Power and Paychecks
APRIL 3, 2015 Paul Krugman
On Wednesday, McDonald’s — which has been facing demonstrations denouncing its low wages — announced that it would give workers a raise. The pay increase won’t, in itself, be a very big deal: the new wage floor is just $1 above the local minimum wage, and even that policy only applies to outlets McDonald’s owns directly, not the many outlets owned by people who bought franchises. But it’s at least possible that this latest announcement, like Walmart’s much bigger pay-raise announcement a couple of months ago, is a harbinger of an important change in U.S. labor relations.
Maybe it’s not that hard to give American workers a raise, after all.
Most people would surely agree that stagnant wages, and more broadly the shrinking number of jobs that can support middle-class status, are big problems for this country. But the general attitude to the decline in good jobs is fatalistic. Isn’t it just supply and demand? Haven’t labor-saving technology and global competition made it impossible to pay decent wages to workers unless they have a lot of education?
Strange to say, however, the more you know about labor economics the less likely you are to share this fatalism. For one thing, global competition is overrated as a factor in labor markets; yes, manufacturing faces a lot more competition than it did in the past, but the great majority of American workers are employed in service industries that aren’t exposed to international trade. And the evidence that technology is pushing down wages is a lot less clear than all the harrumphing about a “skills gap” might suggest.
Even more important is the fact that the market for labor isn’t like the markets for soybeans or pork bellies. Workers are people; relations between employers and employees are more complicated than simple supply and demand. And this complexity means that there’s a lot more wiggle room in wage determination than conventional wisdom would have you believe. We can, in fact, raise wages significantly if we want to.
How do we know that labor markets are different? Start with the effects of minimum wages. There’s a lot of evidence on those effects: Every time a state raises its minimum wage while neighboring states don’t, it, in effect, performs a controlled experiment. And the overwhelming conclusion from all that evidence is that the effect you might expect to see — higher minimum wages leading to fewer jobs — is weak to nonexistent. Raising the minimum wage makes jobs better; it doesn’t seem to make them scarcer.
How is that possible? At least part of the answer is that workers are not, in fact, commodities. A bushel of soybeans doesn’t care how much you paid for it; but decently paid workers tend to do a better job, not to mention being less likely to quit and require replacement, than workers paid the absolute minimum an employer can get away with. As a result, raising the minimum wage, while it makes labor more expensive, has offsetting benefits that tend to lower costs, limiting any adverse effect on jobs.
Similar factors explain another puzzle about labor markets: the way different firms in what looks like the same business can pay very different wages. The classic comparison is between Walmart (with its low wages, low morale, and very high turnover) and Costco (which offers higher wages and better benefits, and makes up the difference with better productivity and worker loyalty). True, the two retailers serve different markets; Costco’s merchandise is higher-end and its customers more affluent. But the comparison nonetheless suggests that paying higher wages costs employers a lot less than you might think.
And this, in turn, suggests that it shouldn’t be all that hard to raise wages across the board. Suppose that we were to give workers some bargaining power by raising minimum wages, making it easier for them to organize, and, crucially, aiming for full employment rather than finding reasons to choke off recovery despite low inflation. Given what we now know about labor markets, the results might be surprisingly big — because a moderate push might be all it takes to persuade much of American business to turn away from the low-wage strategy that has dominated our society for so many years.
There’s historical precedent for this kind of wage push. The middle-class society now dwindling in our rearview mirrors didn’t emerge spontaneously; it was largely created by the “great compression” of wages that took place during World War II, with effects that lasted for more than a generation.
So can we repeat this achievement? The pay raises at Walmart and McDonald’s — brought on by a tightening job market plus activist pressure — offer a small taste of what could happen on a vastly larger scale. There’s no excuse for wage fatalism. We can give American workers a raise if we want to.
Public Comments
(a large batch of those offered by readers of Krugman’s column):
H. Amberg
Tulsa 7 minutes ago
Minimum wage should not be the minimum an employer can get away with paying. It should be the minimum amount it takes to maintain a decent standard of living; one that is able to pay for shelter, purchase food and transportation and obtain healthcare and medications and utilities. No one who works diligently at a full time job should live in poverty. Regardless of education or abilities there should be a dignity in work and that has always be reflected in pay. Otherwise we fought a Civil War for no reason. Calling people free and working them like slaves is disingenuous.
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Cdb
MD 8 minutes ago
As a small note, I was at a small shipyard on the West Coast. We paid our employees about twice what our Gulf Coast competitors did but were still able to deliver vessels into the Gulf market at competitive prices (despite the cost of transport). There is a standard method of measuring shipyard productivity and we were at 13 MH/CIGRT whereas our competitors were generally well above 45. In general our workforce was better educated (most had some community college) but for shipyard trades that is probably not a big issue. The difference was loyalty, very low turnover, attention to detail (especially safety), an innovative workforce (we were doing Lean TQM before it was cool) and general morale (we didn’t have timeclocks).
At least this one anecdote would seem to support Dr. Krugman’s idea that raising wages and otherwise treating workers well may raise productivity more than it costs.
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Dean H Hewitt
Sarasota, FL 9 minutes ago
I don’t think the argument is about affording to pay a higher minimum wage. It should be about providing compensation equal to a certain standard of living. This society has great potential to assure everyone can afford the basics, food, shelter, healthcare, educational opportunities, funds for kids, a healthy life style. The fact is all the money given out is returned in taxes and by increase purchases of goods. We are suppose to be electing people to provide a proper society, I wonder some times.
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Patty Ann B
Midwest 10 minutes ago
We don’t need taxes and we don’t need government services for full time workers. What we need are corporations to realize that all workers are valuable and should be paid a livable wage. The reason McDonald’s is giving this raise is simple, their workers are discovering what the low paid industrial workers realized in the late 19th and early 20th century, that their work is valuable and that their power is in numbers (unions). McDonald’s is afraid of unions as are all corporations. If the service workers of McDonald’s and Walmart get a strong union they will no longer be able to reap incredible profits off the backs of their employees and other corporations will have to increase wages to keep the unions out. This is why Walmart and McDonald’s who could have paid their employees decently like decent people would have done all along, are now giving a pittance in hopes of thwarting unionization..
On April 15th there will be another walk out of low paid employees in support of the $15 minimum wage. They have Walmart and McDonald’s, et al. worried if not shaking in their boots. The rest of industry is also concerned because if you raise the wages of low paid service workers higher paid workers will feel that they too should see a raise. The billions and billions in profits reaped from stagnant and low wages by the stingy capitalists may have to be put back into the business instead of in their pockets. Yeah they are very afraid.
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Blue
Not very blue 14 minutes ago
This might look like a start on raising wages but as usual, it it’s republican backed, it’s really something other than what it’s billed to be. In this case, it’s a salary nudge just enough to get some people from qualifying for safety net benefits but not enough to replace what those benefits do for them in salary to be able to afford the equivalent of those benefits on the open market. It’s especially difficult at this low of a wage to fight ALL temptation and devote every penny of that pitiful raise to the sensible but boring expenditures like savings for the kids education and retirement, cheaper healthier meals at home since just eating out once would blow such a measly raise; or a dental plan in addition to major medical insurance.
This is not a raise, it’s an insult. When you add to the failure of businesses to raise income commiserate with inflation and productivity while also moving health insurance from the employer’s plate to the workers, ditto with retirement and outright stealing away sick time and vacation, the insult is even more clear. These calculations are not included in the discussion of how far behind salary is to business profits. No, this is just business trying to look like they aren’t subsidizing their bottom line with safety net benefits.
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Paul Cohen
is a trusted commenter Hartford CT 15 minutes ago
Paul,
I think the higher you go up the pay scale into white collar jobs in corporations labor will be highly reluctant to clamor for higher wages even though wages for all labor has stagnated over the last 30+ years. The more money at stake the less inclined labor will be courageous enough to risk losing their jobs. The memory of the massive hemorrhaging of jobs starting just in advance of the 2008 meltdown is all too fresh in the minds of these people especially the people in my generation (50+) that were hardest hit by job losses and length of time of unemployment.
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Doug
Boston 16 minutes ago
“Every time a state raises its minimum wage while neighboring states don’t, it, in effect, performs a controlled experiment.”
Dr. Krugman. Each state has many different micro economies. One size minimum wage does not fit, even at the state level. Example: Barn Joo restaurant in Manhattan sells wings at lunch for $13. The Boondocks restaurant in Lyons Falls, NY (population 566 in Lewis County – way up North) sells wings for $4.50. Let’s assume the cost to the owner of the uncooked wings for both places is pretty similar. How could both of these establishments be forced to pay the same minimum wage? It is completely unfair to the owner in Lyons Falls, and by the way, completely unnecessary since the cost of living in that community is a fraction of that for the Barn Joo employee.
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Gignere
New York 8 minutes ago
You forgot the difference in rent. Actually forcing the boondocks to pay $10 an hour wouldn’t be bad, they may have to raise their prices to $5 for a plate of wings. But the workers in Lewis County now have way more purchasing power. Since before the raise assuming they were paid the Federal minimum workers can only buy 1.5 plates of wings per hour of labor, after the raise to $10 workers can buy 2 plates of wings per hour of labor. In fact Boondocks would probably sell more wings after the raise.
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Mark Thomason
is a trusted commenter Clawson, MI 19 minutes ago
“global competition is overrated as a factor in labor markets”
Another factor in global competition is that labor is a smaller part of much of what is sold in that competition. For example, labor is only 10% of the price of a ton of steel. A percentage increase has only a tiny impact on competitive prices. The other 90% controls the competition.
That is true for many products.
As for those things for which labor is a higher %, there is no international competition in flipping burgers. It may be labor intensive, but it must be done here.
We can rebalance our economy to a significant degree no matter how China runs theirs.
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Paul
Long island 24 minutes ago
Great pep talk, but how can we get the “change [in the minimum wage] you can believe in”? The only way is for it to be a centerpiece in the 2016 presidential campaign, and the only potential non-candidate I can count on to do that is Elizabeth Warren. We desperately need a new federal minimum wag of at last $15/hour that is adjusted for inflation and we need to push back against regressive anti-union governors like Wisconsin’s Scott Walker by making it easier for unions to be created and function. Without a countervailing force against the concentrated wealth in Big Business we will all be “commodities” subservient the the wealthy and their political enablers. Right now the Republican Party is largely the political arm of corporate America. The question is: Will the Democrats put an inflation-adjusted minimum in their platform and then campaign hard on it?
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Dr. Planarian
Arlington, Virginia 24 minutes ago
I am surprised that Dr. Krugman did not see fit mention the effect on wages that has been caused by the great success enjoyed by the Republicans in their all-out war on collective bargaining.
It is only a very few truly essential employees with unique skill sets who can effectively bargain with their employers over wages and benefits. And employers, led by Boeing, have tried to reorganize their working processes so as to eliminate, to the greatest extent possible, any need for unique personal skills. Boeing calls it “Process-Oriented Manufacture.”
Combined with the internationalization that has farmed out so much manufacture overseas, this successful full-frontal assault on collective bargaining has permitted the guys at the top to keep all the money.
Remember what Motts did to their union a few years ago. In the wake of record profits, they demanded enormous give-backs from their union, precipitating a ruinous strike that they won because of the decline of Zerox and Polaroid, leading to a lot of desperate unemployed people in the same hometown of Rochester, New York.
I have not purchased any product from Motts or Snapple ever since, and never will as long as I live.
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Jim
Zurich 39 minutes ago
A fair and just society is not easy to achieve. But surely the wealthiest country in the world can afford to pay full-time workers enough of a wage to lift themselves out of poverty. This is a tax I would gladly pay. A fair wage for a full day’s work.
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Stephanie Wood
Montclair NJ 40 minutes ago
I have never set foot in a WalMart, after hearing that the US taxpayer foots the bill to the tune of millions, maybe billions, to subsidize their employees, who are all so poor they have to rely on public assistance. Meanwhile, the Walton family are billionaires. Ditto McDonald’s. The other side of low wages is that the American middle class makes up the difference and basically supports the non-taxpaying, profit-mongering rich, basically creating a feudal system of haves and have-nots. Raising wages a tiny bit is just a gesture. We should FORCE these capitalists not only to pay a living wage, but to offer paid vacation time, sick leave and MEDICAL BENEFITS to ALL of their employees. WalMart and McDonald’s can afford to do this.
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H. Amberg
Tulsa 16 minutes ago
Really the solution to the medical care aspect of your argument is to remove the employer totally from the picture with an single payer plan. And remove insurance companies from the equation.
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Bartolo
Central Virginia 40 minutes ago
Especially annoying is that Walmart refuses to pay more than just a couple of bucks over the minimum wage. The worth of the Walmart families is closing on $100,000,000,000. How on earth do they justify not sharing more of that much money with their workers?
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Barbara Green
Miami 40 minutes ago
Workers who are paid decently are better able to get to work on time – or at all – because they can afford bus fare or gas for their car or car repair. They are in better health because they can afford their medicine. They are more efficient because they aren’t exhausted from working multiple jobs. They don’miss work because they got evicted.
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mwr
ny 41 minutes ago
My local Home Depot has more automated self-serve checkout lines than human cashiers. One of our large supermarket chains is installing automated check-out kiosks and that are supervised by one employee for each four lanes. Is this inevitable or is it a response to the looming “threat” of higher minimum wages? I don’t know, but one thing for sure: it means fewer jobs for unskilled applicants.
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Earl W.
New Bern, NC 41 minutes ago
Wow! I had no idea that all we have to do is have another world war that destroys much of Europe and Asia in order to raise wages for the average American worker. Who knew it was that simple?
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redweather
Atlanta 43 minutes ago
If you’ve ever wondered why low paid service workers don’t always seem all that eager to please, remind yourself that when they do get a raise it is probably of the ten to twenty-five cent variety. Sure, it’s better than nothing, but as Bob Dylan once wrote “when you’ve got nothing, you’ve got nothing to lose.” Paying workers as little as possible breeds employee contempt for company and customer alike.
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Claire Falk
Chicago, IL 43 minutes ago
When McDonald’s workers in Denmark decided that $20 an hour was a reasonable wage, McDonald’s fought that battle and lost. I understand that comparing Denmark to the United States may be comparing apples to oranges, but still, McDonald’s is paying their employees in Denmark a starting wage of $20 an hour and still making a profit.
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laura m
NC 43 minutes ago
Wage slavery……is what these pathetic raises are about. Most service sector employees are minorities. Can’t keep them down legally anymore, but we can impose this wage slavery. It is disgusting. Why shouldn’t unskilled labor also make a decent wage? A living wage. Now McDonald’s/Wal Mart and more to come are throwing them a bone to get them to shut up. Give them a buck, and they won’t agitate for the $15/hr that could actually make a real difference in their lives. And by the by, increase everyone’s salary, and raise us all up.
Our racism is showing in this, big time.
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Carl Ian Schwartz
Paterson, New Jersey 43 minutes ago
I fully agree that workers are not commodities, but are resources for a well-run business where both workers and management thrive and produce goods and services that succeed on the marketplace.
Good work–and good management–ARE vocations, whether that work is secular and involves making and fixing cars properly, plumbing, electrical work, or even a good hamburger. It’s not just reserved for becoming nuns, priests, or ministers.
Americans realized this in the early 1940s, when the worked hard in well-paying jobs to produce the goods needed to win a war against the Axis powers, which used slave labor against their will to produce war materiel.
Things have changed here in America, where public discourse is performed by politicians using polite antonyms for awful things, want to balance the budget by demonizing groups of people and taking equality under the law, and using “religious liberty” as the rationale for shredding the Constitution and its Amendments.
At least our World War II enemies never used a religious justification for their evil.
The drafters of our founding documents believed people can do well by doing good. What happened?
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tko
Clemmons, NC 44 minutes ago
Or we could stop waging war on unions. The unions built the middle class in this country and now that unions are scarce, the middle class seems to be evaporating.
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Louis V. Lombardo
Bethesda, MD 44 minutes ago
America today is the land of great inequality.
Corporate control of America is not just unfair — it is cruel.
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Kate
Connecticut 44 minutes ago
While I think it’s a good thing that low wage employers are finally starting to raise the ages of their workers, what about the rest of us that toil in middle class obscurity? I work for a company that did quite well last year, but handed out minimal raises this year. All the while, our esteemed CEO received a $1 million raise. In the meantime, the company lays off workers a few at a time and everyone is waiting for the other shoe to drop. When do those of us who are the people responsible for making the company successful get the raises we deserve?
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C. V. Danes
New York 46 minutes ago
“…because a moderate push might be all it takes to persuade much of American business to turn away from the low-wage strategy that has dominated our society for so many years.”
If we were dealing with facts instead of ideology, then I might agree. But the fact is that American business is caught in an ideology in which rewarding capital is far more important than rewarding labor. It will take much more than a moderate push to change that.
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Steven
Austin, TX 50 minutes ago
Funny that the very survivability of a minimum-wage slavery job in America is, for American corporations, far less important than the potential PR value of tossing a few more bucks the slaves’ way, in the hopes it will keep them pacified and content.
At a time when basic needs and human rights are being violated in this country at levels far worse than any of the nations we would accuse of said human rights violations — access to food, housing, education — for the sake of the enrichment of a tiny, utterly unworthy minority, who’ve used their inherited wealth to maintain the levels of oppression we now see in our police state nation, the biggest surprise of all is that the vast majority of the people in the country seem entirely fine with all this.
We have only ourselves to blame for not throwing off our chains. And it’s ridiculous to expect the rich are going to do that for us, in any but the most symbolic and quaint of ways.