Living Wage, Dead Economy?

Eamonn Clark

My mind has been abuzz with economic theory lately. I’ve chosen to do my thesis on socialism, given the continual barrage of headlines about it back in the States.

It was with great interest then that I read an article at NCR about the proposal of one particular “fresh face” of the DNC about the so-called “living wage.” The author (no relation) gives a quick tour of the main encyclicals that touch on the problem, concluding that Catholics ought to be in favor of the “living wage” because it secures the right of the employee to live, so long as he is actually doing his fair share of work.

There is so much to unpack, some of which is hinted at in the NCR article. I just want to offer a few lines of inquiry… I’m happy to take critiques in the comments or through the contact tab. Maybe this economics novice is getting something egregiously wrong. (And no, disagreeing with the general idea of monetary policy doesn’t count… But I’m still happy to discuss Keynes and all that, and I have plenty to learn, so bring it on!)

If a worker is not making a living wage, how exactly is it that he continues to live? And if he can’t afford to secure his family, he is not only likely to be distracted and stressed while working, thus becoming less productive, but he will also not provide workers to the future workforce… Not enough money, fewer kids. This second point is part of the argument of Adam Smith at least, in The Wealth of Nations. It is actually usually in the best interests of employers to ensure that their employees are well-funded. His point about kids later entering the workforce may not be as evident an effect to employers in the mammoth economy of the USA, but in developing countries or even just small countries it is more clearly important. In the long-term, it is important in both large economies and in small ones… Just look at the panic in some corners of East Asia about declining birth rates: soon, there will be no workforce!

If the living wage is to be paid, who decides how much it is, and who enforces it? This is quite critical and calls attention to the principle of subsidiarity. Socialists of the American variety would typically argue it should be the federal government. (And off to the races we go with the “central planning” which Hayek warned about so ominously in The Road to Serfdom.) Maybe some would say the state government. Suppose we tried this – are the living expenses at all the same downtown as in uptown? In this neighborhood of downtown as that one? In the city or in the countryside? Etc., etc. No. So the smallest possible unit ought to decide, if there is to be a decision at all. Given the possibility of easy transit today, it is just not feasible for even the most proximate governments (i.e. the county, the city council, etc.) to make a good analysis that won’t inevitably leave many people stuck without the relative purchasing power that was desired for all, or won’t destroy jobs by making employment altogether too expensive to continue at the current quantity.

Taking for granted an appropriate determination of a living wage for some circumstance, what is the effect on the prices of goods? If we allow the market to continue untouched outside of wage-regulation, and wages go up, it seems quite obvious that, over time, prices will rise to match the augmentation of wages. So in the best case scenario, there is a fleeting moment of prosperity, and then we are back to normal. Best case. Worst case, all kinds of price ceilings are implemented to control the purchasing market, and we have set ourselves up for stagflation, where everybody loses. Production will plummet, jobs will be lost, and the money made from that “living wage” imposed from on high will become increasingly worthless.

Is it possible to exploit workers unfairly at all through low wages? This question is the natural rejoinder to the foregoing analysis, wherein I’ve implied that the market should basically be left to itself to decide wages. I return to Adam Smith: sometimes, employers hold the cards, mainly during times of economic bust, when there is low demand for workers. Other times, workers hold the cards, mainly during times of economic boom, when there is high demand for labor. Workers and employers should both be free to form natural unions among themselves to negotiate wages and terms of employment. Left to itself, the market tends to find the right spot which assures long-term stability to the economy, avoiding the pitfalls of monetary policy and other artificial constraints imposed by far-away bureaucratic geniuses. So, if a person is willing to work for a low wage, it is a fair market price. Given all this, it is still possible to take unfair advantage of a worker’s desperation for income. (Something similar would hold for lending at interest, but we won’t get into that discussion here.) While it’s true that a low wage is better than no wage, there is a virtue involved in the act of employing people which requires a basic level of care for the employee, which we might annex to “beneficence.” (Attached to this would be a duty not to employ too many people under one master… The “order of charity,” which I have discussed elsewhere, is another big problem with socialist thought.) However, we cannot legislate against all immorality. Even though exploiting workers through unjust wages is one of the four sins which cry to Heaven for vengeance, it does not seem that civil law is usually the appropriate measure to take, as it can have such terrible unintended consequences. Instead, employers need to be shown that it is in their best interest to treat workers well, and workers need to help each other by forming charitable organizations, stable families and neighborhoods, and so on. These measures will either alter the market price of labor, or the latter will at least help provide a safety-net for when times get tough. Finally, following MacIntyre’s lead, this whole discussion would be helped by jettisoning the language of “rights,” which inevitably contradict each other, and to speak instead about virtues.

At any rate, we cannot build Heaven on Earth by government fiat. The government playing deus ex machina with economics typically leads to disaster. A freer market will tend to be a healthier market in the long term, even though some people will abuse that freedom at the expense of others. Let’s leave the vengeance to God rather than wage-planning to bureaucrats.