficiently to offset the increase in costs, so that profits tended to fall, and it was therefore rational for employer groups to lobby against the living wage movement. They have begun to do precisely that, as the authors reveal.

Where does Paul Krugman come into the picture? Well, 10 years before the publication of this book (and therefore 10 years before he won his Nobel Prize), Krugman wrote a dismissive review of an early book on the living wage movement (Pollin & Luce [ 4]), accusing the authors of denying that the law of demand applied to the market for labour: 'Why increase the cost of labor to employers so sharply, which ... must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income?' (p. 37). Krugman also accused Pollin & Luce of mixing up morality with the market. Advocates of the living wage, he wrote, '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. ... [T]he amorality of the market economy is part of its essence, and cannot be legislated away' (p. 37). This, to repeat, was written by Paul Krugman, not Milton Friedman.

Pollin's reply (pp. 37–41) makes some effective points. On Krugman's argument, he observes, there would still be a market for slaves—and, he might have added, also a market for unwanted children and a Chicago futures exchange for body parts. In fact, Pollin lets Krugman off much too lightly. A future Nobel prize-winner (and media superstar) really ought to have known that the law of demand applies only in perfectly competitive markets. Under monopsony the firm has no labour demand curve, and there is no necessary negative relationship between the real wage and the level of employment. All this was established in 1933, when Joan Robinson published her Economics of Imperfect Competition (Robinson, [ 5]; Chapter 26 on 'monopsonistic exploitation of labour' is the only part of the book that she did not later repudiate).

This is not a mere academic quibble. All those who have seriously studied the labour market at any time over the past century have found that the supply of labour to the firm is not highly elastic with respect to the wage rate, except in strong booms or in wartime, when jobs are easy to find and employers do face the loss of all or most of their workforce if they fail to match their competitors' wages and conditions. In all other circumstances, workers value their jobs, and they are right to do so. All the evidence points in this direction, from the many stories of employees fighting to prevent factory closures, to studies of what happens when they fail (huge pay cuts, on average, for redundant workers in their new jobs), to the interview research of Therese Jefferson and her colleagues on what women workers do, and do not know, about 'the going rate' for their labour, and on their ability, bargaining individually, to persuade their employers to pay it (Jefferson & Preston, [ 2]; 'very little, on both counts' is a fair summary).

It is perhaps not surprising that Krugman should engage in blatant free-market ideology; he is a convinced free-trader, after all, whatever his 'new economic geography' might have suggested to the contrary. But it is a pity that Pollin did not attack him more vigorously for it. Surprisingly there is no reference to 'monopsony', either in Pollin's reply to Krugman or in the index to the book as a whole, and only one passing reference is made to Alan Manning's magisterial Monopsony in Motion[ 3], which deals with the neoclassical theory of minimum wages in great detail. It is neoclassical theory, based squarely on profit-maximising behaviour by the firm, and it leads directly to anti-Chicago conclusions. Invoking it would have strengthened Pollin's case considerably. He might also have revived the notion of exploitation in this context, to rebut Krugman's version of the is–ought dichotomy. Just as the law prohibits 'unconscionable conduct' in financial markets, in order to protect ill-informed borrowers from unscrupulous lenders, why should it not be allowed to offer protection to low-skilled workers from predatory employers?

What lessons does the US experience have for the living wage in other rich countries? The book does not address this question, and perhaps it should have done. The American political system seems designed to be uniquely harsh towards low-paid workers: any nominal increase in the federal minimum wage requires legislation, which in turn necessitates a majority for it in both Houses of Congress and a President sympathetic (or frightened) enough not to veto it. In Australia, where there has been a national minimum wage since 1907, and the UK, where it was introduced in 1997, adjustments occur regularly on the advice of a panel of independent expert advisors, without the need for new legislation. International comparisons of the outcome are notoriously tricky, given the vagaries of exchange rates and the difficulties surrounding purchasing power parity calculations, but I think it would be generally agreed that £5.73 would buy more in Britain, and A$14.31 more in Australia, than the US worker could buy with $5.15 (the hourly rate applicable at the start of 2009; it was due to rise to $7.25 in mid-2009). The Australian and UK experience confirms what Pollin and his colleagues report in this book: a living wage can be paid without significant adverse effects on employment. In both countries, unemployment had reached 30-year lows before the global financial crisis struck in late 2008, despite the relatively generous level of the national minimum wage; the subsequent rise in unemployment was entirely macroeconomic in character. Nations still debating the introduction of a national minimum wage—above all, Germany—might conclude from this, firstly that it should certainly be done, and, secondly, that it should be done well, with the minimum set to provide a living wage and subject to regular automatic or semi-automatic increases. I personally think that there is a strong case for indexing the minimum wage in Australia to a creature called AWOTE (average weekly ordinary time earnings).

These are questions that Pollin and his co-authors might like to consider in the next volume, in what will presumably be a never-ending series (for the low-paid are with us always). These questions do not detract from the importance of this book, which should be read by anyone with the slightest interest in economic justice, low pay or poverty.

References

1 Hobson, J.A.1914. Work and Wealth: A Human Valuation, London: Allen & Unwin.

2 Jefferson, T. and Preston, A.2008. Western Australia's boom economy: insights from three studies. Journal of Australian Political Economy, 61June: 181–200.

3 Manning, A.2003. Monopsony in Motion, New York: Cambridge University Press.

4 Pollin, R. and Luce, S.1998. The Living Wage: Building a Fair Economy, New York: The New Press.

5 Robinson, J.1933. The Economics of Imperfect Competition, London: Macmillan.

6 Ryan, J.A.1906. A Living Wage: Its Ethical and Economic Aspects, New York: Macmillan.

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By J.E. King

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