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Guaranteed Wage

by Jalexson

Copyright 1992

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 some items.

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 rent subsidies.

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.



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