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The reason for low wages

Updated Tuesday 23rd August 2016

Peter Bloom outlines the current reasons for low wages and how the issue can be addressed.

The issue of low wages continues to be an ongoing and increasingly important issue, both economically and politically. Indeed, while it may sound relatively simple, how wages are determined and how they can be changed is matter of intense scholarly and public debate. Indeed, there are even arguments that wages should not be raised! Here I provide an overview of the current reasons for low wages and how this problem can best be addressed.

Significantly, the problem of low wages is nothing new for capitalist economies. Since the mass introduction of wage labour in the 19th century there have always been contentious discussions and often passionate struggles for employees to earn more. A key historical development, in this respect, was the introduction of the minimum wage. This was meant to ensure that everyone who worked received a basic income that could sustain them. This was particularly seen as necessary during the Great Depression when there was mass unemployment. Yet it also reflects a troubling reality of the labour market – that without government regulations and collective bargaining, employers are able to use competition to reduce wages. However, there are also arguments that these measures stifle job growth. The article The Facts on Increasing the Minimum Wage by Mike Patton in Forbes summarises these debates.

The fluctuation of wages is commonly portrayed by economists as a natural effect of market cycles or as attributable to iron-clad economic laws. Yet the modern problem of declining wages has a definite history. It can be traced back to now-decades-old policies favouring businesses at the expense of established employee rights. Additionally, it highlights the general turn away from the need for a welfare state that was dominant in early post-Second World War era. For many, this reveals the broader ‘failures of the free market’ and the threat that that so-called neoliberalism poses for the survival of the middle class. Edward McClelland charts this history in his article The ‘middle class’ myth: Here’s why wages are really so low today in The Atlantic.

This history speaks to the broader underlying causes of low wages. Whereas less pay is commonly framed as an economic issue – it is also clearly attributable to political decisions. The economic and political reasons though for “wage stagnation” are not singular. They touch on larger social changes such as globalisation, technological advances and a rapidly changing 21st-century economy. There are some key factors for ‘wage stagnation’ that exist across contexts – including the shift from full employment to employability, the decline of unions and the international ‘race to the bottom’. Lawrence Mishel’s report Causes of Wage Stagnation for the Economic Policy Institute outlines these economic and political causes.

Given the politics of low wages, it is not surprising that misconceptions around the effects of wage policies abound. Any and all attempts to raise wages by the government is commonly criticised as “killing” jobs. Meanwhile, for those supportive of such measures, any negative impact is simply ignored. It is difficult, therefore, to discover the truth regarding the consequences of such policies. Using evidence to challenge these “myths” is imperative for determining what policies are best to deal with “wage stagnation” in the present and future. The United States Department of Labor attempts to set straight common misconceptions in their informative article Minimum Wage Mythbusters.

Finally, there are more wide-ranging debates about just how good higher wages are for the economy. Understandably, the desire to increase wages—through the market or government intervention—are usually focused on individuals. Specifically, how this would help a particular wage earner. Nevertheless, there may be excellent macro-economic reasons for substantially raising wages. Notably, it could boost consumption, reduce inequality as well enhance economic growth. John Komlos investigates Why Raising the Minimum Wage is Good Economics for PBS News Hour.

 

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