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  • Writer's pictureOren Levin-Waldman

Serious Economic Policy Should be Predicated on Economic Development

As Bernie Sanders appears to be heading towards front-runner status, any number of people are expressing their shock and dismay over electing a socialist. Instead of separating themselves from Sanders ideologically, the rest of the candidates bend over backwards to show how progressive they are too. Now Bloomberg is endorsing unions, which, of course, is not something he did when he was mayor of New York. In fact, an editorial in the Wall Street Journal claimed that Bloomberg was no different from either Sanders or Warren. It then went on to argue how right-to work laws have benefitted the economy and minimum wage laws have hurt employment.

Only one who views the minimum wage through a very narrow prism could seriously believe this. Moreover, only one that thinks that it is preferable for teenagers to have part-time work than for even single parents with children to support could seriously make this claim. The minimum wage is just one labor market institution that serves to bolster wages, and as I have previously argued in this space, it may be beneficial to the middle class.

Opponents of the middle class are not concerned with the middle class. On the contrary, their objective is to boost profits by suppressing the wages of those who lack bargaining power in the marketplace. But in no way should this statement be misconstrued as anything remotely resembling an endorsement of socialism. If anything, a labor market with labor market institutions that protect workers is consistent with the broad outlines of a market economy.

Let’s begin with the first question of just what kind of society we want to create. We can even acknowledge that some might lose their jobs, but the extent of job loss is not entirely clear and which subset of the labor market will lose is open to debate. It is generally accepted that while an increase in the minimum wage will lead to lower employment among teenagers, it is not true for older workers. But assuming that there is job loss, from a policy perspective the question is whether there are overall societal benefits that outweigh the costs.

Shouldn’t we as a society want adults to earn enough to support their children? Is it really preferable for teenagers to have low-paying jobs even if it costs society in the form of social supports for these adults who otherwise don’t earn enough to be self-sufficient? We are told that raising the minimum wage will result in higher prices, but if we all have to pay for additional social supports to subsidize profits, then we are all paying through higher taxes.

The standard argument against the minimum wage rests on who earns the minimum wage based on a narrow construction of the minimum wage. If constructed in terms of who earns the statutory minimum, then only two percent of the labor market earns it, and most of those earners may be secondary earners, meaning they aren’t the primary earners in the household. That is, they may be teenagers or spouses in households with primary earners. It is possible that if the latter, that secondary income may be essential to the maintenance of the household.

What opponents miss, and maybe they do so deliberately, is that the statutory minimum wage is nothing more than a reference point for the larger low-wage labor market. Those who earn around the statutory minimum wage can be said to be earning an effective minimum wage. Now the effective minimum wage population is considerably larger than the merely two percent earning the statutory minimum wage.

The effective minimum wage labor market is close to 20 percent of the overall labor market and many of these workers are older and are more likely to be single mothers with children. Of course, this feeds into our first question of just what type of society we would like to create. But it actually feeds into a larger question that none of our candidates are addressing. That is, should economic policy be merely about economic growth or development?

The argument that the economy is strong is based on the assumption that we have been experiencing growth. But growth can produce a strong stock market without necessarily resulting in serious wage growth. Economic development, on the other hand, entails investing in human capital and creating long term jobs. That a significant number of people voted for Trump in 2016 may have had much to do with worker anxiety over a changing economy which only resulted in their displacement. The desire to bring back manufacturing jobs that were lost also spoke to a desire for new economic development.

The logic behind free college is that enabling more people to attend college may speak to a policy of human capital development. But that, in and of itself, is not enough. There absolutely needs to be a strengthening of labor market institutions. Making it easier for labor unions to organize through repeal of right-to-work laws along with a minimum wage that keeps up will do much to bolster the middle class, especially through contour effects. And to the extent that it does, that would represent a step towards more serious economic development.

If the effect of raising the minimum wage is to force wage up through the distribution has the effect of forcing employers to provide more on-the-job training so that productivity increases, then the effect will have also have been to force employers to invest in human capital development. That is, we are talking about an economic policy revolving around the high-road rather than the low-road. For too long, the country has been pursuing low-road policies of short-term growth and low wages.

All of this becomes viable if coupled with a single-payer health insurance system whereby employment would be severed from health insurance. Because workers would no longer be locked into their jobs, they could leave their jobs for better paying ones, which also would exert an upward pressure on wages that for too long have been stagnant.

While critics are quick to talk about the adverse effects of raising the minimum wage, a better high road economic strategy might obviate the need for a legislated minimum, as wages would naturally be forced to rise on their own. Instead, of talking about all the new programs which will impose new taxes on the middle class, why isn’t anybody among the political classes seriously talking about pursuing the high road?

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