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Copyright 2005 The Financial Times

Christopher Caldwell: Social Logic of a Living Wage

Christopher Caldwell
October 21, 2005

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Last week, Ted Kennedy, the US senator, tried to raise the minimum wage by $1.10, to $6.25 an hour. His measure was defeated, as was a more business-friendly Republican alternative. The pattern is familiar. Congress shot down a similar plan in 2001 and such wage hikes have met resistance elsewhere. Britain, it is true, saw a 20p rise in the minimum wage this month, but more typical has been the experience in Australia. There, the Howard government wants to strip the Australian Industrial Relations Commission of rights to set wages that it has enjoyed since the country’s federation in 1901.

The economic case for a higher minimum wage looks strong at first glance. In the US, it was last raised in 1998. The minimum now pays only one-third of the average salary, at a time of rising energy and healthcare prices. As Mr Kennedy noted, a year of minimum-wage work leaves a single mother with two children thousands of dollars below the poverty line.

In fact, the economic arguments for a higher minimum wage are weaker than they look. But the political arguments are strong enough for leaders to cross them at their peril. Mr Kennedy’s dramatic statistics do not capture the social reality of the minimum wage. Among those who get it, single-income families are a distinct minority. Half of minimum wage earners are under 25, according to US Bureau of Labour statistics, and one-quarter are teenagers. Many people have to take minimum-wage jobs; it is less clear that many have to stay in them. A person who spends six months loading the dumpster at a superstore, showing up on time, being polite, acquires a record for reliability that is a marketable credential. Removing that first rung on the career ladder could certainly spur unemployment.

Not that attacks on the minimum wage are particularly impressive on economic grounds. Claims that modest hikes would cost jobs -- such as were made in the US during the Clinton rise, and in the UK when the minimum was introduced in 1999 -- have been overblown. There is something self-contradictory about the twin rationales of the minimum wage’s opponents. They see the minimum-wage workforce as minuscule for the purposes of measuring the gains (money for poor people) and vast for the purposes of measuring the costs (bankruptcies and job losses). Since only about 5 per cent of US workers get the minimum, modest changes in the level will probably yield only modest results. They will fulfil neither the promises of supporters nor the warnings of detractors.

But that is not the end of the story. There is a larger narrative about how people are compensated in today’s economy. It is recounted in a fascinating way by Frank Levy and Richard J.?Murnane, the Massachusetts Institute of Technology economists, who have long studied the gap between the well and poorly paid. In The New Division of Labor, just out in paperback from Princeton University Press, they examine the role of computers in creating that gap. For Mr Levy and Mr Murnane, computers are best at carrying out "rules-based tasks." Computers enhance the value of those engaged in "expert thinking" (thinking outside the box) and "complex communication" (interpreting information). But they drive down the demand for people engaged in the rules-based work that used to support much of the lower middle class. The results are a "hollowing out" of income distribution and increasing inequality. Low-paying rules-based jobs -- various secretarial, computational and manufacturing posts -- are candidates for either automation or outsourcing. These two phenomena, the authors hold, are expressions of the same trend: they come into play where rules are sufficient guidance for doing the job. True, a few high-end jobs, such as software design, are migrating abroad, but those are exceptions, the authors think. "Creating a Fritos advertising campaign requires extensive tacit knowledge of the US market," they write. "Debugging software modules for an Oracle database requires knowing a self-contained set of programming rules that is available to students everywhere."

The authors find John F. Kennedy’s remark that "a rising tide lifts all boats" inapplicable in today’s economy. The same processes that increase demand for skilled workers reduce demand for unskilled ones. One possibly dangerous consequence, they fear, is that the "haves" of the new economy may use the political clout that money buys to accelerate these processes. But that could set off a destructive reaction. "Our market economy," Mr Levy and Mr Murnane write, "exists in a framework of institutions that requires the political consent of the governed. People doing well today have a strong interest in preserving this consent. If enough people come to see the US job market as stacked against them, the nation’s institutions will be at great risk."

There is evidence of just such a perception of a stacked job market. America now has a strong grass-roots political movement that is claiming a level of compensation that cannot be justified by the laws of supply and demand. Last November, a Florida referendum to raise the state’s minimum wage to a dollar above the federal one got 71 per cent of the vote. The Association of Community Organisations for Reform Now was instrumental in the initiative. The group, which many dismissed a decade ago as a remnant of 1970s progressivism, is once again a force after campaigns in dozens of cities and states to pass "living wage" laws. One-third of states now have minimum wages above the federal level.

This is not an economic but a political victory. It does not mean that, say, wrapping hamburgers is worth a dollar an hour more than we thought it was. But it may mean that social peace is.

The writer is a senior editor at The Weekly Standard

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