I have heard it said that with the massive bailout of the financial sector American capitalism will never be the same. But if we are going to redefine capitalism to encompass some form of regulated markets, let’s do it right. The latest call for a bailout of the auto industry presents an opportunity to truly redefine the nature of the social wage in this country. Although General Motors will claim that part of why they need assistance is to meet their obligations under union contracts, most reasonable people understand that so called flexible labor markets can’t create a demand for cars that simply does not exist. GM has put all its eggs in one basket for too long: gas guzzling SUVs which no longer have appeal when gas prices rise, as they did during the summer.

The real question that policymakers, especially when contemplating the types of bailouts that are being requested, should be just how can we meet the needs of workers while simultaneously making American industry more competitive around the world. Perhaps the larger message from these economic crises is that we really cannot count on deregulated markets to do this. Government obviously has to play a more active role. One area where government can make a difference is in the area of universal healthcare. When a company adds on average $1000-1500 per car to cover the health insurance costs of both its active labor force and retirees, as per union contract, it finds itself at a competitive disadvantage, especially against foreign competitors whose healthcare costs are picked up by the state.

The answer isn’t to absolve companies of their responsibilities to their workers, but for companies to stand by their workers on matters of such importance. It really is in the interests — the self-interests even —  of business to demand national health insurance. The current healthcare regime predicated on employer provided insurance no longer serves the national interest. This isn’t only because coverage is limited to only those employed or fortunate enough to work for firms that provide it, but because the current system really does put us at a competitive disadvantage.

Initially begun as compensation for not providing higher wages in collective bargaining agreements between the big automakers and the United Auto Workers following World War II, as the idea spread and more companies provided this benefit it ultimately came to be expected as a matter of right. At the time health insurance was relatively cheap, but that is no longer the case. One might even think that corporate America would be begging government to take over health insurance in the same way it begged to be regulated during the early Twentieth Century. Unfortunately, corporate America has not been so eager to relinquish it in favor of national health insurance because it would also weaken their control over their workforces. Because workers need coverage, and increasing prior conditions among an aging workforce makes it difficult to get new coverage, workers are only effectively locked into their employers.

Corporate paternalism not only hurts working Americans by locking them into their jobs, but it ultimately renders us as a nation less competitive because the costs have to be worked into prices. Were there to be national health insurance, American companies could become more competitive, and American labor could become more mobile, which might also ensure a better match-up between skills and jobs thereby resulting in greater productivity.  Even if workers had to pay an additional tax for this insurance, it would be offset by what they would save in the ever rising premiums they currently pay out of their paychecks to cover their families.
If corporate America is going to come hat-in-hand to the American taxpayers for assistance, then we as a condition of that assistance need to demand that this corporate paternalism be ended in favor of a system that not only can make us more competitive, but also empowers workers. The need for national health insurance is only one issue to be addressed as we consider bailing out companies. Others include higher wages, particularly at the bottom of the distribution to reduce income inequality; caps on exorbitant executive compensation for those companies receiving assistance; requirements that companies receiving assistance provide job retraining and job search assistance to those who will still have to be laid off; and an overhaul of existing American labor law so that workers’ rights will be protected. If we are truly going to redefine capitalism at taxpayers’ expense, let’s ensure that it is done in such way that it truly benefits workers.

It strikes me as supremely ironic that the candidate that once made a big issue out of campaign finance reform failed to see the connection to the Wall Street bailout. If there is a reason for why Congress put together a package that appears to favor Wall Street interests at the expense of Main Street and ordinary workers, it has to do with our current system of campaign finance. The first version of the bailout that was defeated in the House of Representatives was defeated because of two extreme ideological strands. Those on the left voted against the bailout because it was perceived to be a measure favoring money interests at the expense of ordinary workers. Those on the right voted against it because of their commitment to free market ideology. That is,  in a free market economy where individuals are free to make choices and investments, they have the right to reap the benefits, and huge ones, of those choices and investments because they assumed risk. As a matter of principle, then, they have no right to complain when the investments they have made have gone sour. This, of course, leaves those in the middle.

Those in the middle were no doubt motivated by a view that unless something was done, the entire financial system will collapse and the consequences will no doubt be felt by everybody. That both Democrats and Republicans can actually agree on action is quite a feat. It is doubtful that this agreement stems from a true meeting of the minds as opposed to a system of financing campaigns which relies on multiple contributions from political action committees. This systems simply rewards incumbency regardless of party affiliation. That Congress felt the need to respond to calls by a Treasury secretary who hails from Wall Street and a Fed Reserve Chairman whose primary constituency is the banking industry perhaps says more about the orientation of Congress and its general responsiveness to business interests over the last several decades than it does about the specifics of the crisis. Congress has increasingly been responsive to business interests, and the additional $130 billion in pork in the Senate version that was ultimately passed clearly attests to this.

On one level, the responsiveness of Congress to business interests owes much to the absence of institutions that give voice to workers’ concerns. Labor unions, in particular, historically gave voice to workers and served as a key constituency to ensure that national economic policy would also serve their interests. With the decline of labor institutions that constituency has simply been absent from the policy process. But on another level, Congress was bound to be more responsive to those special interests that were able to contribute large amounts of money to their campaigns out of the sheer reality of the political universe in which we live. When the average campaign for a House seat costs several million dollars, it is to be expected that members of Congress will seek contributions from where they can get them. This is not an issue of Democrats versus Republicans; but of incumbents v. non-incumbents.

If the crisis can be said to be in part attributable to a general political climate that has consistently voted for deregulation, that same climate only made it a foregone conclusion that the same Congress that favored deregulation would also favor a bailout, regardless of its form. Arguably a welfare state that immunizes society from risk and in turn creates a set of expectations that whenever a problem arises government will solve it is also a contributing factor. But if Congress wasn’t so beholden to the myriad of interests for campaign contributions, it would perhaps be in a better position to actually contemplate the merits of a bailout in a deliberate fashion, rather than deferring to so-called  “expert” opinion that just happens to come from the very industry seeking assistance. In short, if we hadn’t seen the erosion of the types of institutions that gave workers voice — and voice finding expression in a Congress responsive to the needs of workers — we would never have seen the type of policies over the years that were favorable to business that ultimately gave us this debacle. In order to level the playing field so that Congress will be responsive to the needs of all citizens we really do need to have a system of campaign finance that does not rely on private contributions. Perhaps the American worker ought to be making the case that campaign finance reform is ultimately a matter of workers’ rights. It is ironic, then, that Senator McCain missed a tremendous opportunity to remind the public why campaign finance reform was so important.

A couple of years ago, one of the biggest events in labor history occurred when the Service Employees International Union (SEIU) and the Teamsters decided it was time to withdraw from the AFL-CIO and form a new council. Others, like the United Food and Commercial Workers, UNITE HERE, United Farm Workers, and the Carpenters only followed. It then came as no surprise that The Laborers’ Union representing over 700,000 in the construction industry also followed suit and joined the same coalition as the others: Change to Win where the focus would be on organizing new workers. At the core of the controversy was the strategy being pursued by the old-line federation. Whereas the old AFL-CIO establishment leadership maintained that more resources should be spent on political activities — attempting to influence public policy — the defectors were arguing something more fundamental, which is more effort and money needs to be channeled into organizing workers. Contrary to the conventional wisdom that would have viewed these defections as further evidence of the decline of American labor, they really bespoke a movement to revitalize the labor movement that has for too long been out of touch with working Americans.

Union membership has been in a state of steady decline. At its peak in the 1950s, as much as 35 percent of American wage workers were union members, and by the end of the Twentieth Century only 14 percent were. Among industrial workers, union membership fell from just under one half in 1955 to around 16 percent by the end of the century. The implications of this decline have been enormous. While union membership was declining, in part due to economic transformations from an industrial based manufacturing economy to a service based post-industrial economy, and also in large measure to right-to-work laws in many states particularly in the South that made union organizing more difficult, conservative members of Congress were launching an assault on social policy and other labor protections. The biggest stagnation in the minimum wage appeared to coincide with the sharpest decline in union membership during the 1980s and 1990s. Because workers were unorganized, the federal minimum wage had failed to keep pace with inflation, the social safety net had been eroded, and the gap between the top and bottom of the wage distribution had grown, and many localities sought to remedy this with passage of their own living wage ordinances. This trend, of course, was triggered in large measure by the outsourcing of municipal services, which had been done previously by unionized municipal workers — in other words another assault on organized labor.

Were all these events and labor’s decline a mere coincidence? Historically one of the greatest contributions of the American labor movement to the American political process is that they were able to organize their rank-and-file members and get them out to vote. That the composition of the U.S. Congress changed during this time was also no small coincidence. With the decline in union membership many of those who would have voted for the Democratic party simply didn’t, and in many cases disfranchised themselves. But it was also the case that when labor presented itself as a strong constituency in the political/policy process, that Congress was more inclined to pass legislation beneficial to working Americans.

All this clearly has implications for the direction of national economic policy today. Without a strong constituency to lobby for the types of policies that will further the interests of working Americans rather than the financial interests who profit off the backs of workers, we are only likely to see more policies that effectively enable irresponsible behavior — the very behavior that we the taxpayers in the wake of the collapse of Fannie Mae, Freddy Mack, Lehman Brothers, and AIG are being asked to foot the bill to clean up. Moreover, unless there is a strong constituency to influence not only public policy but the election of friends of labor to Congress, we are not likely to see much of a difference between the two political parties on matters concerning the economy. But in order for Labor to lobby, there does indeed need to be a constituency to rally behind that political activity. Therefore, Labor needs to do both —  organize more workers and then engage in the type of political activity that can have an impact: get their members out to vote for those who will truly advance the interests of working Americans. This is perhaps where the American labor movement may have lost its way, and we are all suffering because of it.

A recent New York Times Magazine piece on the advisors to Senator Obama’s campaign notes that the new progressive economists from the Chicago School of economics believe that the nation’s economic problems can be addressed by, among other things, a reversal of Bush’s tax cuts. In the name of achieving greater income equality and fairness, the middle class should receive a tax cut and the top 1 percent — those earning between $500,000-800,000 — should pay more. And the top .1 percent — those earning around $9.1 million would see their tax bills increase by $190,000 a year. If the nation’s economic problems are solely about tax fairness, this plan might have some merit, but such a scheme is not really going to help the middle and working classes that much.

To paraphrase Bill Clinton’s 1992 Campaign slogan of it’s the economy stupid, it is institutions stupid. Middle class wages have stagnated because of the deterioration of labor market institutions — primarily labor unions and minimum wages — designed to bolster wages. Reducing wage and income inequality requires bolstering the wages of those particularly at the bottom of the distribution. Wage inequality tends to be less when the percentage increase is greater for those at the bottom of the distribution relative to those at the top. It is no small wonder, then, that European nations with strong labor market institutions tend to have lower levels of inequality. But they have something else which nobody seems to be talking about in this presidential campaign: universal health care.

We talk about the stagnant wages of the middle class over the last few decades, but those wages have stagnated as healthcare costs increased. The basic social contract of our health care regime has called upon employers to provide health care to their employees. This contract was born out of pattern bargaining between the automakers and the UAW following World War II. If workers agreed to take lower wages, the employers would provide health insurance. Then insurance was relatively cheap. But as insurance increased in costs, and these costs were only part of the overall wage package, it only seemed logical that firms would recoup some of those costs by holding the line on wage increases. And if institutions were no longer there to assist workers, their wages could only be expected to deteriorate even further.

There is no question that the current tax code is unfair, but to make it the centerpiece of an economic reform and recovery package only obscures the true import of institutions. An Economic recovery package that strengthens labor unions and raises the minimum wage — one that essentially gives workers voice — is what the country needs and would represent true change. To focus on the tax code as Senator Obama’s advisors from University of Chicago’s economics department suggest is really nothing more than a repackaging of the proposals the Chicago School of economics is famous for: Friedmanomics.

Labor market institutions such as unions and the minimum wage do make a difference with regards to overall wage structure and achieving a more equitable distribution. The minimum wage, for instance, is not only about helping the working poor to earn a wage above the poverty line; it is also about shoring up the middle class through wage contour effects. A minimum wage is effectively able to  accomplish for non-unionized workers what labor unions have traditionally been able to accomplish for their members: it gives them a sense of voice by establishing a set of standards through the force of law, which is also enforceable by the state. This becomes even more important in an era of declining unionism. Because the minimum wage has all too often been conceived of narrowly as primarily an anti-poverty measure, its broader implications have been overlooked. The broader implications have also been missed because of our narrow construction of the minimum wage population as only those earning the statutory minimum, and not those who are earning an effective minimum.

Were we to conceive of the minimum wage in terms of contours, we would be able to understand just how important the minimum wage is as a labor market institution that can serve as a bulwark against stagnating middle class wages. In the 1950s John Dunlop developed the concept of a wage contour to explain how a firm’s internal wage structure might be as much affected by external forces as internal ones. A wage contour would be defined as a group of workers with similar characteristics working in similar industries and earning similar wages. For each group there would be a group of rates surrounding a key rate, and these group rates would be affected by changes in the key rate. The key rate was essentially to be defined as any rate serving as a reference point in a particular industry. A minimum wage can similarly be viewed as a reference point for what others in similar industries and occupations ought to be paid.

If we took the low-wage labor market and divided it into contours, it would look something like this: the first contour would be comprised of those earning in a wage interval between the statutory minimum wage to about 25 percent above. The second contour would pick up at the end of the first and range to about 25 percent above that. The third would range to 25 percent above that, and so on. This naturally encompasses a broader segment of the labor market. But even looking at the first contour, for instance, an “effective minimum wage” population will emerge as those earning the median of the first wage contour. As a raise in the statutory minimum wage results in a raise in the “effective” minimum wage, it is also likely that there will be resulting increases in the median wages of at least the second and third contours, and perhaps more.

According to data from the Bureau of Labor Statistics’ Current Population Survey, following New York State’s increase in the minimum wage from $6.00 to $6.75 in 2006, the median wage rose from $7.05 to $7.21 in the first contour. But it also rose from $8.57 an hour to $9.61 in the second contour, and from $10.33 an hour to $12.01 in the third contour. Meanwhile in the rest of the U.S. where the federal minimum wage was still $5.15, the median wages remained $5.77, $7.21 and $9.21 an hour in the first three contours respectively.

The point that I wish to make is that following New York’s increase in the minimum wage, and the effects were similar for other states, the median wage also rose for those who had been earning up to at least 91 percent above the state’s statutory minimum wage, and most likely rose above that. But in states where there had been no increases in the minimum wage, the median wages of those earning up to at least 91 percent above the statutory minimum wage remained stagnant. A minimum wage that would  keep up with say the rate of inflation might well put an end to wage stagnation at the bottom of the wage distribution and among the lower middle class. As such, there are overall macro welfare benefits that cannot be overstated.

The minimum wage as a policy measure has traditionally been viewed through the ethos of neoclassical economics. According to this ethos, the goal of the market place is to achieve efficiency and a wage floor is simply inefficient because it prevents wages from automatically adjusting to a point where demand for labor will be exactly equal to the supply. This ethos also defines social welfare in terms of Pareto optimality, whereby benefits to one group don’t in the process result in costs to another. A minimum wage, then, does not yield overall social welfare because its supposed harmful effects results in inefficient outcomes. The costs in the form of disemployment effects are viewed as outweighing the benefits of making another group of people better off because they now have higher incomes. But what if we were to define our social functions in terms of other societal goals? What about justice or greater democracy for instance? Would we not also come to a different view of what constitutes efficient behavior?

In this blog, I would like to argue that a minimum wage as but one form of wage policy has a role to play in achieving not only a more just society, but a more democratic one. But to understand that we do need to view our traditional cost-benefit calculations differently. In the case of justice, social welfare is defined in terms of a society where individuals are able to live autonomously and in dignity and not be exploited by others. Societal outcomes simply are not just when market efficiency considerations are permitted to trump the rights of workers. And in the case of democracy, social welfare is defined in terms of a society where the benefits of democracy, perhaps measured in terms of maximum citizen participation, are considered to be of greater importance than again considerations of market efficiency. My larger point is that if we can see beyond the neoclassical ethical foundations that have long dominated the minimum wage debate to ethical foundations predicated on creating a just society, it is only a small step further to move to ethical foundations predicated on democracy.

The first question one might ask is why we need to move beyond the traditional efficiency considerations of the minimum wage? Prior to the New Economy of the minimum wage that was borne out of the famous studies by David Card and Alan Krueger, and others that followed, it was indeed the accepted wisdom that increases in the minimum wage would lead to adverse employment consequences. Even the early institutional perspective championed by Sidney Webb that a minimum wage could be an efficiency wage because it would result in workers being more productive acknowledged that employers forced to pay higher wages might have incentive to engage in substitution. Webb made it clear that better paid workers would better maintain themselves and would come to work with more energy, in part because their morale would be raised as well. Employers would not only have incentive to offer their workers better training; they would also have incentive to perhaps invest in labor saving technologies. It was this acknowledgment that was echoed in George Stigler’s famous observation that a minimum wage results in one of two consequences: either it results in lower employment or it results in greater efficiency.

Empirical studies in recent years have simply not borne out the traditional orthodoxy that increases in the minimum wage result in employment consequences. When they studied the fast food industry, Card and Krueger noted that employment actually increased following a minimum wage increase. Others have similarly noted that although there most likely was a tipping point, moderate increases in the minimum wage would not have harmful effects, largely because the minimum wage has for years been so far below a market clearing wage. Other studies also noted that with the deterioration in value also came corresponding increases in income inequality, especially at the low-end of the wage distribution.

Perhaps the challenge to the conventional wisdom has made it clear that the traditional orthodoxy of the minimum wage is less of an orthodoxy because it is necessarily correct and only an orthodoxy because the mainstream happens to subscribe to it. And yet, that it has been shown not to be true in all cases does open the possibility for policy experimentation. Society is freed up to consider other goals and objectives and other means of achieving social welfare. If those goals and objectives include achieving a more just and democratic society, the crucial question becomes just how the minimum wage, or any other type of wage policy for that matter, can be put in the service of those goals.

A justice ethos rejects the neoclassical’s social welfare function predicated in efficiency. Rather, social welfare is measured in terms of equity and fairness, and ultimately whether those working for a living are able to sustain themselves in dignity. Consequently, the cost-benefit calculation changes. That is, if the benefits of marketplace efficiency mean that there are many workers who will live in poverty and be exploited, or will suffer indignity because they have effectively been coerced into working in the low-wage labor market that does not allow them to live fully autonomous lives, then the costs are too high. And in so doing, it effectively redefines what it means to talk about efficiency. A society with workers earning low wages who are in a position to be exploited because of their low wages, may not be the most efficient society after all. On the contrary, a justice ethos does not assume a just distribution to occur when a competitive market in the name of efficiency results in great disparities in income with those at the bottom not being able to meet their basic subsistence needs. Rather, individuals who work for a living should earn a wage sufficient to support themselves above the poverty line and in dignity. To earn a wage below subsistence is essentially to be exploited. A minimum wage that serves the justice ethos’s social welfare function is ultimately about a policy measure that equates labor rights with human rights. On a more practical level, however, it is about compensating low-wage workers for their lack of collective bargaining power. By raising the wages of those at the bottom, the minimum wage is able to effectively accomplish for non-unionized workers what labor unions have been able to accomplish for their members through collective bargaining. It gives them a sense of voice by establishing a set of standards through the force of law that can also be enforced by the state.

A justice ethos in short redefines social welfare in terms of the benefits of equality and individual autonomy — especially autonomy because of its importance to human dignity — outweighing the costs of traditional market place efficiency. The justice ethos, then, leads to a third ethical foundation — that of democracy and the idea that the concept of the minimum wage can be put in the service of achieving a democratic society because it may serve to further the ends of equality and personal autonomy. Once we get beyond the ethical foundations of the neoclassical orthodoxy and see the value of a justice based approach to the minimum wage, it isn’t too difficult to ultimately view the minimum wage from the perspective of ethical foundations of democracy.

The democracy ethos asks how a minimum wage furthers the objectives of democratic society. The social welfare function is again conceived differently. The benefits of democracy are clearly judged to outweigh otherwise laissez-faire notions of efficiency and other policies that serve to achieve those benefits, even at a cost to market efficiency. They are worth it precisely because of the vision contained in this ethos. Democratic theory assumes a society of free, equal, and autonomous individuals. These individuals enjoy the same rights of citizenship as others and must enjoy their autonomy so that they can participate as full fledged citizens in the democratic process. The greater their autonomy, the more likely they are to participate in the democratic process. The democratic ethos’s conception of autonomy actually takes the justice ethos’s conception of autonomy to the next level. Whereas the justice ethos views autonomy as an end unto itself which is ultimately a matter of human dignity, the democratic ethos views it as an essential element to achieve democracy. One cannot participate as a full-fledged citizen if one is not fully autonomous. A wage policy, then, whether in the form of a minimum wage or some other labor market institution, that effectively gives workers greater voice has a role to play in achieving greater democracy.

A minimum wage, as but one example of wage policy, that can enhance individuals’ autonomy can play a role in enhancing the equal standing of individuals as that which is essential for them to function more autonomously. Not only does the minimum wage improve their standing, but it serves to enhance their autonomy as individuals, thereby enabling them to have greater participation in the democratic process. By enhancing their autonomy, the minimum wage also enables low-wage workers to make greater claims to citizenship as both a process that furthers the equal dignity of all citizens and also as an essential ingredient for participation in the democratic process. If the minimum wage effectively enables one to function autonomously, which in turn enables one to participate more in the political process, that minimum wage can be said to constitute but one policy tool in the service of greater democracy.

Therefore, a minimum wage needs to be viewed more broadly than simply a limited tool to boost the wages of the poor. Rather it must be viewed as but one tool in a larger arsenal of wage policy intended to achieve a more just and democratic society. If we can to this, we might then be able to look back and say that it accomplished the following: First, it enabled workers, especially those at the bottom of the distribution, to achieve human dignity through greater autonomy. Second, it enabled these workers to use their newly acquired autonomy to participate more fully in the democratic process. In the end, measures than effectively enable more to participate also allow for more people to be included.