Moving past the low-wage social contract

By Josh Freedman
September 11, 2013

Two weeks ago, thousands of fast-food workers in 60 cities around the country organized protests to demand higher wages. Many are paid the federal minimum wage — which translates into a maximum annual salary of roughly $15,000 per year, almost always without benefits. These workers live in poverty and cannot afford basic services like healthcare for their families or child care.

Yet these more than four million fast-food workers are not alone. More jobs are being created in low-wage industries, ranging from retail sales to child care to home health assistance. This current low wage plight is also nothing new. In fact, over the last few decades we have embraced what Michael Lind and I call the “Low-Wage Social Contract,” in which public policy has accepted and abetted the spread of low wages.

Instead of trying to raise wages, policymakers have tried to help low-wage workers through refundable tax credits and wage subsidies that lower the burden on workers. We have also encouraged employers to pay low wages so that they can charge lower prices. In theory, proponents of the low-wage social contract argue, low wages could be a good thing if low prices and low taxes make all consumers better off.

This low-wage social contract, however, has failed to live up to its theoretical promise. The best solution is to instead embrace a social contract based on the combination of higher wages and large, universal public programs.

While there are many options for reform, this combination is the only mechanism that promotes economic growth, tackles the increasing costs of important quality-of-life services and alleviates growing inequality.

The low-wage social contract has failed for three key reasons. First, basic services like healthcare, education and child care have become more important. While simple consumer goods (like a burger you might find at McDonald’s or clothes at Walmart) have become cheaper, the prices of healthcare, education and child care have surged. Tuition has increased four times as fast as inflation over the last 35 years, while medical expenses have grown more than twice as fast.

The low-wage contract is partially responsible, because the various government subsidies to help keep families afloat have likely contributed to making these services even more expensive. Medical expenses now put more people into poverty than tax credits can lift them out of it.

Second, the low-wage contract has increased inequality and limited the aggregate demand that keeps the economy running. As Robert Kuttner and other scholars have pointed out, the rise of low-wage service jobs has worsened inequality and increased the divide between the haves and the have-nots.

Similarly, workers who do not earn enough money to consume cannot buy the goods and services made by other workers. To keep aggregate demand high, policies have encouraged borrowing and taking on debt — a development that was at the root of the 2007 financial crisis.

Third, the gains from low wages and higher productivity have not actually flowed to low prices for consumers. Profits are rising and productivity in many some sectors is increasing while wages are falling — meaning that the gains from the low-wage social contract are not being recycled back to either workers or consumers.

Rather than helping low wage workers, the low-wage contract simply makes the richest better off at the expense of the poorest.

Increasing means-tested benefits or tax expenditures will not be enough to fix the problems of the low-wage social contract. Nor would the opposite — a system of very high wages and very high prices that is often associated with Scandinavian countries like Sweden — be able to work with the extreme levels of inequality that now exist in the United States.

Instead, the best option is to embrace a strategy designed to raise wages part of the way, while lowering the cost of social services through universal programs funded by progressive taxation.

This strategy, which we call the Middle-Income Social Contract, would make it possible for a full-time service worker to afford middle-income goods and services. Child care in the form of universal public preschool, for example, would be directly provided to all.

With this arrangement, families will not have to spend all of their money — and even go into debt — to afford a middle-class standard of living. And we would finally address the upward price spiral in health and education. At the same time, higher wages for middle-income workers will help drive demand in a “middle-out” economy that politicians keep talking about.

Fixing the economy will involve tossing the low-wage social contract into the trash next to those fast food wrappers. But scrapping the low-wage model in favor of a middle-income contract is an important step. It is the best bet for replacing the unequal, imbalanced and sluggish economic system with one that actually works for most Americans.

PHOTO (Top): A group of workers and labor activists march down West Grand Boulevard as they demand a raise in the minimum wage for fast food workers in Detroit, Michigan, May 10, 2013. REUTERS/Rebecca Cook

PHOTO (Insert): Strikers march outside a Wendy’s restaurant in Boston, Massachusetts August 29, 2013, as a part of a nationwide fast food workers’ strike asking for $15 per hour wages and the right to form unions. REUTERS/Brian Snyder

20 comments

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We don’t need any “social contracts.” What we need is a field of economics with the courage to once again (in the wake of the black eye it suffered as a result of Malthus) consider the full range of economic issues associated with never-ending population growth. If it did, economists would recognize the inverse relationship between population density and per capita consumption, and its role in driving unemployment and global trade imbalances. It would then understand the folly of free trade theory applied to nations grossly disparate in population density and, consequently, per capita consumption.

Declining incomes are the natural consequence of sitting down with nations who come to the trade table with nothing to offer but badly bloated labor forces, hungry for work, but with no comparable markets to offer in return.

Wages among retail and food service workers are low because they’ve been robbed of their opportunity to leave those jobs behind in favor of higher-paying manufacturing jobs. Striking against McDonald’s and Walmart is a waste of time. Instead they should focus their anger on idiotic U.S. trade policy.

Posted by Pete_Murphy | Report as abusive

How about a government financed education program designed to teach high school students that they cannot expect to have a middle-class life by flipping burgers a few hours a day. Striking and carrying a sign proclaiming that you are “worth” $15 an hour doesn’t make it so. You are actually only worth what someone will pay you for your services, and for flipping burgers it’s NOT $15/hr.

Posted by JRTerrance | Report as abusive

We need social contracts, but not the ones indicated in this article. The USCA had to lower wages to keep jobs in this country and be competitive with the rest of the world. Globalization has already occurred and cannot be stopped. “The world is flat” now and much of corporate America became Global Corporations. They have global supply chains. If we want to be a link in the chain, then we must remain competitive. It looks like the wages are now starting to even out. China and India have increased their wages considerably over the last decade, while ours dropped. So the playing field is now much more level. This is a good thing for the long term.
Income inequality is another matter entirely. It can and should be addressed. Though we must keep in mind that the .01% does not actually hoard piles and piles of money. They are “worth” a lot as they have control over a lot. It’s the lower group, the top 5% maybe, that needs the adjustment as they do hoard much of their wealth. Making 500 times the average salary is just ludicrous and should be stopped. It’s just morally wrong. The way to the top 1% should be from contributions (creating a new product/company), not on accumulating salary.

Posted by tmc | Report as abusive

It’s funny to use the term “social contract” in the sense in which is it used in this article. When Rousseau coined the term, he was exploring the source of the fundamental power of the state to legislate and to enforce legislation. In doing so, he was questioning the institution of the absolute power of monarchy — an institution that doesn’t exist anymore, at least not in the Western world.

Here, the question is not about the relationship of the state and its citizens. Instead, it is about the relationship of citizens to each other. That is, the idea is that some citizens should be compelled to pay others more for their services than the services could command in an unregulated market.

There are many terms that could be used to describe the issued discussed in this article, but the term “social contract” does not appear to be one of them. Indeed, the term “social contract” might be more accurately applied to the question of the origin of the state’s power to regulate private sector wages in the first place.

Posted by Bob9999 | Report as abusive

“The best solution is to instead embrace a social contract based on the combination of higher wages and large, universal public programs.”

So once more we hear from someone who advocates immature dreams as a solution to real world challenges. They want a perfect world, and they want it NOW!

America is BROKE! Up until WW II even most Americans did NOT live lives of abundance and comfort. Life subsistance farming was hard, and participants typicallyt dies relatively young. “Retirement” was but an uncommon illusion.

So the huge gains in free time and disposable income have brought only greater and greater demands for MORE? Stifle. The Star Trek economy is not here. You don’t throw out that which WORKS for that which may not (if you have any brains).

Where does the money come from for more and more “universal public programs? And if more and more is GIVEN away to people just for being “present and breathing” what happens to personal responsibility, self improvement, living withing your means and providing for YOUR OWN “old age”?

No self-respecting American should accept the idea, as Bob9999 puts it, that “…some citizens should be compelled to pay others more for their services than the services could command in an unregulated market.”

The unintended consequences of such nonsense would destroy the viability and function of our present economy. Those who would do so would kill the goose that lays the golden egg.

Posted by OneOfTheSheep | Report as abusive

The Star Trek economy is not here, indeed. But we should have at least hypothetical vision how the civilization will reach money-free economy in 100-150 years.

However, meeting the China and U.S. wages is not a change in the Star Trek direction.

Posted by OUTPOST2012.NET | Report as abusive

This author has a very narrow minded, jaded perspective on how he would like the USA to be. And I don’t have much agreement on his point and I really, really hate the whole in the box outlook about people being put into class levels. I look around every day and am appalled at the lack of basic social skills so many service workers have. Their bad attitudes, their horrible buthering of the American language, their detached and uncaring manners, etc. They are not contributing a whole lot to a better more joyful society that is for sure. But hey, according to this author these same people should not be held accountable for brining children into a low income, limited resource life. No way could I live on minimum wage today as a single person. As a part time job as a teenager it was perfect. For my retired dad, it’s perfect. For people thinking they should have families when they are doing minimum wage work for a career, they need to stop having little ones and making these little ones’ lives so hard. I came from a family of very limited resources, but I had a lust for learning and tried hard to observe and absorb what I thought were good things, good behaviors, good attitudes, good habits. I learned from others and they willingly taught me things about success, motivation, drive, finances, etc. Until we get off the kick that a bad attitude and noise making protesting is the way to achieve self confidence and momentum in life, no “progressively taxed” program is going to reverse the trends that we are seeing. Carelessness, sloppiness, detachment, bitterness, envy, etc. are character traits that are prevailing in far too high a number of our Nation’s population. You won’t get a better job with such negative character traits so accept your lot in life or make a decision today to grow and take a new direction and until you do, please use a condom or go on the pill for everyone’s sake including yours

Posted by QuidProQuo | Report as abusive

This author has a very narrow minded, jaded perspective on how he would like the USA to be. And I don’t have much agreement on his point and I really, really hate the whole in the box outlook about people being put into class levels. I look around every day and am appalled at the lack of basic social skills so many service workers have. Their bad attitudes, their horrible buthering of the American language, their detached and uncaring manners, etc. They are not contributing a whole lot to a better more joyful society that is for sure. But hey, according to this author these same people should not be held accountable for brining children into a low income, limited resource life. No way could I live on minimum wage today as a single person. As a part time job as a teenager it was perfect. For my retired dad, it’s perfect. For people thinking they should have families when they are doing minimum wage work for a career, they need to stop having little ones and making these little ones’ lives so hard. I came from a family of very limited resources, but I had a lust for learning and tried hard to observe and absorb what I thought were good things, good behaviors, good attitudes, good habits. I learned from others and they willingly taught me things about success, motivation, drive, finances, etc. Until we get off the kick that a bad attitude and noise making protesting is the way to achieve self confidence and momentum in life, no “progressively taxed” program is going to reverse the trends that we are seeing. Carelessness, sloppiness, detachment, bitterness, envy, etc. are character traits that are prevailing in far too high a number of our Nation’s population. You won’t get a better job with such negative character traits so accept your lot in life or make a decision today to grow and take a new direction and until you do, please use a condom or go on the pill for everyone’s sake including yours

Posted by QuidProQuo | Report as abusive

The premise for the solution proposed is nearly opposite what direction would provide greater results. Progressive taxation is actually a strong part of the problem. Those who lead Wendys Corporation desire a certain income – this why they worked hard to obtain the job of CEO, etc…. If you tax them more, they will simply raise the prices to ensure they and their shareholders receive the benefit expected from both investing in their own talent as well as investing in the company. Low wages result from low levels of power – usually a result of low skill levels. Arbitrarily raising the income level across the board and increasing progressive taxation will simply produce higher commodity prices – because those with power will only put their energy where they see a return on investment. This may actually result in depressed GDP, as talent and capital runs high tail from those who wish to take it from those who possess it. You cannot simply “legislate” power without a logical nexus to where power actually exists.

Where does power in low wage, low skill, low power individuals – 1) in their ability to increase their skill, and 2) in their votem AND in their ability to pay taxes. Certain “progressives” have argued the “Robin Hood” mentality for far too long, which carries a false presumption in American society- that those elites were simply born into their wealth and that it is the workers who always produce. Whereas, there is actually a tremendous degree of talent and intelligence in high wage earners – it is not simply a fiction as progressives have supposed for far too long. Therefore, it cannot simply be a case of taking from the rich and giving to the poor – whether they are “worth” it or not. Instead, the poor need to exert their efforts in making those with trememdous levels of talent, ability and intelligence to depend upon them in a literal sense to make the system function properly. As a result, I propose the use of a highly regressive taxation system – where the elite are forced to depend upon the tax revenue collected from the low wage earners in order for their government to function properly. This would not only encourage high wage earners to pay the lower wage earners more money in order for the economy to survive, but also depress the desire within the high wage earners to “overcome” the progressive taxation hurdle. It would also make tax revenues much more stable in all levels of government.

It may sound crazy, but you have to attack the problem at the root cause. High wage earners and their salaries are not the problem, the problem lies in the lack of power among low wage earners. Increase the power of the low wage earner by requiring dependence upon this sector of the population and you have solved the existing “low wage social contract” problem within the economy by changing the terms of the contract – the high wage earners are now entirely dependent upon the low wage earners. The exact structure of this tax system can take numerous forms, adjusted as needed to ensure maximum benefit for the social good – which includes high wage earners as well as low wage earners.

Convincing low wage earners that this is the only truly viable solution – likely impossible!

Posted by Klintonicals | Report as abusive

This is a very childish article, written by an obviously intellectually immature author. It is not feasible to pay burger flippers $15 without cascading that affect across ALL people earning a paycheck (ie, burger flipper = $15, Chemist = $150, etc.). It is also not supportable by the economy, as prices for those Bic Macs will have to rise accordingly, causing loss of sales and then more unemployment. Grow up, dude and go see a Doctor helping you with your cranial-anal inversion.

Posted by NMGliderPilot | Report as abusive

I wonder what examples the bible gives about how things should be. Let’s look at the New Testament and the first Church for ideas:

Acts 4:32-37 KJ21-
32 And the multitude of those who believed were of one heart and of one soul; neither said any one of them that any of the things which he possessed was his own, but they had all things in common.
33 And with great power the apostles gave witness to the resurrection of the Lord Jesus, and great grace was upon them all.
34 Neither was there any among them that lacked, for as many as were possessors of lands or houses sold them, and brought the prices of the things that were sold
35 and laid them down at the apostles’ feet. And distribution was made unto every man according as he had need.
36 And Joses, who was surnamed by the apostles Barnabas (which is, being interpreted, “the Son of Consolation”), a Levite of the country of Cyprus,
37 having land, sold it and brought the money and laid it at the apostles’ feet.

Posted by LOVETRUTH | Report as abusive

Summary: The author is a socialist. Allow government to manage the means of production and determine wages and benefits.

“From each according to his ability, to each according to his need(s)”

Louis Blanc 1839
Embraced and reinforced by Karl Marx ~1868

Fail: Russia, China and Vietnam who have now adopted capitalist economic models. Only in totalitarian North Korea does it survive, and we all know how that is working for the common North Korean.

Posted by COindependent | Report as abusive

The Way It Is Now: More and more jobs are paying minimum wage with no health benefits. Someone making $15,000 (before taxes) a year can’t afford to buy goods. That same worker can’t afford health care for themselves or their family. Fewer people can buy goods. Companies feel the profit squeeze and have to raise their prices to compensate to please the shareholders. Everyone pays higher prices.

We need to reverse the myth of “Trickle Down”. We need to “Trickle Up”.

Raise minimum wage to a liveable yearly income. Give tax breaks to Corporations who create full-time, insured positions in the U.S. More people can buy goods. Corporations hire more full-time Americans because there is market demand. Those who are now the “Working Poor” become self-sufficient and no longer need Food Stamps, etc. Taxes remain stable at worst. More earners have more pocket money. Corporations pay dividends to shareholders.

Globalization is the worst four-letter word in our century.

Posted by JL4 | Report as abusive

@JL4,

“Raise minimum wage to a liveable yearly income.” Pure, socialist bovine scat; at least in our present economy. The number of such jobs would plunge even as automation increasingly “picked up the slack” in meeting business’ needs.

“Give tax breaks to Corporations who create full-time, insured positions in the U.S.” Tax breaks only work when they are of similar or greater value to the alternative. Eliminate overtime (substitute “comp time” at time-and-a-half) and you “make” more jobs for more people. But in all this understand absolutely that our society is needing fewer and fewer people to do that which must be done and so if the purchasing power of “people to buy goods” is to be preserved then each will have to work less and less for a higher and higher rate.

Our government could require that certain “employment benefits” be granted all (proportional holidays, vacation, sick leave, retirement account contributions) on the basis of hours physically worked. If one leaves employment for any reason (other than being fired for cause relating to illegal activity or jailed) they would receive wages earned plus the value of holidays occurring in the next 90 days, unused but accrued vacation, and some proportion of accrued sick leave.

Every individual would have a government “retirement account” for such contributions from which eventual benefits would pay after age 70 (or later, if desired). At what point do businesses and the economy collapse under such a scenario? If not, why not? I don’t know. Does anyone?

Posted by OneOfTheSheep | Report as abusive

What makes the situation so futile is that we’re trying to address issues that simply can’t be addressed while ignoring poverty AND the policies imposed the poor (such as cheap workfare replacement labor). We seem very confused about who qualifies as full-fledged citizens with fundamental rights. I read that some 80% of middle classers support paying mandatory workfare labor less than minimum wage. What makes their labor worth less than a fast food worker’s labor?

Posted by DHFabian | Report as abusive

A free market system can only function when all people can freely participate.

All people can freely participate only if they are enfranchised.

Enfranchisement in a free market requires secure capital.

If this planet’s resources are assumed to be the property of all its inhabitants, and we agree that the planet has value, we can use this value as basis for a fiat currency, to be evenly distributed to each, and secured by the various states in permanent local trust accounts providing a regular dividend.

This allows people to access a fair share of the Commons for basic needs, makes governments accountable/indebted to citizens, and doesn’t require the redistribution of anyone’s wealth, just the distribution of and access to previously unrecognized wealth.

Posted by tralfamadoran | Report as abusive

Ah what? There is no such thing as a low wage social contract. Medicaid, food stamps and welfare were never intended for those who were working, they were created for the disabled or those who were unable to work. What our society has always had in place was a middle class social contract; one in which workers were paid a living wage that allowed them to afford to buy homes, have health insurance, afford child care etc. What has happened is that the minimum wage with pushback from Republicans has not increased to reflect inflation. The $15 an hour request is not a raise. It is what minimum workers would be getting paid if the minimum wage had just increased with inflation over the past few decades. This article makes it sound as if we should pay workers more and responsibly pay higher prices; this is a false dichotomy because companies should have been paying these workers a fair, $15 an hour, wage all along. They could easily afford to increase wages without increasing prices and still make an astounding profit.

Posted by rexiperplexia | Report as abusive

@JL4, globalization is only a dirty word to the people of USCA and EU. Several BILLION people have benefited greatly from it. If you’re a religious person (I’m not) that should make you happy. The world is changing exponential fast now. Wages and social orders are truly evening out around the globe. I think the western governments have done a fair job at keeping our standard of living basically static while the rest of the world catches up. Even @OOTS sees this happening and occasionally acknowledges it with some suggestions. As they say, you can’t stop the train, either get on board or…

Posted by tmc | Report as abusive

The cost to society of raising miniumum wage to a living wage is minimal and assertions by politicians this would drive consumers elsewhere is nonsense – I live in Ottawa – where is someone going to look for an alternative for food (if the vote-with-feet argument were true so consumers avoiding Ontario’s now overpriced burger after the supposed wage-increase inflation would find Quebec is a half-hour trip , New York a good couple of hours . If minimum wage were higher consumption of basic services would increase dramatically since, suddenly, low earners would be able to obtain the things they need including better food or accommodation so they can be more productive (and are the ones most likely to spend money on things they need like basic food items , rather than bank the money since there is less leeway to do that compared to high earners ) . I think society is heading for a socialist model since the present crowd of politicians has never experienced poverty and that is nowhere true than in the context of what is going on in the Canadian senate (and elsewhere with a shakedown now starting in the Ontario legislature) – these issues are equally true in America with its inflated medical and other service costs such as high post-2ndary tuition or in the public system poor quality .

Posted by JohnOnT | Report as abusive

The value of a worker’s labor cannot be increased by government fiat. I think work is good both for the individual and for society. Raising the minimum wage will simply lock more workers out of the labor market. Let the market determine wages.

At the same time, government can do more to enable more people to work. Healthcare, education, and transportation are where we can make improvements. Marginal workers cannot afford healthcare in the U.S which has far and away the most expensive healthcare in world (Not the best, just the most expensive). There is a war on public education going on in this country, and we are losing it to the budget cutters. We have terrible public transportation. If you cannot afford a car, getting to work can be extremely difficult. I would also argue that many marginal workers who do have cars shouldn’t be on the road. They drive without insurance, they drive wrecks that seem to account for the vast majority of our auto pollution, and their driving skills are at least as marginal as their work skills. But I do want to give these marginal workers the opportunity to work.

Let government help improve healthcare, education, and transportation – job enablers. But avoid raising the minimum wage, that only locks more workers out of jobs.

Posted by QuietThinker | Report as abusive