Living wage an economic issue not a moral one

The “living wage” movement continues to draw both opposition and support, fueled in part by media coverage of demonstrations and strikes by fast-food restaurant workers.

Now mixed in with the higher minimum wage movement, the blended issue also draws energy from broader concerns about income inequality in our economy as well as generalized worries about jobs, living costs and immigration.

The “living wage” is a concept, not a law, and includes the cost of goods and services believed necessary for individuals and families. The Massachusetts Institute of Technology has compiled its calculations of the living wage for most areas of the U.S. and the data for Snohomish County may be found at tinyurl.com/MITLivingWageSnoCo.

At this point the wage issue remains a political fight for the public’s attention, characterized by efforts to describe it as a battle of good vs. evil. The underlying question, though, is really, “Who benefits and who pays?”

Economics provides a guide, even in the good vs. evil balance. It may seem that paying a higher wage has the moral high ground, but where is the morality in depriving one person of work so that another can support a family of four on an entry level job?

There is no doubt that an employee would benefit if he or she were paid more to do the same work. The economics of the industries involved, though, means that paying the higher wage won’t be the end of the story.

The outcome would depend a lot on how the wage increase was achieved. If the worker-centers function as quasi-unions and are able to get specific employers such as McDonald’s or Subway, for example, to raise wages, we will get one result. If, instead, the worker-centers pursue a political strategy and succeed in getting the federal, state or local government to mandate a wage increase, the result will be very different because all employers and workers in that jurisdiction will be affected.

The industries with a concentration of entry-level jobs and low wages are typically in the lodging, food production, restaurant and retail merchant industries. As individual business enterprises they wouldn’t seem to have much in common, but each operates in an environment that is highly competitive, with constant downward pressure on prices and profit margins.

With this industry structure combining with the economic forces in place, what would be the most likely outcome of a mandated wage increase?

The initial effect would probably be an attempt to “test the market” by raising consumer prices enough to cover the increased labor cost. This would almost certainly result in some loss of sales volume, though, and the affected businesses would begin to back off somewhat from the initial price increases, but they would likely remain higher than they had been.

At the same time, employers in the fast-food sector, along with retailers and others with large entry-level wage workforces, realizing that they will have to absorb some, or all, of the increased labor cost, employers will freeze or cut back new hiring and will seek every way possible to replace jobs with technology.

Marginal firms, who find themselves unable to raise prices enough to absorb the costs or afford the capital investment in labor-saving technology, would be forced to drop out of the business. Higher wage costs would also favor business consolidations, further reducing jobs – and competition as well.

The workers who remain would enjoy higher wages but the overall level of employment in the country would decline — unless a new industry opens up job opportunities for the displaced workers. This has happened frequently in U.S. history, but is highly unpredictable, especially in the short run.

This is classic labor economics. The highly visible benefits of collective bargaining power go to the remaining workers who still have jobs, and nearly invisible costs are borne by others; those looking for work and, overall, the American economy.

It’s not really about good vs. evil. It is about self-interest and the degree to which the public interest and the economy are affected by that self-interest. A labor union is no more evil, or good for that matter, than an employer is. A labor union does not have the overall interests of the American economy at heart. That is not its obligation, its responsibility, or its function. It represents the interests of its dues-paying members, just as the employer represents the interests of the firm’s owners.

It’s up to us, then, to look out for ourselves and the economy. If individual employers want to raise wages, or are pressured to by organized labor, that is their business and their decision. When it comes to legally mandating wage increases, though, it’s up to us, the public, to evaluate the situation and make our own decision in the public interest.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.

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