The federal government needs to substantially alter the way it attempts
to help those at the bottom of the income scale. Current approaches such
as housing subsidies and the minimum wage law damage the economy without
being capable of eliminating poverty. Implementing a guaranteed wage system
would help the working poor improve their economic situation.
The minimum wage is incapable of providing a living wage to those at
the bottom of the income scale. It cannot be set at a high enough level
to provide sufficient income to support a family. Increases in the minimum
wage commonly produce price increases and reduction in the number of jobs.
Some prices increase to cover increased wages required by the law. Others
increase because the increase in demand allows sellers to charge more for
Most companies can raise wages only be raising prices or increasing
productivity. Large American companies typically operate with very narrow
profit margins and rely on volume to generate large total profits.
Many politicians fail to understand the difference between profit margins
and profit as expressed in terms of assets or a return on investment. A
company might make less than a penny on the sale of a given product, but
still make an acceptable return on investment by selling large numbers
of the item. A company faced with an increased cost in wages, raw materials,
or other areas must either pass along the cost in the form of a price increase,
find some way to reduce the total increase in costs, or attempt to increase
sales sufficiently to offset a reduced profit margin.
If enough companies respond with price increases, the cost of living
rises and eventually offsets the wage increase. Some companies may increase
prices indirectly by keeping the item price the same while downsizing the
item. Other companies may attempt to increase productivity by automating
more operations(e.g., use of product scanners at super markets) and thus
reducing employment. Retail type businesses may attempt to increase sales
by attracting customers from other competitors and forcing the competitors
to reduce their staffs or even close. Fast food chains have been utilizing
this last approach.
Manufacturing firms, like many in the apparel industry, that face fierce
foreign competition may have to close because they cannot raise prices
sufficiently to remain competitive and other approaches are not feasible.
Under a guaranteed wage system government would subsidize a worker's
hourly wage depending on the difference between the wage and the amount
the worker needed to earn to support his or her family. A qualifying worker
would need to provide the primary source of income for the family and the
payments would be based on the worker's principle job. The pay subsidy
would depend on the amount needed if working 40 hours a week. The subsidy
would not be reduced for working over 40 hours, but no additional money
would be paid either.
For example, a company employs three people at a wage of $4 per hour.
One worker needs to make $6 per hour to support his family, another needs
to make $7, and the third is a high school student living with parents
who provide financial support. The first two work full time and the third
works only 15 hours a week. The government would pay the first worker $80(
$2 X 40 hours) and the second $120( $3 X 40 hours). The third would receive
no government payment because of a lack of need for a higher wage.
Under the minimum wage approach, the employer would have to pay all
three workers the minimum wage even though each would have a different
need for assistance. One of the most serious weaknesses of the minimum
wage is the requirement that companies pay the minimum wage to those who
do not need the additional pay. The minimum wage law may be playing a major
role in encouraging high school students to emphasize working at jobs over
studying for school. The minimum wage provides a seemingly substantial
income to students who do not have to worry about the expenses of room
and board. A part-time minimum-wage job can provide a student with money
for a car as well as money for alcohol and drugs.
The guaranteed wage should provide sufficient income to cover basic
necessities. Someone with a minimum wage job may still need food stamps
or government housing assistance.
Eliminating the need to pay the minimum wage would allow companies to
hire more of the unemployed who would otherwise need other forms of government
assistance. Thus part of the funding for the program would come from cost
reductions in other government programs. An F.I.C.A. type tax on income
over some amount(e.g., income more than 20% above the income taxed for
F.I.C.A.) would provide additional funding. To discourage businesses from
using the program to pay low wages to some employees and very high wages
to others, companies with wage categories less than some minimum amount
would have to pay a matching amount for salaries subject to the above tax.
The minimum wage has failed because it attempts to force private businesses
to guarantee everyone a living wage. The private sector cannot achieve
this goal because employers must make a profit to survive and thus cannot
finance jobs that prevent profitable operations. The guaranteed wage would
encourage the private sector to produce jobs while having government assume
the responsibility of insuring that individual workers receive sufficient
wages to cover their needs. Government can redistribute income because
it can force people to pay its taxes.
The guaranteed wage would offset the chief weakness of a market economy
which is that individual income depends on supply and demand both of the
labor market and in the sale of goods. Professional athletes have high
incomes because few people have the necessary ability to perform their
jobs. Dishwashers have low incomes because many people can perform the
job. Supply and demand helps insure a healthy economy but cannot guarantee
a living wage.
Unemployment compensation should be changed to operate in a similar
manner to that proposed for the guaranteed wage. The current system penalizes
a worker who takes a job that pays less the than the previous job before
unemployment compensation runs out. The loss of income may discourage unemployed
workers from taking lower paying jobs while looking for a better job. The
system should change so that a worker will temporarily continue to receive
the total income regardless of what the new job pays. A worker would receive
the difference between the pay from the new job and his unemployment compensation
until he had received the maximum amount of unemployment compensation he
was allowed or until he found a better paying job. This approach would
allow a worker to extend the period of unemployment compensation and retain
his former income for a longer period.
Federal programs aimed at specific needs like those providing food and
housing have not been effective in meeting the needs of those at the bottom
of the income scale. Welfare payment systems have not worked either. These
programs suffer from two major problems. They have high administrative
costs and require eligibility standards that create disincentives for self-improvement.
Housing programs have the highest administrative costs because such
programs have eligibility standards for those wanting housing as well as
those wishing to provide housing. Early programs had especially high costs
because the federal government used the housing program to subsidize the
housing and real estate development industries. Administrators determined
where to build new housing and what type of housing to build. Recent programs
reduce costs by allowing use of existing housing but still require that
those offering housing receive approval before their tenants can receive
Government has to establish eligibility standards for those seeking
assistance to control costs and prevent people from taking advantage of
the program. Unfortunately such standards create a disincentive to seek
employment. Someone who gets a job that provides less income than federal
assistance programs can end up being worse off if the job increases income
beyond the maximum allowed for a person receiving the specific form of
assistance. Welfare recipients may be reluctant to give up the security
of welfare for the uncertainty of the job market especially if they feel
unqualified for any job.
Administration of the guaranteed wage program might be handled through existing agencies. For example, employment offices might handle determination of eligibility and distribution of government wage supplements. The Internal Revenue Service could help prevent fraud through examination of tax returns for excess wages. For example, the IRS would insure that someone claiming eligibility did not have a second job that paid more than the one for which eligibility was claimed or that no one else in the household had a higher paying job.
I also write at Mediard
You can support this site through PayPal.