Thursday, June 17, 2004

The new model - Wages never rise

Title: Minimum-wage issue stirs debate
Source: News and Observer
Date: June 16, 2004

This article discusses the current proposal in congress to raise the minimum wage from $5.15 to $7.00. What is interesting to look at are the arguments being used against this pay increase. For example, from the article:
    Business owners and economists have sounded the alarm -- just as they did the last time lawmakers pushed for a raise. The U.S. Chamber of Commerce, the National Association of Convenience Stores and the National Federation of Independent Business are among organizations lobbying against the measure.
Also:
    With a $1.85 raise in the minimum wage, people who today make $7 or $8 an hour may see their pay jump from 50 cents to $1, he said.

    And that, opponents argue, isn't good for businesses, workers or the economy.

    "You can never get something for nothing," said Peter Arcidiacono, an economics professor at Duke University. "Businesses are going to hire less workers, and because they have to pay workers more they will probably also raise prices. A minimum wage is a really blunt instrument for dealing with poverty."
Also:
    Arcidiacono's response: Better to have a job that pays $5.60 than no job at all in a society with a weak safety net for the unemployed.
By following this logic, it is impossible to ever give rank and file workers a pay increase. Even as automation creates massive productivity increases, workers never will see the benefit.

Meanwhile, executive pay is rising at an incredible rate, with executives making millions of dollars per year. Just read the posts on executive pay in this blog, like this one (executive receives $78 million severance package) or this one (executive receives $25 million for 2 month's work), or this one (10 top executives at New York City's brokerage and financial firms get $231 million) or this one (executive at Lucent gets $44 million) or... you get the idea.

The point is, when you pay executives millions of dollars, that causes prices to go up and less employees to be hired too. But that is OK. Why, then, is it not OK to raise the pay for rank and file workers as well?

This quote from this article is important:
    Imagine a hypothetical company with 20,100 employees. At the top are 100 executives who pay themselves an average of $4 million per year. The other 20,000 employees make minimum wage -- $5.15 per hour -- for 2,000 hours per year of work.

    Those executive numbers sound top-heavy, but today they are not. Executive pay truly has been rising at a spectacular rate. For example, when Enron collapsed it had about 20,000 employees. According to the book Pipe Dreams by Robert Bryce:

    "Enron filed documents in bankruptcy court that showed total cash payments of $309.8 million to a group of 144 top Enron executives during 2001. In addition, those same executives cashed in stock options worth $311.7 million."

    That's more than $4 million per executive across 144 executives.

    So in our hypothetical company, we have 100 executives making $400 million per year. We have 20,000 employees making about $200 million per year. If we simply cut the average executive pay from $4 million per year to $2 million per year, we can double the pay of rank and file employees in this company.
The point here is extremely simple: The reason why we cannot pay rank and file employees more is because all of the money is being concentrated in wealthy executives and shareholders instead. This is how the concentration of wealth works. It has nothing to do with "supply and demand". It has nothing to do with "the economy". It is a massive transfer of wealth from the poor and middle class to the wealthy.

The Alternative

Here is a different way to look at this, and the correct way: If we pay rank and file workers more, they will have more money to spend in the economy. That will mean lots more dollars flowing into stores, restaurants, car dealerships, airlines, amusement parks, theaters, etc. When consumers buy more, every business benefits, and the economy grows. That growth, in turn, creates more jobs.

The way to let consumers buy more is to increase their wages. Rather than letting wealth concentrate in executives and shareholders, spread it out -- the economy would be much better off for it.

If we were to double the minimum wage, there would be explosive growth in the U.S. economy. And prices do not have to go up at all -- simply cut executive pay in half at the same time. If we did this, the U.S. economy would explode.