YOU DECIDE: How can we help low-wage workers?

Date posted: September 27, 2013

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

My first paying job was with a fast-food restaurant chain in my hometown. I started as the french-fry assistant, standing over a deep fryer cooking a basket of potato strips, emptying the basket when they were cooked, salting them and finally bagging the fries for customers. I was then promoted to the grill, but that didn’t go well. The manager found my best skills were in working the counter, taking orders and making change. This was in the days before computer-operated cash registers. I had to do the math of calculating the correct change in my head. I earned $1 per hour, which in today’s purchasing power, is about $7 – close to the minimum wage.

So I have a great deal of empathy for fast-food workers. Thus, I was very interested in following the recent nationwide protests over the relatively low wages earned by these workers. Many of the protesters wanted a doubling — to roughly $15 an hour — of the wage rate paid to them. Having worked as one, I can certainly understand their desire.

Yet other observers pointed to what they called the realities of our economic system. They asked, Who would pay for the doubling of fast-food worker wages? Would it be the customer through higher prices for fast food? Would it be the investors in fast food companies earning less on their money? Or would it be fast-food workers themselves if some of their jobs are replaced by machines or technology?

Let me try to look at these issues by drawing on economic logic and findings, and then let you decide the best approach to assisting low-wage workers.

First is the question of what determines how much a worker is paid. This is a long-discussed question in economics that often creates passionate and sometimes heated responses. In the modern business world, two factors are importantly related to a worker’s rate of pay. One is the difficulty of the task performed by the worker and the value of that task to the company. The other is the number of workers available to perform that task.

By difficulty I don’t necessarily mean the sweat and toil involved. Instead — and this is more true today than ever — I  mean the cognitive difficulty, particularly in terms of specialized knowledge needed as well as the complexity of the associated decision-making. As an example, consider surgeons. They spend many years learning their skills, and the decisions made in the middle of operations have to be done quickly and can mean life or death. These factors translate into an extraordinarily stressful job but also a very high salary.

Also, as the number of individuals who can work at a particular job rises, the rate of pay falls simply because businesses have more people competing for each opening. Another reason surgeons are so well paid is because few people have those skills.

Both of these factors work against fast-food workers. While working in fast-food requires some training, the training time isn’t long, and the difficulty isn’t high. Again, I know; I did it, and many people can also. But please, please, don’t misinterpret my words. Nothing I am saying suggests that fast-food work is anything but honorable and worthwhile. But work at fast-food restaurants simply won’t command the level of wages of jobs requiring specialized skills possessed by relatively few people.

If fast-food wages were doubled; what would be the ramifications? A large amount of economic research spanning many decades suggests a mandated increase in a worker’s wage without a commensurate rise in the worker’s productivity ultimately encourages companies to use fewer such workers. Perhaps the company replaces workers with machines or technology. And if the pay hikes are passed on to fast-food customers, economic evidence suggests people buy less fast-food.

However, there are two retorts to these arguments. One is that higher wages will motivate workers to be more productive and also cut down on worker turnover.

The other response is that fast-food companies can afford to pay workers out of their profits. Available data indicate the profit rate for fast-food companies is less than 5 cents on the dollar. Companies have to worry about maintaining a competitive profit rate in order to continue to attract investors and remain in business.

For some, fast-food work serves as an introduction to the workforce and is a rung on the economic ladder as the individual acquires more specialized skills and climbs upward. For these upwardly mobile workers, the flexibility of fast-food work is the big draw.

Still, there are many workers who for a variety of reasons remain working at relatively low-paying jobs for a long time. In this case, an idea proposed 50 years ago could be a way to help them. It’s called a “negative income tax,” and it sends low-wage workers new money (in addition to any monies withheld in their paycheck) from the IRS to supplement their earnings. However, the financial assistance is structured in a way to always maintain the incentive for the worker to earn more on their own — that is, assistance is always reduced less than a dollar for every new dollar earned. The “earned income tax credit” is a form of this plan.

We’ll always have low-wage jobs. But recognizing why can help us decide how to structure workable ways to help the workers performing them.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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