Low Wages are the Enemy of a Strong Domestic Economy

President Obama's push to hike the federal minimum wage to $9 an hour has renewed debate about the role of regulation when it comes to human capital in an economy. Companies clearly want to pay as little as the market for labor will allow; however, there is no denying that a variety of factors have conspired to see that the wages of most workers have been flat for going on a half century, or that it's been bad for our economy as a whole.

In terms of market dynamics, two major forces have put downward pressure on American wages: outsourcing and automation. Relaxed trade regulations in the era of globalization have encouraged many American companies to move factories overseas where the cost and standard of living is much lower and pollution standards are nearly nonexistent. High-speed internet has compounded that dynamic by providing low-cost video and telephone services, which opened the floodgate for occupations in fields like customer service and consulting to also be off-shored, when they were previously thought to be immune.

Meanwhile, rapidly-changing technology has continued to allow companies to replace more and more positions with robotics, especially on the low end of the economic spectrum. Economic theory had long held that technology could only open up more opportunities, as jobs lost were quickly replaced by new ones, when companies invested such savings in growth. But today, $1.3 trillion in cash sits idle among corporations, while unemployment remains near historic highs. 

More Americans than ever are living below the federal poverty line. Toll booths continue to shed human operators for cameras and computers, retail stores continue to offer more self-checkout lanes and the crunch on public sector budgets have forced many agencies to do the same work with less people. American companies continue to enjoy record profits, while investing much of the money that isn't idle in foreign markets. Meanwhile, the wealth gap grows and more Americans than ever are forced onto an already overburdened social safety net.

This isn't the first time that changes in markets and technologies have resulted in an economy which was healthy at the top, while still failing to provide adequate opportunities for enough citizens to earn a living wage. In fact, it's been rather typical. The difference is the mechanisms that are put in place to help bring at least a dose of humanity to the imbalances that naturally accompany growth in unfettered capitalism.

During the gilded age, we pretty much took the notion that as long as the alternative was starving in the streets, people would work under any circumstances offered and at any wage. This kept the cost of labor low, but also hampered demand. America experienced its greatest prosperity during an era in which the working class had won its most equitable arrangement. 40-hour work weeks, costly overtime and reasonable retirements all helped to keep more people employed, as the work was spread out. 

What has changed most in the modern economy is a drastic increase in capacity. We can make far more of everything with far fewer workers. This has driven up profits, but because workers have not shared in the fruits of their increased productivity and cannot consume enough of what we are capable of producing, the enormous surplus of production capacity is helping to stymie growth. As a result, we don't have enough consumption capacity, or speaking more plainly, consumers don't have enough disposable income to fuel growth in an economy where 70 percent of GDP comes from us buying things.

An economy can get stuck in a trick bag when wages are low and unemployment is high. With excess labor, there's no immediate benefit to individual companies who pay more than they have to. In fact, they're likely to find themselves at a competitive disadvantage. This is where good government can enact policies which move them in a healthy direction all at once, providing an umbrella of protection. But while the governments of any developed economy routinely take steps to help correct market shortfalls, any sort of mechanism deployed to correct wage inequalities tends to spark knee-jerk ideological reactions from many Americans. At the end of the day, we take measures to correct pricing in nearly every market imaginable from milk to electricity, and until we figure out a way to ensure that the new economy provides living-wage job opportunities for more Americans, previous standards of growth will remain unattainable. 

Walmart has been mumbling about horrific February numbers just as low-wage workers begin to experience smaller paychecks as a result of expired payroll tax breaks. Unlike the wealthiest Americans, who often stockpile cash or invest it in foreign markets, low-income households tend to spend close to 100 percent of their income on the exact sort of commodities that drive growth. When they get pinched and have to cut back, it loudly reverberates throughout the enitre economy. Conversely, putting more spendable income into their pockets is the fastest way to jumpstart consumption, while also working toward a more humane society and reducing the chances of social strife.

President Obama said that no one working a full-time job in the wealthiest nation in the world should live in poverty. He's right, but unfortunately even $9 an hour won't prevent that from being the case. Nonetheless, it's at least a start, and pushing up the bottom will have a ripple effect among low-income workers as $9 an-hour jobs begin to pay $11-12 in order to draw the better skilled labor. Will some companies cut jobs as a result? Perhaps, but the overall effect of millions of low-wage workers getting additional disposable income, nearly all of which will be spent into the economy, will be increased consumption folllowed by sustainable growth. If we can do that and put a dent in the amount of children who go to bed hungry, who could be against it? If corporations are humans, as we've been told is the case, it should be fair to expect that they act humane. Paying at least close to a living wage would be a good start. 

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. You can also follow Dennis on Facebook. Sign up for a free email subscription and get The Bradenton Times' Thursday Weekly Recap and Sunday Edition delivered to your email box each week at no cost.