February 14, 2013
By Oren M. Levin-Waldman and Paul Lerman
As the Nation continues to limp towards recovery, one problem that persists is long-term unemployment. This problem reared its head recently with passage of a right-to-work law in Michigan. But passing these laws in the name of greater freedom does not address the real problem; rather it creates a distraction from the issues that have for too long been ignored.
The traditional fiscal and monetary approaches are limited because they fail to address the fundamental problem: the lack of demand. Individuals can only demand goods and services if they have the financial wherewithal to do so. Wages, however, have been stagnant for more than three decades. If the Nation wants to grow the economy, wages need to increase.
Mandatory wage floors, such as minimum and living wages, are no doubt one approach, but they engender considerable opposition because they usually have ripple effects and force employers to adjust the wages of those throughout their respective internal wage structures. Another approach would be to encourage employers to pay their workers, especially low-skilled and low-wage workers “living” wages principally because it is in their interest to do so. Employers voluntarily paying their workers a living wage would essentially be paying an efficiency wage. It could be argued that workers will become more efficient, hence leading to greater loyalty and improved productivity, because they feel better about their jobs. In short, their morale improves, and so too does their productivity. Workers who are paid better have less incentive to leave, thereby reducing employer turnover costs. However, in either approach there is likely little direct observation of increased value for increased wages.
A better path leading to increased employee wages is to upgrade employee skills thereby justifying increased wages. It is widely reported that increased education leads to increased earnings presumably because education increases skill levels and thereby increased employee value to the employer. According to the American Society for Training and Development (ASTD), in its State of the Industry 2011 report, American industry spent $171.5 billion on workforce education and development in 2010. On an individual employee basis, companies are reported to have spent an average of $1,228 in direct expenditures per employee. Assuming that the average employee works 40 hours/week or 2000 hours per year the direct expenditure is $0.61 per hour per employee across all employees. Closer inspection of the ASTD data indicates that only 4% of the total expenditure is designated to be for “Basic Skills” and 7% for “Interpersonal Skills” – categories likely to include low wage rate employees. Thus, the hourly expenditure for these employees is likely lower than the average. The data suggests that a potential strategy for increased wages is for industry to direct additional education and training resources to employees at the lower end of the wage scale. Higher employee skill levels would be expected to put upward pressure on wages in consideration of increased employee value.
To bring the Nation out of the current economic stagnation requires a partnership between the public and private sectors. Simply relying on the private sector alone isn’t going to solve the jobs crisis, but neither are large government expenditures in government programs. Rather, employers need to continue investing in their workers as part of developing human capital, but the return on that investment needs to be shared with employees through rising wages. Some believe that the wage component would require a push from the government in the form of a policy that pegs the minimum wage to the inflation rate. However, a statutory minimum wage would likely be viewed as coercive and, some would argue, actually have a detrimental effect on employment.
A better approach with the potential for having the same effect would be for government to encourage firms to invest in worker education and training through targeted worker development tax credits. By investing more in worker education and training, employers would be adding value to their employees. This is turn would encourage employers to pay an efficiency wage in recognition of the higher skill level of their employees. Having invested in their workers, employers will want to keep their workers and would pay a higher wage to give them incentive to stay. Employers will naturally be hesitant to incur the turnover costs of recruiting new employee after investing in their workers.
Unions, instead of trying to refight the battles of the early 20th century, should be looking for ways to encourage development of their members. Unions should push for worker education programs as part of collective bargaining. As much progressive legislation has historically come about from the lobbying efforts of organized labor, unions might want to begin lobbying for policies that will be beneficial to both workers and employers. Targeted tax breaks for worker education and training would be a good place to start. This approach could be a win-win for all.
The result of rising wages will be an increase in effective demand for goods and services, which in turn should lead to the creation of even more jobs. And as an additional bonus, more jobs would allow the public sector to reduce expenditures for public assistance and other social welfare programs.
Oren M. Levin-Waldman is professor of public policy at Metropolitan College of New York and author of Wage Policy, Income Distributionm, and Democratic Theory (Routledge 2010). Paul Lerman is an Independent Corporate Educational Consultant.