Wages, Capitalism, And Morality: Part I

Economist Milton FriedmanIt is commonly believed that fairness demands a certain level of wage be guaranteed to all workers. That is the idea behind the minimum wage that has long existed in the U.S. and other countries. But does that wage benefit workers? Some economists say it does, but others argue that it actually hurts those it is designed to help. People on latter side of the argument include Thomas Sowell, Walter Williams (who calls the minimum wage “maximum folly”), and Nobel Prize winner Milton Friedman.

Friedman has long argued that the minimum wage increases unemployment among low-skilled people, notably teenagers and young adults, particularly in the minority community. The statistics support Friedman’s view. As a 2012 Cato Institute study noted, seventy years of research has shown that “minimum wage increases tend to reduce employment.” Moreover, that such increases encourage employers to “cut worker training,” “cut back on fringe benefits,” and “hire illegal aliens.”

The research leaves little room for doubt—the minimum wage is counterproductive. That fact is a real disappointment to those who regard it as a valuable tool in the battle against poverty. Politicians, of course, who seldom let facts stand in the way of a program that makes them feel good about themselves, will continue to ignore economic reality and argue for increasing the minimum wage.

But how should the rest of us who abhor poverty react to the shortcomings of the minimum wage? We could follow the politicians and support an approach that doesn’t work, but that would be absurd. Or we could take the view some commentators recommend and just let capitalism work. In a free market system, they reason, employers require no coercion to pay fair wages—they will do so on their own as a way of retaining employees. And as employees gain more skill, their wages will increase accordingly. On the face of it, this view seems sound. But is it really?

Just letting capitalism work would make sense if capitalist enterprises weren’t run by human beings. I am not being facetious here. When speaking of large systems, particularly in a hypothetical way, it is all too easy to forget that humans run them and humans are flawed creatures. Employers, like employees, sometimes act imprudently, unfairly, and even unscrupulously. In fact, they have been known to act not only against the interests of others but even, albeit unconsciously, against their own interests.

Just letting capitalism work, unencumbered by regulations, is not a new idea. It was followed during most of the Industrial Revolution and produced sweatshops with unsafe, unhealthy working conditions, a torturous workweek, scandalously low wages, and the exploitation of young children. These moral abominations were eventually overcome and a realistic understanding of the imperfections of capitalism was achieved in western societies, although writers such as Ayn Rand have clouded that understanding by condemning altruism and glamorizing capitalism and the “virtue of selfishness.”

Problems with Modern Capitalism

Two developments in contemporary capitalism suggest that the ideas of people like Rand still exert a strong and unfortunate influence. One is the disparity between executive income and worker income. The average CEO of a US corporation reportedly makes  $3.5 million annually (including salary, bonuses, and stock options); the average private sector worker makes $55,500. The ratio is therefore about 63 to 1, considerably higher than in any other industrialized country. In contrast, for example, the average Japanese CEO makes $580,000 or 16 times the salary of the average worker.

Moreover, the disparity between US CEOs and workers is growing. According to The New York Times, the CEO of one major corporation had an increase of 149% in a single year (2009 to 2010), from $34 to $84.5 million. In the same period another CEO went from $31 to $76 million, and a third from $9.2 to $32.6 million.

The second development is the rise of business conglomerates. Large companies take over smaller companies and then are themselves taken over by even larger companies. The process happens in many industries and results in mega-corporations, often with LLC status to provide immunity from legal actions against their subsidiaries. One effect that has gone largely unnoticed in this process is that decision makers have little or no contact with their workers and therefore little concern for treating them fairly. The principal and in many cases the sole concern of such executives is the maximization of profit.

Here is an actual example of what can happen when a conglomerate takes over a group of assisted living facilities specializing in care for patients with Alzheimer’s and other forms of dementia. Let’s call the group Quality Care for Seniors or QCS, and the conglomerate Capitalism Writ Large or CWL. (Neither, of course, is an actual name.)

QCS  facilities are located in the Midwest and Southeast. CWL is a multinational Limited Liability Corporation with holdings not only in assisted living facilities, but also in condominiums, hotels, shopping centers, and other enterprises. It is located in California and uses the services of an intermediary buffer company based in another western state.

Before the conglomerate took over, the starting hourly wage for QCS caregivers was $8; workers with several years’ experience averaged $10. They also had some benefits. These included: 1) a 100% matching 401K and a (very modest) health care plan; 2) a modest premium for working less desirable shifts—25 cents an hour for the 3 to 11 p.m. shift, 35 cents for the 11 to 7 shift, and $1 extra per hour for weekends; and 3) monetary rewards for meritorious performance.

After the conglomerate took over, the basic wage remained the same, but the matching 401K and all the hourly premiums and monetary rewards were eliminated.

The result was an immediate decline in morale among caregivers, followed in time by resignations and new, less able and often less motivated replacements. Administrators of individual QCS facilities attempted to mitigate the effects of these developments on residents, whose families paid sizeable fees for their care. But local administrators had virtually no ability to modify managerial directives from CWL. Therefore, some decline in the quality of care was inevitable.

One important lesson in this example is that CEOs and other executives operate mainly, if not solely, on the principle of self-interest and that requires showing a profit for their company and its shareholders. They may want to be fair to their employees but the corporate system provides no motivation to transform that desire into a plan of action. In fact, the unchanging goal of increasing this quarter’s profit over last quarter’s may well offer a strong counter-motivation.

Another lesson here is that conglomerates are even more focused than smaller companies on the “bottom line” and more oblivious of the consequences of their decisions on their employees. After all, to conglomerate executives, the employees of their subsidiaries are not living beings but mere statistics, as are the clients they serve. In other words, executives at CWL have never seen QCS caregivers at work. Nor have they seen the residents, many of whom cannot feed or bathe themselves or brush their hair or teeth. (Many cannot even speak.) The caregivers must do all these things for them and more. They must cheer them, encourage them, comfort them, and most important of all, love them.

No executive who observed caregivers at work for an extended period of time would ever feel the same again about the disparity between their wages and his own. And no such executive with a functioning conscience would ever again cavalierly issue directives to squeeze more work out of caregivers for less pay. But unrelieved emphasis on the bottom line has a way of numbing conscience.

To summarize, the minimum wage is counterproductive, so it shouldn’t be increased. In fact, a strong argument can be made for eliminating it. Unfortunately, doing that will almost certainly serve as encouragement to corporations to continue and even expand practices that cry out for reform—specifically, giving extravagant remuneration to executives while being ungenerous and even unfair to the men and women largely responsible for their success.

So neither of the answers being offered by leading commentators—increasing the minimum wage or eliminating it—is satisfactory. But that does not mean there is no answer. It means only that a new approach is needed, one that addresses the complexities of the issue and incorporates ideas from a discipline seldom consulted by economists—the discipline of ethics. Part 2 of this essay will present that approach.

Copyright © 2013 by Vincent Ryan Ruggiero. All rights reserved