" The Audacity of the Fight for Higher Wages"

Jared Bernstein @ NYT's Economix:

I was struck Thursday by the juxtaposition of two stories in the news (two and half, really).

First, the banks had another banner quarter in terms of profits, up $42 billion, or 23 percent from last year.  News reports emphasized lower loan losses, meaning the banks had to mark down or charge off fewer nonperforming loans.  That increases the share of their capital that they can put to work spinning off profits, something they are very good at.

A classic case of it takes money to make money.

At the other end of the economy were the striking fast-food workers, calling for an increase in their pay to $15 an hour (the average for these workers is around $9, up from $8.66 in 2009).

I also noted — this is the half-a-report I mentioned above — that in the upward revision to second-quarter gross domestic product that came out on Thursday, corporate profits were  again up near record highs as a share of national income while compensation fell again and is now at the lowest share it has been since the year I was born (1955 — ancient history, I know).

And yet, what I mostly heard about this was about the audacity and the economic illiteracy of the strikers.  Don’t they realize that it’s still a tough economy?  Don’t they get that their employers are not the big corporations but the franchisees who can’t afford to pay more?  Don’t they get that the increase will just have to be passed on in prices?



Don’t get me wrong. These are good questions. They have answers, and the commentators should know and offer them, as I will in a moment.  Neither do I begrudge any sector its profitability; that’s what capitalism is all about, right?

But let’s face it. Something’s broken here in an economy that serves up low wages to significant numbers of adults whose families depend on their earnings (the typical worker earning between the minimum wage and $10 an hour earns half of his or her family’s income; 88 percent are adults).  And something’s broken when the media and economic pundits seem to devote a lot more energy to explaining why companies can’t pay living wages than considering what to do about it.

About those questions:

■ Moderate increases in the minimum wage have had their intended consequences of lifting the earnings of affected workers.  Yes, the increase is absorbed by small price increases, some redistribution from profits, and other mechanisms, which can include some job or hour losses.  But the research is clear on this point: the benefits to low-wage workers far outweigh these costs. Those protesting workers are not economic illiterates at all. The research supports their actions.

■ Yes, it’s still a tough economy, but research on the 1990-91 minimum-wage increase, introduced in a downturn, found the same effects just noted.  Moreover, the runway to this debate is very long.  Start now and the increase could come when the economy is in better shape.

■ The franchisee point is a strong one. They do operate with narrow profit margins, and one should not conflate their profitability with that of their corporate parents. But minimum wages apply to all companies and industries (though there is an exception for waiters, as the great economist Sylvia Allegretto often notes), so no single company is at a competitive disadvantage. Also, another way part of the wage increase could be offset is through a reduction in the corporate parent’s royalty charge to the franchisee.

So, sure — this is all just capitalism, and I’m all for it. But market failure is also a hallmark of capitalism, and those purporting to hold forth on the economy have a responsibility to recognize such failures, particularly when they violate norms of equity and opportunity. If significant portions of some industries pay wages on which grown-ups cannot support a family, while other industries post historic profits, and, importantly, the gains to the latter fail to ever reach the former, then corrective policy is needed...