Monday, January 20, 2014

Social Immobility

When politicians lament the persistence of inequality they are really saying that they want to use the power of the government to give people more. In this case, they want to give people  higher wages by increasing the minimum wage. Naturally, the politicians insist that it will cost nothing. 

True enough, it will cost them nothing, but since a wage increase at one level of a company will impact the wages of other workers, it will surely cost companies something.

Those who buy votes by promising to increase the minimum wage reject the idea that the new rule will cost jobs. They do not see that a wage is ultimately a function of the value a worker adds to a product. They assume that plutocrats are exploiting workers, and that increasing the minimum wage will right the balance.

When pundits complain that workers at Costco earn more, on the average, than workers at Walmart, they fail to mention that, thanks to differing business models, a worker at Costco adds more than twice as much value as a worker at Walmart.

In New York City a few years ago a group of developers wanted to turn the Kingsbridge Armory, in the Bronx, into a shopping mall. They wanted to invest $300 million and hire 1,000 workers to build the mall. Then, the businesses that would operate out of the mall would hire 1,200 staff.

That would have spelled real jobs for real people. It didn’t work out. The New York City Council demanded that the prospective employers pay an above minimum wage. They were told that they would have to pay more than $10 an hour.

Th developers folded the project. There is no mall. There are no jobs, but the City Council has stood up for the vested interest groups that own it.

As is well known, the tragedy of the Obama economic recovery is that fewer and fewer people now hold jobs. As David Brooks pointed out, the problem with poverty in America is not the minimum wage rate, but the lack of employment.

In his words:

The primary problem for the poor is not that they are getting paid too little for the hours they work. It is that they are not working full time or at all. Raising the minimum wage is popular politics; it is not effective policy.

One should add that the problem is not how much the government can force private employers to pay their employees but how much value these employees can add to a product.

Is America producing workers who can do their  jobs effectively and competently? Is America producing workers who can add something measurable to an enterprise?

If not, the debate over the minimum wage is political posturing.

Moreover, it is counterproductive. If you tell workers that they deserve to be paid more for doing the same thing, you are removing part of their incentive to improve themselves and part of their responsibility for their current wage. If you tell them that government will vote them a pay raise, you are telling them that their own efforts are being systematically undervalued by wicked and predatory employers. How well do you believe that that will motivate them to work harder and better?

The problem, as Brooks sees it, lies in the culture. American culture has been producing people who do not much want to work or do not know how. If they do not know how, they do not want to learn.

Instead of harping on inequality, we should, Brooks says, see the problem in terms of social mobility. Today’s America has increasingly been divided into permanent castes, constantly at war with each other.

Brooks writes:

Some on the left have always tried to introduce a more class-conscious style of politics. These efforts never pan out. America has always done better, liberals have always done better, when we are all focused on opportunity and mobility, not inequality, on individual and family aspiration, not class-consciousness.

Social mobility, one of the great products of the Enlightenment and the Industrial Revolution, accepts the existence of status hierarchies. It accepts the existence of different skill sets and different levels of achievement.

It rejects a caste system that fixes people in one social stratum, the one they were born into.

Increasingly, Americans in the lower social classes are becoming a permanent underclass, out of work and out of luck, permanent wards of the state. Those who belong to the upper classes can provide their children with so many privileges and advantages that those who are in the lower classes cannot and will never be able to compete.

Brooks lists some of the cultural factors contributing to the decline in social mobility:

There is a very strong correlation between single motherhood and low social mobility. There is a very strong correlation between high school dropout rates and low mobility. There is a strong correlation between the fraying of social fabric and low economic mobility. There is a strong correlation between de-industrialization and low social mobility. It is also true that many men, especially young men, are engaging in behaviors that damage their long-term earning prospects; much more than comparable women.

Many people agree that these cultural problems trump stopgap solutions like increased minimum wages. And yet, no one really seems to have a very good idea of how we are going to do it. Surely, it would involve undoing the countercultural revolution that overtook the nation during the 1960s.

And it would also require us to overcome the national obsession with multicultural diversity. If people are going to add value to an enterprise they will need to learn how to work as a team, to function as part of a group. They will need to define their identity as loyal employees of their company. They need to follow one set of rules that pertains to everyone equally. they will need to get over the idea that they should be following their bliss or doing as they please. A company where different people are following different rules can never prosper. If it does not prosper it will not be able to pay its workers a higher wage.

Brooks is a bit too optimistic, but surely there is nothing wrong with his agenda:

If we’re going to mobilize a policy revolution, we should focus on the real concrete issues: bad schools, no jobs for young men, broken families, neighborhoods without mediating institutions. We should not be focusing on a secondary issue and a statistical byproduct.


David Foster said...

I don't see the word "credentiaism" is DB's column, but this is a huge factor restricting social mobility.

Sam L. said...

Brooks has shot himself in the foot by saying such conservative things. I thought he'd left all that behind.

Anonymous said...

I agree minimum wage has very limited ability to help poor people, except possibly in an inflationary period which so far we're not in, but I also believe it is a fair debate.

My pragmatic approach is also probably wrong - teach people how to live on less income, waste less money on status, and live below their means. And so I'd support things like subsidized housing, transportation, and health care. At least I don't see how you can't consider these if you want people to take crappy jobs over no jobs.

Stuart Schneiderman said...

Thank you for linking the Barro column. I am not opposed to some of these solutions, but the bottom line is still whether or not people can add enough value to an enterprise to justify their wages.

David Foster said...

Historically, wages in the USA were higher than those in Europe, and books on the history of technology will tell you that this was a major factor in the more rapid acceptance here of labor-saving mechanization in agriculture and manufacturing. The higher wages, though, were not driven by legislation, but rather by the availability of good land, at a low cost or even free, which provided an alternative to working for somebody else for wages.

Dennis said...

Barro believes that the Keynesian multiplier is less than one. He believes that for every dollar the government borrows and spends, spending elsewhere in the economy falls by almost the same amount.[7]

The above mentioned Josh Barro is the son of Robert.

Anonymous said...


These Barrios you mention must be stopped. If they are correct, the entire Keynesian model falls apart. What will Nancy Pelosi do without her magical unemployment insurance multiplier?

In Keynes' defense (I cannot believe I'm writing this), he did believe governments should "spend against the wind," saving money during good times and spending it during economic contractions. This is sensible, but I don't know if he'd ever met a politician who was capable of such a discipline.


Dennis said...


"Contrary to some of his critics’ assertions, Keynes was a relatively strong advocate of free markets. It was Keynes, not adam smith, who said, “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.”1 Keynes believed that once full employment had been achieved by fiscal policy measures, the market mechanism could then operate freely. “Thus,” continued Keynes, “apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before” (p. 379)."

Keynes did go through what Milton Friedman called the "Naive Keynesian and the "New Keynesian."

Politician only take the parts of a theory they like and the rest is of little value.

The Barrios would identify with Federic Bastiat's concept of "legalized plunder." Obama and Pelosi are not the first to engage in it.

Anonymous said...

i believe that you are ignoring a very large parte of the unemployment problem - the economic existence of the blue collar class has been chipped away over decades by free trade, outsourcing and the huge influx of illegal immigrants into the united states. increasing the minimum wage would likely have a useful social effect if you also removed all the illegals who are competing with citizens and working for much lower wages. the rough count of legal and illegals in the u.s is approx 60 million with the ratio at about 1:9.