Income Inequality, another Perspective

The other day I was in Walmart and saw a young, deformed worker and it made me think about what would happen to him when Walmart raises its wages. I, along with most people, think that a higher minimum wage is a good thing. Unfortunately good intentions are too often accompanied by unintended consequences. For one thing, higher wages will bring individuals who can get higher wages now into competition with this young man. There will be more people vying for these jobs and employers, having a bigger pool to choose from, may hire fewer handicapped or otherwise less desirable (couldn’t think of a better word) individuals. Jobs currently held by the bottom rung of the work force will be taken by individuals a step further up on the ladder. Whatever the scenario of outcomes from higher minimum wages, unless we have full employment, I think more “less desirable” workers will not be able to find jobs. Though in principle I favor a higher minimum wage, I worry about what it will do to people like this young man. So what can we do about income inequality while minimizing unintended negative consequences? The gap in income is in part driven by the faster growth rate of income at the higher end of the wage scale and stagnation of wages at the lower end. The more rapid growth of wages at the higher end is in part the result of the overabundance (evidenced by very low interest rates) and thus lower value of capital. This, along with the increased value of talent, has given talent an edge over capital in the market place. The glut of capital though, also pushes higher low end wages, but is offset by global competition and technological innovation. Currently wages of whatever size are considered a corporate expense and as such reduce corporate taxes. A mechanism that would set a ceiling on (I imagine some sort of a sliding scale keyed off of the number of employees and maybe the nature of the business.) wages that can be considered an expense may be enough to offset the advantage of talent over capital in the market place. However, in this scenario, the market would still determine both the relative and absolute values of various skills. A way to increase the value of lower end wages is to increase the demand or reduce the supply of it. The increased revenue from the reduction of corporate tax deductions could be used to fund infrastructure projects thus increasing the demand for labor. There are other policy changes that would also contribute to increased demand, such as redefining the standard work day as consisting of say, 35 instead of 40 hours. After all 40 hours is pretty arbitrary. These types of initiatives would then allow for a rise in minimum wages, putting more buying power into people’s hands, would further increase the demand for labor. The increase in demand, by its nature would then reduce the supply. A further reduction of supply could be accomplished by reducing the number of two earner households. Rising costs without commensurate increases in wages has forced many women into the workforce. Policies like tax deductions for a stay at home parent during the early years of a child’s development would not only decrease the supply of labor, raising its value, but solve a number of social ills. The above initiatives, along with somehow allocating more of the economies gained through technological innovation to the lower end of the wage scale may move us toward full employment without increasing the competition for the handicapped man at Walmart. This will obviously need some government intervention though I don’t think an overwhelming amount. Market forces, if unimpeded by either government or special interests, drive for lower costs of inputs, a significant portion of which are wages, and higher prices of outputs and any adjustments to these forces need to somehow come from a source outside of the market. A key part of a government’s responsibility is to provide these adjustments for not only the benefit of the society as a whole, but to keep the market from self distructing.