The Social Costs of Paying Low Wages

Oren Levin -Waldman

Oren Levin -Waldman

The recent release of the Congressional Budget Office’s report that an increase in the minimum wage could lead to a loss of as much as one million jobs by 2016 has created quite a stir. Those on the right hailed it as proof that an increase in the minimum wage is a bad idea precisely because we are still plagued by long-term unemployment. Meanwhile, those on left hailed the report as a vindication that the minimum wage would result in at least 16 million Americans getting a raise, which in turn would benefit the economy through increased spending.

On one level, the controversy over the CBO report only highlights the narrowness of the minimum wage debate to date: adverse employment effects v. anti-poverty benefits. But on another level, it is typical of the type of cost-benefit calculus, which itself is too narrow. The only costs really considered are employment, specifically among low-skilled workers. Meanwhile, the only real benefits considered are those that accrue to the low-wage labor market earning either the minimum wage or wages around the minimum. And yet, there is a broader calculus that needs to be taken if we as a political community truly seek to formulate policy that truly reflects the collective will of the people.

The problem with a narrow cost-benefit analysis is it invariably misses the larger social costs associated with paying workers low wages, and the larger social benefits that may accrue when those workers are paid a liveable wage instead. First, let’s consider what the CBO report actually said. It did not say that a million jobs would definitely be lost. Rather, it said it could happen. In this vein, it appeared to be acknowledging that the data on the effects of the minimum wage have been ambiguous at best. Rather than ambiguity being a justification for doing nothing, it ought to be an opportunity for policy experimentation. The report also was not entirely clear about just what it meant to talk a about lower employment.

Lower employment could result from three possibilities: 1) employers lay workers off in response to a higher wage floor, in which case the lower employment is a “disemployment” effect; 2) A higher minimum wage might lead employers not to create new jobs in the future, in which case the lower employment is the result of slower growth as individuals are maturing and getting ready to enter the labor market; and 3), a higher wage might attract individuals who had previously shunned the labor market back into the labor market in search of the higher paying jobs, in which case the lower employment is a function of more workers chasing the existing supply of jobs. In this case, the higher wage has attracted more people into the labor force, with no corresponding increase in the number of workers actually employed. Although a fine line to be sure, there is still a difference between a disemployment effect because the minimum wage caused people to lose their jobs and lower employment because either more workers were attracted to the labor market or employers decided not to create more jobs in the future.

Of course, one might ask what difference does it make? After all, lower employment is still lower employment. The problem with framing the question in this fashion is that we are inevitably led to the competitive market model solution of lower wages. This flows from the underlying assumption that unemployment is caused by wage rigidity. If we only lower wages, more people will be hired. And yet, rarely is the question asked: just what are the larger social costs to society of paying workers low wages?
When employers pay their workers low wages, they are imposing a social cost on all of society. True enough, consumers benefit from lower prices. But those same consumers who are the beneficiaries of lower prices are also put in the position of having to subsidize those low wages in the form of higher taxes to pay for programs like food stamps, increased housing allowances, and other public assistance these workers may need because their wages are below subsistence. And yet, there may be other social costs as well.
Poorly paid workers are less likely to be engaged in civic organizations than highly paid workers, and they are less likely to participate in the political process at the most nominal level of voting. Does the political community not bear the social cost of political anomie?
Poorly paid people may have poorer health because they cannot afford healthier food and the costs associated with regular exercise. Studies have found that the rates of diabetes tend to be higher in poorer communities where residents have less access to gym facilities. Again, society then has to pick up the cost when they truly do get sick.

When people are poorly paid we are able to see the social costs more acutely in the nation’s cities where the effects of poverty are most visible. Of course, it is also in these same decaying urban areas that crime rates tend to be higher. Society, then, has to bear the additional cost of incarceration.

When all of these social costs are tallied up, it would appear that society in effect is being asked to subsidize the profits of low-wage workers’ employers. Now if we can see what the true costs are, we can also get a sense of just what the larger social benefits to paying higher wages might be: less reliance on public assistance programs, lower political anomie, more civic engagement, healthier workers, less incarceration because of lower crime rates, and less urban blight. In tangible terms, the benefits of paying higher wages should translate into lower taxes because of the reduced social costs. Moreover, a workforce that is more self-sufficient and less reliant on the largesse of others only maintains the social fabric of the nation, especially one predicated on the American work ethic.

Economics is not dispositive; rather it is about behavior and should serve as no more than a fountain of information in the larger policy calculus. There are indeed social costs associated with paying lower wages. We can either support those at the bottom of the distribution through higher confiscatory taxation needed to provide the necessary subsidies because their wages are too low or we can support them by paying them a liveable wage that will enable them to be self-sufficient and live in dignity. At the end of the day, the minimum wage is about the type of society we would like to be.

Oren Levin-Waldman  is Professor of Public Policy and Public Administration, Metropolitan College of New York

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One Response

  1. I agree minimum wage should be a livable wage. All of their arguments against higher wages are just scare tactics. I want to know why every time somebody says we need a wage increase the first thing they say is “well if we did that we would have to lay people off.” WHY is it always the hard working people at the bottom of the flow chart that get laid off?? Why don’t they lay off a few CEO’s or cut back their salaries or bonus’s. How many new employees could one CEO bonus pay for. Every company I’ve ever worked for has been top heavy in the management area. They all have their sons, nephews, or mistresses working there. I get really tired of hearing how important upper management is to a company. All the jobs on the floor are just as important if not more. They wouldn’t have a company to run with out the hard working people on the floor. Why cant they see that it is a 2 WAY STREET. I’m pretty sure the president of my company cant do my job, but I think I could do just as good a job at bankrupting a company, putting thousands of people out of work, stealing their retirements, and then convincing them that I deserve a “golden parachute” bonus for all my hard work. I just cant believe the excuses we are forced to accept just because they are wealthy. WHY do they get to keep their money when the average worker loses everything. They should have to forfeit their profit to the retirement of all the people they hurt. There is no incentive not to ruin a company, hell they probably get a big tax break for it. They get away with it because the rich people make the laws, and they make the laws that benefit themselves. I REALLY TRUELY BELIEVE that if some of the companies that have been run into the ground had a UNION in house they might never have failed. CEO’s have proven too many times that when nobody with a genuine stake in the game is watching they can get away with murder. Just one of the reasons why corporations fight so hard to keep unions out. We need these watch dogs especially now. We need somebody on our side. Recently during a organization drive at my company for the IAMAW UNION. The president of the company sent out a letter telling all the workers “Don’t do what is best for the Union, vote no”. I couldn’t believe how stupid he was. Basically he told every one “Don’t do what is best for yourselves.” The employees are the Union. That year he got a million dollar bonus and the employees got their bonus cut. I just don’t understand. The employees only got a 2% raise that same year which was quickly taken away by a federal raise in payroll tax(but at least they said they gave us a raise) At the same time the company spent $12 million on “experts” to keep the UNION out. How many more people could they have hired with $12 million. Makes me wonder what do they have to hide?? IF they are doing such a good job why would they be afraid of a UNION. A UNION could actually be a benefit to a company by solving some problems before they get out of hand. The company strategy seems to be “Tis better to BEG forgiveness than to ask permission.” By then the damage is done. There are more middle and low income people than their are rich people. People that buy everyday things. These are the people that drive the economy. These are the people that keep the truck drivers, the farmers, the grocers’ in business. How many so called rich people do you know that shop at Walmart. Isn’t Walmart the largest chain store we have. I was so furious when I heard about the Walton family museum. Right after it was built they were charging a ridiculous price to enter. NOT one of their people that works in their store could afford to go there, besides that, how many better ways could that money have been spent. They choose to make a symbol of the GLUTTONY of the family name rather than use the money to employee people trying to take care of a family, or a single mother desperately trying to get some job experience and health care to take care of her child. Rich people are not the ones that keep the fast food places in business. Regular everyday people do. I get so tired of all the politically correct people saying how unhealthy it is to eat there, those people just look for things to complain about. Could these be the same people who gave the go ahead to put growth hormones in the cattle feed. Think about it, they use it to make the cows fat. The hormones are in the meat we eat, we get those same hormones and America is fat. The powers that be know this, but capitalism, is far more important than the health of the masses. Take a look at some of the old movies from the 60’s and 70’s. totally different body shape, very few overweight people. That was before there was capitalism in the beef.
    The new FAD for the super rich this year seems to be philanthropy. GIVE ME A BREAK!! It seems to me like its too little too late. I ask how did they get all these millions? At any time did it cross their minds to share the wealth with the people that made it possible. What kind of wages did they pay their employees? Did they have good health care? Did they get regular raises, or profit sharing? DO these CEO’s remember it is the employees hard work and dedication that helped to make them millionaires. They did not get there by themselves. Once again I feel that it is a self serving celebration of gluttony. They get lots of publicity for being so magnanimous AND what every millionaire needs most, a HUGE tax right off to hide behind. Why do most of the donations go toward research. Granted some research is extremely beneficial but then you see some that are so ridiculous you just know its fraudulent. It is also very noble to try to help poor people is other countries, but I really wish they would check to see that every food pantry in our own country was full enough to meet all the needs first.
    The funny thing about that is the middle class are the ones who do most of the donating of time and money to help the pantries. That kind of donation comes from the goodness of the heart and not the greed of the pocketbook.
    Thank you for listening, I just wanted to ask some questions that nobody seems to have any answers for.

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