Finding new ways to make work pay

By Reihan Salam
November 14, 2013

One of the scariest notions about America’s sluggish labor market recovery is that it doesn’t represent an aberration, but rather a new reality in which good jobs are few and far between, particularly for those with limited skills. It is certainly possible that the future will be brighter than we think, and that we will soon enter a new economic Golden Age in which people with low education levels will flourish as employers clamor for their services at ever-higher wages. But if this happy outcome does not come to pass, as the current evidence suggests, the United States and other market democracies will have to come up with a Plan B.

A number of interrelated developments, from automation to organizational innovation to off-shoring, appear to have reduced the willingness of employers to pay middle-income wages to less-skilled workers. That is, the problem is not that there is no wage at which employers will take on less-skilled workers. If this were the case, agriculture and hospitality companies wouldn’t be pressing lawmakers for an immigration overhaul that would allow for a large influx of less-skilled workers from abroad.

Rather, the problem we face is that employers are only willing to employ less-skilled workers at very low wages, including wages that the voting public considers unacceptably low. Public support for raising the federal minimum wage, now at $7.25, is overwhelming. A Gallup survey released on Monday finds that 76 percent of voters favor a $9 per hour minimum wage, and one assumes that support for an even higher minimum wage would be almost as robust.

Many will argue that an increase in the minimum wage to $9 will not have a dramatic effect on the number of low-wage employees or on hours worked, and that may well be true. Yet it is possible that job growth might decline in the wake of minimum wage increases, as new research by Jonathan Meer and Jeremy West of Texas A&M University suggests. Nicole M. Coomer of RTI International and Walter J. Wessels of North Carolina State University, meanwhile, have explored the possibility that while increases in the minimum wage don’t appear to have a significant impact on total employment levels, they might cause workers to shift from jobs subject to the minimum wage to those that are not subject to the minimum wage. For example, the minimum wage for tipped employees, like restaurant servers, is lower than the standard minimum wage. Regardless, the minimum wage debate won’t get resolved any time soon.

What we do know, however, is that in market democracies with high effective minimum wages, whether established by statute or centralized collective bargaining, the lowest-wage employees tend to be more productive than their lowest-wage counterparts in the United States. This implies that as minimum wages increase, employers might become more inclined to substitute capital for labor and that they will be somewhat more reluctant to hold on to employees who can’t handle a steep learning curve. Earlier this year, Sarah O’Connor of the Financial Times wrote a brilliant account of Amazon UK’s Rugeley fulfillment center, where many employees are drawn from the ranks of the region’s long-term unemployed. Workers who can handle the intense workload are made full-time Amazon UK employees. Those who can’t are let go, and quickly. What O’Connor doesn’t explore is the very real possibility that Amazon UK’s personnel policies flow from Britain’s hourly minimum wage, which at 6.19 pounds ($9.84) is substantially higher than the U.S. minimum wage. The UK wage essentially mandates a reasonably high level of productivity that young workers, workers with limited English language proficiency, or workers taking on their first jobs a long spell of unemployment might struggle to reach.

The usual way around this dilemma is for policymakers to back wage subsidies and other social supports. If employers aren’t willing to pay wages high enough to allow less-skilled workers to achieve an acceptable standard of living, one response is to provide these workers with a suite of benefits, from in-kind transfers like food stamps (or SNAP) and Medicaid, to cash transfers like the earned-income tax credit (EITC). Scott Winship, a scholar at the right-of-center Manhattan Institute, has carefully documented the extent to which transfers have helped increase the incomes of poor families. According to Winship, households at the 20th percentile — those earning higher incomes than one-fifth of U.S. households, but lower incomes than four-fifths of U.S. households — saw their market income increase by a mere 12 percent from 1979 to 2007, but factoring in taxes and transfers saw their incomes increase by 28 percent to 46 percent, depending on how we value publicly-financed health insurance benefits. Though it’s certainly possible that without transfers, we might have seen social and economic changes that would have increased market incomes, but it looks as though rising transfers made a huge difference in cushioning low-income households from an unfavorable economic environment.

If the labor market position of less-skilled workers is going to get even worse in the coming decades, we have to think seriously about finding new ways to make work pay. For example, we could try to streamline the various benefits federal and state governments have used to raise incomes at the low end to foster a more work-friendly approach to fighting poverty. Oren Cass, domestic policy director of Mitt Romney’s 2012 presidential campaign, recently outlined such an approach in National Review. The basic idea is that while the non-working poor will continue to receive in-kind transfers, channeled through state governments, the working poor will receive cash transfers instead. Low-income households will receive support in either case, but they will receive support with fewer strings attached if they find and hold on to gainful employment. University of Arizona sociologist Lane Kenworthy, author of the forthcoming Social Democratic America, has called for an expanded employment-conditional earnings subsidy that would rise in sync with economic growth. And in Switzerland, a coalition of activists are campaigning for a basic income, an idea that has been championed by left-libertarians, egalitarian socialists, and even a number of pro-market conservatives who see it as a less bureaucratic, more straightforward alternative to the welfare state. This basic income would not be employment-conditional, which raises the danger that it would encourage people to exit the workforce, as Annie Lowrey observes in the New York Times. But some still find the idea compelling.

New York City is embarking on an experiment to figure out the best way to better the lives of the working poor. Right now, the earned income tax credit delivers the biggest benefits to the parents of dependent children, and far smaller benefits to single adults. Paycheck Plus, an initiative of New York City’s Center for Economic Opportunity in partnership with the research organization MDRC, will provide low-income single adults without dependent children with a more generous wage subsidy. Though we won’t know the results for some time, these efforts will help inform the all-important conversation about the future of the growing number of Americans who find that their paychecks aren’t big enough to make ends meet.

PHOTO: Workers and their supporters protest outside McDonald’s as part of a nationwide strike by fast-food workers to call for wages of $15 an hour, in Los Angeles, California August 29, 2013. REUTERS/Lucy Nicholson

14 comments

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Bah – you are attempting to optimize the rudder trims on a sinking Titanic. Here are the real solutions: 1. Estate tax on all amounts over a million. 2. Allow local states/cities the full control of economic decisions like import taxes, minimum wages and offshoaring/immegration. 3. Constitutionally limit banks to fractional lending ratio of 2. 4. Force farms to go organic/sustainable and food imports must be tarriffed. 5. Local auto and tech assembly or tarriff.

Posted by BidnisMan | Report as abusive

Absolutely correct. At last another “voice in the wilderness”. Yes, America AND the world faces the new reality you describe.

There is no longer such thing as a “job” of fixed and perhaps “basic” qualifications that one expands with experience. Today the “job” has been replaced by employer “needs” that shift like sand in economic winds that swirl hither and yon in patterns no one can yet forecast.

The inevitable result is that there is no longer any loyalty between employer and employee in what has become a “light bulb” market in which no individual’s contribution is unique. One hires someone that already meets a “need”, and when that need ceases to exist for any reason that hire is history.

There has NEVER existed a “willingness” on the part of employers to pay anyone any more than is necessary. When there are many jobs and few qualified workers, wages go up. When there are many workers and few jobs, wages go down. What’s so hard to understand about that?

The difference today is that employers have figured out that it is in their considerable interest(s) to reconfigure complex positions into ones that can be performed by people of perhaps tenth grade competency with minimal instruction or supervision. The writing is on the wall for almost every position that requires more than “low skills”.

The result is that entire generations of young people have prepared to work in the America of yesterday, in some cases by taking out huge college loans. Imagine their surprise when they realize after-the-fact that the America of today has no place for them…and will not. What good is higher education if the number of positions that require such qualifications is already endangered and well on the way to virtual extinction?

Now retired, I hire young people to do things at just over minimum wage, $7.50/hr., that I don’t want to do for myself. Take it from me I won’t do that if I have to pay $9 or $10/hr. Business isn’t going to hire people at that rate they have to train either.

Any substantial hike in the minimum wage is going to do two things. It will cut the American underclass off at the knees, and essentially removing the “first step” onto the carousel of economic progress. The “best and brightest” can still leap on, but the marginal now fall under the bus.

It will also speed the rate of automation of jobs in the fast food industry and such others as that technology becomes more and more capable and adaptable. While expensive, automation is a one-time expense that eliminates many significant expenses of human employment permanently.

Machines don’t get overtime, don’t do drugs, don’t get hauled off to jail, don’t bully each other, don’t get sick or need health insurance, don’t suffer from deadline stress, have dependents, take sabbaticals, seek promotions, earn vacations or pensions, or bad mouth the company when dissatisfied or discharged. Perhaps the ultimate problem is that machines don’t buy anything!

“…we could try to streamline the various benefits federal and state governments have used to raise incomes at the low end to foster a more work-friendly approach to fighting poverty.” Why is such common sense considered a “new idea”? And why on earth have governments EVER offered benefits that were NOT “employment conditional”?

Today governments reward the indolent who can or will do nothing of value to society to sit home and make more of themselves. Then they wring their hands and wail wondering why their underclass is growing faster than their economy.

There is simply NO rational reason to retain ANY incentives that encourage people to have more children that they themselves can support and raise to maturity without public assistance. THEY are the “growing number of Americans who find that their pay checks aren’t enough to make ends meet.”

Posted by OneOfTheSheep | Report as abusive

@oots, I agree with you on some points, but then you got into insulting the working poor. You wrote:

“Machines don’t get overtime, don’t do drugs, don’t get hauled off to jail, don’t bully each other, don’t get sick or need health insurance, don’t suffer from deadline stress, have dependents, take sabbaticals, seek promotions, earn vacations or pensions, or bad mouth the company when dissatisfied or discharged.”

The people you fail to recognize are the millions of individuals – young and old – who are working very hard in our country. And you always go back to how the poor are breeding like rabbits. That’s not a falsehood, but it is probably the smaller percentage of the total poor.

But I do agree that corporations have abandoned their workers, with the exception of those in the upper echelons. America was built on the concept of the pursuit of happiness – a concept of individualism that meant (until these days) a person could start at the bottom, work hard, show initiative, get an education and move up the ladder of personal success. Apparently you did it, and you’re proud of it. You should be, too.

So corporations have already begun the “let machines do the work” when they treat their lower level employees exactly like machines.

I wish you would acknowledge that more people than not are raising their children without public assistance. I did it for years as a single parent without one dime from the government. Lots of people do. Give me, and the millions of others, a little credit.

Posted by JL4 | Report as abusive

Great article! I am very happy to see people starting to understand the needs of the future. But there are many like @BidnesMan that are still stuck in the 20th century. We really need to re-access our whole implementation of capitalism. It plain will not work in the near future. As @OOTS puts it, machines don’t buy anything. The population should stabilize at 11-12 billion people by 2050 or so (see the latest from Hans Rosling). But automation will continue exponentially fast eliminating jobs. So we will add several billion people and eliminate sever billion jobs. Obviously we will need new social systems to handle this. It cannot be avoided and cannot be “fixed” with 20th century and even older thinking like tariffs. I have faith though as the USCA is declining and Asia is rising. They are a wise people.

Posted by tmc | Report as abusive

Stop subsidizing Walmart and other “low wage leaders” with tax dollars and make them pay a living wage. If that means raising the minimum wage, maybe that’s what has to be done.

A person working a full-time job, 40 hours (or more) per week should be able to earn enough to pay their bills and put food on the table.

Far too much of “worker wages” is being siphoned off by mega-companies to give their shamelessly wealthy executives MORE.

Posted by Wry | Report as abusive

As posted on Mr. Hadas last article:
@OOTS is right on this in many ways. I think he is reluctant to state the true answer though, and that is indeed more of those evil social programs. Not the old 20th century welfare state programs, but new 21 century social/economic programs. We must completely re-think how and who works at “jobs” and how people are provided a living wage. It must be a transitionary plan as even though the population will stabilize, automation will continue on its exponentially fast track. Just think, we now have the capability to create a “droid” that has the dexterity and intelligence of the average person (100 IQ). Soon we will be able to mass produce them. How do you think that will affect jobs?

Posted by tmc | Report as abusive

@JL4,

I’m heartened that we now agree on some things. I’m not sure how you came to the conclusion I have anything but respect for the honest efforts of the working poor to better their situation.

When I wrote: “Machines don’t get overtime…” it was my intention to describe all of the advantages an employer gets by automating ANY position held by a human. And of course the savings are greatest when a large number of low skill positions can be replaced, such as in the fast food industry. It’s not a new idea…ever heard of the New York City “Automat” of the ’40s??

The “working poor” that have large families should be an example to those just “starting out” aware how each new mouth materially reduces the resources available to the household for each. Those with children already on any kind of public assistance have already eliminated their personal chances to have a “better life”. By their own hand (?) they sentence themselves to a seemingly ever-ending inescapable scramble to put food on the table and get enough sleep to get up and do it all over again, day after day.

Yes, America was built on the concept of the pursuit of happiness – a concept of individualism that believed a person could start at the bottom…and move up the ladder of personal success. But such social and financial achievement requires that one plan and prioritize so as to better leverage their personal situation into a better one over time. It sounds like you fit that profile, as did I.

So I apologize for any unintended slight you felt because you are completely right “…that more people than not are raising their children without public assistance.” I admire them, and your own efforts.

I do not admire those who increase the size of their families to increase their benefits. When each new mouth is not a child to be loved and raised as a valuable and contributing citizen of these United States, but more dollars, their spawn run wild (being an inconvenience) and grow up to be endless problems or predators upon civil society. It is THIS demographic I see ever expanding and a credible threat to the American way of life.

Posted by OneOfTheSheep | Report as abusive

“That is, the problem is not that there is no wage at which employers will take on less-skilled workers. If this were the case, agriculture and hospitality companies wouldn’t be pressing lawmakers for an immigration overhaul that would allow for a large influx of less-skilled workers from abroad.”

The real problem is that labor is in a state of over-supply in the U.S. and, among many of our trading partners, it is in a state of gross over-supply. And, as the US and the rest of the world grow more densely populated, the inverse relationship between population density and per capita consumption makes it inescapable that the situation is going to get worse.

The companies mentioned above (agriculture and hospitality), together with all companies, favor higher rates of immigration because it stokes the economy with more consumers and because of the additional downward pressure it exerts on wages.

There is no solution to high and worsening unemployment that doesn’t begin with halting the practice of growing the economy by adding more people, which only adds to the labor force at a rate that exceeds demand.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive

Thank-you @Wry – Current wage levels are corporate subsidization plain and simple. If an employee is paid a wage that sill qualifies them for various “social benefit” programs, then it isn’t really “minimum” is it? It is by any definition below minimum. We transfer payments of individual taxpayers to support corporate negligence. Employers need to either pay the wage or pay the taxes necessary to make up the shortfall. A higher minimum wage may indeed slow job growth, and absolutely should come with increased expectations. So be it. It will ease a painful economic adjustment for many, and many will be left behind. Hopefully, population increases will slow accordingly.

Posted by Nurgle | Report as abusive

I’m on board with your assertions as well Pete – your comment snuck in there while I was awaiting Reuters review :)

Posted by Nurgle | Report as abusive

@Pete_Murphy, I don’t believe that your statement
“The companies mentioned above (agriculture and hospitality), together with all companies, favor higher rates of immigration because it stokes the economy with more consumers and because of the additional downward pressure it exerts on wages. ” is true. In part yes, some companies favor immigration to keep wages down. But not many. Most that do favor it seem to just plain need the workers. Whether they’re high-skilled, or low skilled, they just can’t get enough of them to fill their needs. Yes, that drives up wages, but that’s really not a problem.
It seems to me you’re just trying to support your findings on “inverse relationship between population density and per capita consumption”. I have not read your book, but it seems that it is based entirely on this premise. What I don’t understand is why does it mater? It seems like just playing with statistics to me. I mean, what exactly are you saying? Removing people will stabilize jobs? Yeah, if there were no other factors like automation and other productivity improvements. Do you propose that as we automate things we should reduce the population according to your algorithms? So the US should start a program to deport people at the some specified rate to keep up with automation?

Please sir, you constantly post comments about this with little or no explanation. Certainly not enough to warrant buying your book to find out.

How does the population stabilizing by 2050 at 11-12 billion affect your theory?

Thanks in advance….

Posted by tmc | Report as abusive

As a member of the IT community i have seen some of the worst of the decisions made by businesses that have spread far and wide including small business owners. They want to pay little to nothing for support, and they generalize the people in my field. Judgements on what my lifestyle must be aside, most jobs in my field have been regulated to contract positions. No respect is given to the amount of education required to know what we know, but since the future is to only have people with certifications, we are treated as though we are an inconvenience to endure until that utopia is reached, with out demands for a living wage, health insurance, and a retirement to look forward to. My future has been hijacked by economic snake oil salesmen, and I know it isn’t just my field, but the whole country that is getting this condescending treatment. It’s very depressing, and hard to find hope in any of it with the path we are being dragged on by so many people who really need the undercover boss treatment.

Posted by epockismet | Report as abusive

One aspect of the employment problems in America that is often unmentioned is the lack of competition abroad for the business class. You have Europe, Japan, South Korea, and a few other nations producing successful mutli-national corporations, the rest of the world is providing labor for these corporations. Too much competition on one end, and not enough on the other has disrupted the balance of power allowing businesses to make outrageous demands of their employees. The only solution is to reform the trade system, place high tariffs on countries with substandard labor, environmental, anti corruption, and rule of law practices. Then labor will have a chance and the economy will be booming again.

Posted by wildcat27 | Report as abusive

Grant ourselves and our posterity the LIBERTY to realize our full potential …or reserve it exclusive domain of the chattel ranching few. The choice is ours America …or is it ?

Posted by CRUXy | Report as abusive