Economic Models Often Only Rationalize the Status Quo

30 Jun 2015 10:09 AM | Deleted user

Those who oppose increases in the minimum wage often argue the need for low-wage workers to get the necessary training and education so that they can be in a position to command higher wages. Otherwise, if they are earning low wages it is because they are not worth more, which is to say they offer nothing of any real value to their employers. Or is it the case that low-wage workers really lack the market power to bargain for something better?

According to the neoclassical model in economics — the model of competitive markets — each worker receives the value of his or her marginal revenue product, which is the amount of increase in the output that results from an increase in say a unit of labor. If adding an additional worker results in a rise in total revenues, the firm’s output will rise as a result. An effective minimum wage, then either results in the layoff of those workers whose value is less than the minimum wage, or in an increase in productivity among low-efficiency workers.

Also in competitive market where the new and technologically advanced is always replacing the old and obsolete, it is only a foregone conclusion that the wages of the unskilled will be forced down while the wages of the skilled will be driven up, thereby increasing the gap between the two. This view has led to what has been referred to as the “Washington Consensus” that maintains skill-biased technical change to be the source of inequality, stagnating wages for the average worker, and potentially long-term unemployment. This consensus has also maintained that the economy could grow through policies of deregulation and privatization intended to achieve greater efficiency. As for wage stagnation, the emphasis is on training and the upgrading of skills.

If we parse this a bit, what we are really being told is that the market place really does not fail, or if it appears to it is only because of interventions, like wage floors, that create inefficiency. More fundamentally, if workers aren’t paid enough to support themselves, well then it is their own fault. The market place, after all, affords opportunity and it is up to us to take advantage of this opportunity when we can. If the natural market place is creating a two tiered economy with highly skilled and paid workers at the top and poorly skilled and paid workers at the bottom, then it is up to those at the bottom to improve themselves.

The onus, in other words, is on the individual worker, not so-called economic forces beyond our control. As tempting as it is to attribute this view to a gross misreading of Adam Smith and his invisible hand — the notion that wealth will trickle down — the foundations of individualism and personal responsibility upon which this neoclassical view rests are deeply ingrained in the American political tradition. In other words, individualism, personal responsibility, and neoclassical economic assumptions are at the core of American identity.

Of course to acknowledge as much is to also rationalize a status quo that maintains the power of some at the expense of others. If workers are responsible for their skills levels, then employers are not responsible for training and retraining their workers as the introduction of new technologies may require. If the emergence of the two-tiered economy is due to globalization, then an even larger burden is placed on the workers to obtain the necessary skills.

These assumptions, however, may miss some fundamental points. First of all, wages really aren’t set by so-called natural forces, but by power relations that are asymmetrical. Even Adam Smith was aware of this problem. All our unskilled workers could get training, in which case the bar is raised but wages don’t increase because of the oversupply of newly trained workers. Second of all, the call for worker training misses the specific requirements that employers might have. Employers should be training their workers according to their own specific needs.

And yet, employers have little incentive to train their workers if we as a society tell them that it is they the workers who need to obtain the necessary training. Moreover, employers don’t need to feel guilty about paying low wages because they know their workers will receive the necessary subsidies from taxpayers.

There is nothing wrong with individualism and personal responsibility, but there is when these terms are used to rationalize a set of relationships that preserve the power of some at the expense of others and have the effect of denying true opportunity to all. The focus on training programs coming out of the Washington Consensus has proven to be little more than a charade that diverts attention from what we really need: the creation of jobs that pay decent wages.

What the American economy truly needs is a commitment to the high-road — an economy where the emphasis is on high wages and investment in human capital — rather than the current low-road — low wages and no investment in human capital — which has long underpinned the Washington Consensus that effectively places the onus on the workers.

It may be convenient to place the blame for our economic problems on others, and no doubt the pursuit of the low-road has enabled corporations to enrich themselves off the backs of their workers. The real question that we need to ask is just what has been the result of this economic strategy? Wage stagnation and growing income inequality? Is this a record that we as a nation should take pride in? When politicians taut the growth of the economy despite continued wage stagnation and rising income inequality, they are either oblivious or worse they just couldn’t care less.

Our response to globalization and the growth of the low-skilled labor market should not be fewer regulations, but an active wage policy that serves to bolster the middle class so that it can continue to demand goods and services in the aggregate. The minimum wage and establishing an automatic adjustment mechanism would obviously be a good place to start. More fundamentally, however, we need to rethink our values as a society.

Where we really need to begin is with the neoclassical model and its implications for policy which has conveniently been used to rationalize putative policies of doing nothing and maintaining inequitable power relations. Those who religiously hold to the model conveniently forget, or maybe not so conveniently, that economics is merely about explaining behavior; not about determining public policy.

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