Wage Hikes & Labor Strikes: A Winning Macroeconomic Scenario?

While checking the daily news late last week, the first thing to catch my eye was a CNNMoney article reporting that fast-food workers were again striking across the United States for a $15-an-hour minimum wage.  It appears that, while waiting for any forthcoming legislative changes that might never materialize (and probably won’t at the federal level, at least not soon), workers are choosing to walk off their jobs in order to pressure their employers to give them a higher wage. Currently, the Federal Minimum Wage is $7.25 an hour, where it as been for since July 24th, 2009 (although states and localities also set their own minimum wages, so the actual minimum in a given location may vary).  Workers argue that it is a matter of workers’ rights to a “decent” wage, to help them care for their families, etc.  Although I honestly do sympathize with the difficulties many lower-income people in this country face, I am not so sure that attempting to force their employers to raise the rates will ultimately benefit them and the country as a whole (although bargaining is certainly more preferable than one-size-fits all legislative mandates and price floors).

First, the usual classical liberal argument: forcing employers to raise wages could deter them from further hiring (even if worker productivity is sufficient for employers to absorb higher rates with little impact).  Even if fast food chains can technically “afford” to pay current workers more without firing anybody, the added cost of hiring could disincentivize them from doing so (or could even incentivize layoffs).  The workers that remain might benefit, but at the expense of others who are “shut out” (e.g. unemployed).  Macroeconomically, too, the costs could largely cancel out the benefits: any extra consumer demand resulting from workers receiving a higher wage would be offset by less demand from newly unemployed people (or people who otherwise would have found a job).  The effect could  be similar to the theorized outcome of above-equilibrium minimum wage hikes: higher unemployment, slower hiring, and a less flexible labor force (see first chart below).



Second, if wages are bargained “too high”, this could create a dependency scenario where people continue to work in the fast food industry without any incentive to pursue higher value-added careers that require more complex skills, depriving the economy of skilled workers and limiting future potential output.  For living standards to continue rising in the long run, workers must be able to specialize in new and innovative industries, many of which never existed before.  Low wage jobs exist (or, in my opinion, should exist) merely as a stepping stone up the economic ladder; indeed, I think the low wages themselves act as a necessary disincentive from people becoming dependent upon them.

Lastly, as harsh as it sounds (and as The Economist has previously pointed out), many of the low-skilled jobs being performed by fast food workers are probably replaceable via automation and new technology.  I believe the only things holding back big fast food chains from replacing their workers with automation are:

1) a recognition of consumers’ desire for human interaction for a quality fast-food experience

2) a desire to avoid being cast as unsympathetic to the plight of fast food workers, which could hurt the corporate image if mass layoffs are announced

3) the use of some workers as an established way of doing business

What’s a policymaker to do, then?  If we really want to help workers, I think we should be aggressively training them to perform emerging higher value-added jobs (computer engineering, programming, supply-chain management, etc).  The problem is, student loans provided by the private sector are often too costly/unobtainable for low-skilled workers (as there is much more risk involved).  At the same time, having the government (or state governments) further subsidize student loans for post-secondary education might further inflate college tuition unless new measures are enacted to ensure college competitiveness to hold costs down.  The government could fund alternative forms of education (job training like apprenticeships), which are unfortunately still quite scarce in the United States.  However, as the financial crisis and countless other crises have demonstrated,  it must be ensured that beneficiaries have some skin in the game for the programs to succeed.  It must also be recognized that even with such programs, not everyone can become a high-skilled worker.  Does this mean we will have a permanent class of unemployed or underemployed people?  Maybe, though I tend to be rather optimistic: historically, the economy has tended to create unforeseen opportunities for everyone, though the transitions are often rough.

Whatever the many governments within the United States decide to do policy-wise, the question of what corporations should do in the face of striking workers and demands for wage increases must be addressed soon.  Already, several McDonalds workers have been arrested this week after protesting for a $15-an-hour wage.  Further strikes and arrests could be economically disruptive at a time of historically weak economic growth.  The question is, will companies cave in to worker demands, or continue to hold their own?  The answer could end up reshaping the norms and trends of American wages for years to come.



The Inefficiencies of being Efficient

One of the most noticeable (and controversial) aspects of capitalist economies is their emphasis on productivity and efficiency.  Use and allocate resources wisely, with the most output for the least amount of input, and you enable a rise in living standards.  It is an underlying structural characteristic of all developed economies, especially that of the United States.  Here, an emphasis on efficiency permeates deeply into our culture.  We value punctuality, a strong work ethic (phrases like the “Protestant Work Ethic” come to mind, though it’s unclear if a relationship exists and, if it did, which caused what).  Our government has a strong military emphasis, where obedience, stealth, and stamina are a necessity.  Yet efficiency can, paradoxically, also lead to massive inefficiencies, potentially leaving us with massive new problems to deal with.

One obvious example of this is US consumerism.  The wealth that our economy has generated over time is enormous and, during periods when it reaches the “middle class”, extra disposable income has lead to explosions in consumption and the purchases of things that before were never considered “necessary”.  Wealth & income begotten by efficiency lead to an inefficient consumption of resources; we spent simply because we could.  A big example of this is the food situation in America.  People purchase enormous meals that they often do not finish, leaving entire plates full for the restaurant to throw out.  Of course, we eventually correct for our excesses for a while, with the pendulum swinging back towards efficiency.  But because technology has driven a fair amount of productivity growth, this lessens the need for a painful change in behavior.  Instead of consuming less, we can simply produce more – not necessarily from increased labor, but from more and better capital that either substitutes or complements labor.  The only reason we still have painful readjustment periods is because, despite unprecedented productivity growth and widespread income growth (for a fair amount of US history, at least), consumption has a way of growing so fast that new debt must be taken on, necessitating painful corrections.

There are other, less obvious, examples of when efficiencies can beget inefficiencies.  One way is that you reach a state of efficiency in an inefficient way.  For example, government spending has long been the target of the public, especially American conservatives, of being wasteful and unproductive (especially compared to the private sector).  Their ire is often directed at legislators, especially when it is revealed that no one has read bills that are passed and funding for special projects slips through, and fiscal conservatives regularly insist that officials comb through every appropriation and spending item.  However, the sheer amount of time and resources to investigate many of these expenditures could arguably outweigh the cost of funding some special projects.  Although government spending would surely be more “efficient” if funding for  “wasteful” projects were eliminated by having legislators look at every item in detail, it would come at a huge opportunity cost: to pass important legislation and go about the business of governing.  It would also involve more time and resources for investigation, and a setup of parameters of what truly makes a project “wasteful”.  Besides, the creation of specialized bureaucracies (another indication of a capitalist mindset – keyword “specialization”) have helped to target, control, and track individual governmental endeavors, helping to restrain inefficiencies.  The lesson?  Sometimes, its ok for spending to be increased, even if it is redundant or wasteful – because the cost of finding inefficiencies could outweigh the benefits of actually eliminating them.  The problem is, we won’t always know when this is the case – and finding out when this is the case could also be inefficient and a waste of resources.  Ironically, if we want to continue to have a government, we will have to accept that it will be wasteful – and that this waste might be the most efficient option we have.

The question is, at what point does the market-oriented mindset of efficiency paradoxically defeat itself?


The Next Phase of Political Globalization

This is just one of many topics I’ve been thinking about lately (the theme generally varies randomly day by day), and I’m hardly the first person to address it, but I would like to note that I think the world has begun to to enter another, accelerated phase of “political globalization” over the past couple of years.  By political globalization, I mean an integration and synchronization of governmental policies, state sovereignty, territorial jurisdiction, and boundaries.  However, I’m not exactly talking about a “one world government” or “world state”, at least not yet.  Rather, I think political globalization will first happen in fragmented and regional segments.  Since they tend to share many similarities, it would make sense for regions to be the first level to experiment with an integration and synchronization of the functions of individual member states.

It is hard to deny that political globalization has already happened to an extent, largely as a direct result of waves of economic integration that have made the happenings in one economy quite significant to the performance of another.  As the globe has unified into regional economic blocks or as one cohesive unit, there has been significant pressure to coordinate the policies (especially the economic policies) of individual states. This can be clearly seen in the the case of Europe.  It is widely agreed that the southern “periphery” region near the Mediterranean will continue to pull down European growth overall until wages there are pulled back in line with productivity.  Until that happens, however, many have urged the economically stronger “north” to consume more and for governmental fiscal policies to become expansionary to prop up demand in Europe overall until the periphery regains strength.  This has been resisted thus far, especially by a cautious Germany that still bares the scars of its hyper-inflationary episode in 1920s Wiemar Republic.  However, as European recovery continues to languish, pressure continues to build for the north to not only step up but for a “fiscal union” to be created to complement the existing monetary union.  European nations have already given up much sovereignty when joining the European Union (EU); it seems ever more likely that further losses in sovereignty are necessary to preserve the union.

This convergence of policies will not be confined to Europe, however.  Rather, the economic globalization of the past few centuries has transformed many economies into one, though they continue to be impacted by many often contradictory policies and politics.  The Global Financial Crisis demonstrated the need for further political globalization to occur; the United States “sneezed” and the rest of the world caught a cold, resulting in several international conferences that called for a global implementation of Keynesian-style fiscal stimulus across several states to quickly re-inject falling economic demand.  After the crisis faded, industrialized nations further realized that a coordinated revamping of financial regulations, including new minimum reserve requirements and capital controls, were necessary.  This new-found synchronization of global politics will not fade, and will in fact be aided by the structure of capitalism itself.  Since capitalism values efficiency, anything that makes economic transactions more difficult – such as borders, differing policies, different legislation & regulations, etc. – will be fair game for phase-out or elimination.

It isn’t just economic forces that will be inducing further political unification.  As diverse peoples increasingly interact with one another due to advances in communication, transportation, and wealth, I believe that the “us” vs. “them” mentality that differentiates states will slowly fade, even if not entirely eliminated.  Increasingly, an identity as being a “citizen of the world” (cosmopolitanism) has gained some traction, with people becoming less likely to identify with the state they reside within/are formally a citizen of.  This increases the likelihood of further political globalization; as people increasingly recognize one another as fellow human beings, there will be pressure on governments to harmoniously synchronize their policies and politics to match one another.  Eventually, this could lead to a proliferation of regional supranational unions, such as the European Union, and perhaps one day a global union.  Such efforts will be further strengthened by the gradual realization that ironically, though tasked with the security and protection of their citizens, the current Westphalian nation-state system has in many ways decreased their security.  The “us” vs. “them” mentality states and state borders help to create often leads to vicious competition and/or security dilemmas (think realism and neorealism) that arguably can make the world worse off than it otherwise would be.  People may take this as an indication that a harmonization of political identities, borders, etc. is necessary.

This isn’t to say that regional or a one-world state is inevitable, or even probable (especially not in the near future). The nation-state system has been entrenched for hundreds of years now, and nationalism continues to exert strong influence (a la Russia, or even America following 9/11).  Additionally, most people (myself included) are weary of the idea of abdicating national sovereignty to a higher political entity, for multiple reasons (loss of a cherished national identity, pragmatism, religion, etc.)   Regardless, however, the forces that are shaping the world today and a widespread reevaluation of the Westphalian system will undoubtedly lead us to a new phase of political globalization and an overhaul of how states interact with one another in the future.  The question is, are we prepared to adapt?

The Unfinished Business of Healthcare Reform

I plan on finally resuming regular postings on here by next week.  Before I begin, however, the following is a post I made in January 2013 on MSU Roosevelt Institute’s blog.  It argues that healthcare reform in the United States is far from finished, and proposes that new federal measures be enacted to help address chronic deficiencies within the system.  While it is certainly not comprehensive, and does not necessarily reflect my current views on what needs to be done in regards to healthcare, it still provides a good framework for an in-depth discussion on the subject.

 Of the many issues facing the United States today, few are as controversial as the issue of healthcare.  For years, debates have raged across the country as to how to properly address perceived deficiencies within America’s healthcare system, with opinions severely polarized as to how healthcare should be delivered, payed for, and what role (if any) the federal government should play. The recent passage of the Patient Protection and Affordable Care Act (PPACA) on March 23, 2010 seems to have only intensified the debate further.  This should not be viewed as a negative consequence, however; quite the contrary.  For healthcare reform is – and should be – an ongoing, gradual process; no single action can solve all the problems immediately.  Indeed, given the importance of an adequate healthcare system to the well-being of societies everywhere, it would be desirable for the debates to become a regular part the national status quo.  Truly, the importance of a good healthcare system cannot be understated: not only does it help to increase the overall health and wellbeing of a nation’s citizenry, but it also helps to ensure that they remain active and productive members of the economy as well.  It is this higher productivity that is vital for sustained economic growth and higher living standards for everyone.  Unfortunately, as any American will readily admit, the US system does have some serious flaws that threaten this vision unless bold modifications are undertaken.  Specifically, these flaws include exceptionally high healthcare costs (and high cost growth rates), a glut of uninsured individuals, a lack of insurance portability, and perceived threats to quality.  Despite the passage of PPACA (whose vices & virtues this post will not be discussing), many of the roots of these overarching weaknesses remain unaddressed.  What are they, then?  Although the causes are many, three of them especially stand out.  First, because the federal government has exempted employer-sponsored healthcare benefits from an employee’s taxable income, many employees are encouraged to select more health insurance/costlier coverage as opposed to higher wages, and effectively feel insulated from the cost (thinking they are spending someone else’s money).  Because this tax exemption does not apply when people attempt to buy individual insurance, the federal government is also effectively incentivizing people to stick with employer-sponsored insurance as opposed to the (more portable & transparent) individual insurance plans.  A second major cause of the US’ healthcare problems is the inability to buy insurance across state lines.  This effectively creates localized monopolies that drive up the price of insurance.  Lastly, the negative consequences of American eating & exercise habits are a major burden on the system.  Given the entrenched nature of these causes, it is naturally quite difficult to find solutions that are deemed acceptable to everyone across the political spectrum.  However, because they address elements of concern for both sides of the aisle, the following proposed solutions, when considered, do have the potential to gain widespread support:

  • Remove the federal tax exemption for employer-sponsored insurance; cut income taxes to offset cost.  Repealing the distortionary tax exemption will decrease artificial demand for healthcare (thus lowering cost pressure, something both sides would like) and will encourage the individual purchase of portable plans. It has the added benefit of hitting high earners the hardest, which should make it more appealing to liberals.  A cut in income taxes to offset the cost would appeal to conservatives, and such tax cuts have the added benefit of being adaptable to maximize progressivity.
  • Encourage states to loosen barriers that prevent the out-of-state purchase of health insurance by offering them increased Medicaid funding in return.  Loosening barriers to allow cross-state purchases of health insurance would encourage competition between insurance companies, lowering costs.  These lower costs have the added benefit of offsetting the need for increased Medicaid funding.
  • Mandate and appropriate funding for the annual creation and delivery of specialized pamphlets that notify citizens of the importance of healthy lifestyles, allow them to easily estimate the impact their habits and choices have on both their own wellbeing and society’s, and offers guidance on the do’s and don’ts to becoming healthier.  The cost of funding should be offset by tax increases or spending cuts elsewhere in the budget.

When combined, such reforms not only have the potential to gain substantial bipartisan support, but will make great progress in permanently strengthening America’s healthcare system for many, many years to come.

– Tyler Leighton