Robert Reich's Latest Demand Is That Wages Must Fall
This is truly delicious: difficult to understand but truly delicious. For Robert Reich’s latest demand about what we must do in the economy is that wages must fall. Yes, that is fall, not rise, but fall. At which point I guess I should repeat my point that there’s probably a reason why Robert Reich is a professor of public policy, not of economics. I should also point out that there’s been an accusation made, only partly in jest and admittedly only on Twitter TWTR +1.02%, that Reich’s recent outpourings are actually a part of an agreement between him, Don Boudreaux and myself. He makes up ridiculous demands and Don and I gain a target rich environment. Sadly, this is not the truth: Don and I are not that clever, Reich isn’t informed enough to realise that he’s offering up that target rich environment and as the gripping argument, neither Don nor I are ever short of economic nonsense to critique so why would we conspire to add to the stock?
The specific point that Reich makes is about how to make life better for the average working stiff in the United States. He argues for equal pay for equal work which is, as far as I am aware, already part of the law (certainly equal pay for the same job is). He also argues for predictable working hours as a necessity, which doesn’t sound all that good to a freelance writer like myself but your view may vary. But then we come to the two real doozies:
– Provide universal childcare – pre-school and after-school – financed by employers and taxpayers.
– Require that employers offer paid family and medical leave.
These are both an argument that wages should fall. No, really, they are both an argument that the workers’ wages should fall. And before you go off shouting that the Europeans (of whom I am one and yes, I have actually made up the wages for a European company, indeed pay them right now, so I do know how this works) do it so why can’t Americans you need to know that Europeans do not do what Reich is demanding.
So, to explain why this means that wages will fall. What your employer pays in order to get you to come into work is usually referred to as your total compensation. What you actually see in your pay packet is usually called your wages. This is a generally agreed upon convention. We can and do talk about the wage share of GDP (what turns up in wage packets) and the labour share of GDP (the wage share plus the cost of health insurance, employer paid FICA and so on, including pension contributions). We also generally conclude that employers don’t care very much (in fact, don’t give a darn) how that total compensation is made up. That’s the price they’re willing to pay to get that job done. Whether that price is divided into wages only, or wages plus heath care insurance, or employer paid FICA, they just don’t give a darn (there are subtleties about, say, the tax treatment of health insurance but leave that aside here).
And we do really make this assumption. It’s this that is behind the idea that employer paid FICA really comes out of wages. And that really is a standard and general assumption made by almost all economists. If you raise the rate at which employers have to pay FICA then total compensation won’t change but wages will drift downwards (or more likely, not rise as they would have done) to make room for this extra cost. And it’s also, as above, why we include that employer paid FICA in the labour share of national income. This is just the way that we think the world works.
So, if we now mandate that employers have to offer some benefit or other to the people that work for them what do we think will happen to wages? That total compensation number’s not going to shift, we’ve added another benefit that must be paid for: correct, wages fall.
This is quite aside from the lunacy of trying to link benefits to the number of children someone has. What do you think’s going to happen to that Mom of five when she returns to the workforce when any potential employer has to pay for, say, 15 hours a week of pre- and post- school child care per child. Or 75 hours of child care a week when there’s likely to be some number of singletons applying for the same job? That’s a tough one I’ll admit but my best guess is that people from large families are going to find it significantly harder to get jobs than those without one at all are.
But it’s that requirement that employers offer paid family and medical leave which is really lovely. Because of course what is happening here is that Reich, as with many others, is looking over to Europe and seeing that there is paid family and medical (we generally call it sickness) leave available. But it isn’t employers who pay for it: it’s taxpayers. Now, if you want to demand that US taxpayers fund sickness and family leave, well, you’re the people paying the US taxes so of course you’ve every right to demand how they’re spent. But everyone really does need to understand how these systems work: it’s not employers paying the bill, it’s taxpayers.
How it actually works (in the UK at least, I’ve not had to deal with this in either Portugal or the Czech Republic directly in the small companies I have there but from what I’m told the rules are pretty much the same) is this. Our equivalent of Social Security, or FICA, is National Insurance. And when you make up the wages for everyone (or your payroll company does, whatever) you of course take off the with holding part of income tax, the NI taxes that the employee must pay directly and also add the NI that the employer is nominally paying. This is in fact exactly the same way that the US system works. These tax deductions are then going to be sent off to the government tax collecctor.
But what if you’ve got someone who is out sick and getting Statutory Sick Pay as a result? Or the various forms of family leave that are available? Or even, has just given birth and so gets Statutory Maternity Pay? You make up the wage packet for this employee with that mandated pay in it, as normal. But then the amount that you have paid in that statutory sickness, maternity or family leave pay that you have paid out is deducted from the amount that you’ve collected from everyone elses’ pay before you sent the check off to the government tax collector (to be fair, in precise detail, sometimes only 90% of that mandated pay is recovered by the employer in this manner). The amount you pay out in statutory pay is deducted from the tax bill: it is thus the taxpayers, not the employers, who are paying all of this.
This is a crucial distinction. All those family friendly pay policies come not from the pockets of employers but from the pockets of the taxpayers. And if the taxpayers want to have such a system, well, why not? But everyone does need to understand who pays for this. It ain’t the capitalist plutocrats, it’s Joe Sixpack. Something that might temper Joe’s enthusiasm for the plan.
But there we have it. Robert Reich is demanding that employers pay for all of this. And that is the second time he’s arguing that wages must therefore fall. And I really would be arguing that Reich is demanding that Joe Sixpack’s wages must fall in order to meet Reich’s demands for a just society, if only I could convince myself that Reich was even aware, let alone understood, what he’s actually demanding. For I really don’t think he does understand that he’s calling for a cut in wages. Which brings us back to why he’s a professor of public policy, not economics, really, doesn’t it?
forbes.com |
