Need employees? Pay a living wage
When I was practicing law, clients would often tell me “I couldn’t sell my house.” To that statement, I had a stock response: “Yes you could sell your house. You can always sell your house. The question is whether you can sell it for the price you want.”
The recent whining we are hearing from the business community reminds me of that statement. To their whine that they can’t hire enough employees to operate, the immediate rejoinder should be “at the price you’re willing to pay.” Because the reality is that many businesses are not willing to pay people enough money.
The alleged culprit is the higher unemployment benefits granted laid off workers as part of the Covid relief laws. According to recent analysis, as much as forty percent of workers earn more money from unemployment than they do from working.
The response from conservatives and much of the business community has been predictable: end the higher unemployment benefits. If we do that, people will be forced to go back to work. Indeed, even though it costs the state nothing to provide the expanded unemployment benefits since the federal government is footing the bill, at least two states have taken it upon themselves to unilaterally end expanded unemployment benefits for their residents.
Not terribly surprisingly, these states are run by Republicans. What is shocking, but unfortunately also unsurprising, is that many of the people who have been hurt by this change will vote those same Republicans back into office.
The response of many Democrats, including President Biden, has been to take a defensive posture, to claim that remaining unemployed in this crisis can be due to a number of factors, including lack of childcare and fear over the safety of their family. And indeed, research has generally supported the argument that few people forgo jobs to remain on unemployment, no matter how generous the benefits.
I for one, however, will not blanch at the reality. As a liberal, former small business owner, and student of economics, I believe there is a significant group of the unemployed who are not actively seeking work because they earn more in unemployment benefits than they would get in wages. The response to that realization, however, should not be to cut those benefits. Instead, the response should be to raise people’s wages.
In a properly operating labor market, labor scarcity should drive up wages. It’s simple supply and demand. The fact that we’re not seeing such a dynamic, however, is evidence of the dirty secret of America’s labor market: it is not a properly operating market.
Markets require that two parties be able to bargain over the value of the goods or services one will provide the other. Our labor market, however, has given all the power to one side of the negotiating table: the employers.
As a result of industry consolidation, laws eviscerating organized labor unions, and a widespread view of employees as an expense rather than an asset, employers engage in a take-it-or-leave-it approach to wages. In short, they offer substandard wages, hire whoever comes in the door, and then complain about the quality of their workers. And if they can’t find workers willing to debase themselves to their demands, they lobby the government to impoverish people until they have no choice otherwise.
Economists call situations like this where one party has overwhelming, even monopolistic power, market failure. And that’s exactly what we have here.
The solution to market failure is simple: government regulation. That’s why most utilities are regulated. As a utility user, you are rarely in a position to bargain over the source of your electric or gas. As a result, the government makes sure the utilities don’t use their market power to gouge you.
In one sense, the expanded unemployment benefits are a form of market intervention by the government. Essentially, employers who want to hire workers should offer them more money than those workers would get in unemployment benefits. In that way, the government tried to become a market participant to correct for the market failure.
The problem is that the employers refused to play fair. Instead of paying their employees more, they held firm, reducing their services, and using their influence to lobby the government to force people to work. Slavery may have been prohibited by the 13th Amendment to the Constitution, or was it???
Anyway, their response is an example of what economists would call “rent extraction” — essentially taking more money than they should in an efficient economy through the use of their influence and market power.
As a result, the government will have to step in with regulation to resolve this market failure. As it turns out, we have an ideal solution to this problem: the minimum wage. Therefore, under the circumstances, increasing the minimum wage is entirely appropriate.
The typical response to this policy proposal is that it will cost jobs, and there is some truth to that critique, although it is generally overstated. In this case, however, it appears the government needs to force the private sector to do what’s in its own best interest, and that is to pay workers a living wage.