Wage Policy, Income Distribution, and Democratic Theory

Oren M Levin-Waldman

• Publisher: Routledge
• Year: 2010
• eBook ISBN: 9781136881862
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Wage policy can be broadly defined as a set of institutions designed to bolster the wages of workers, especially for those workers who lack negotiating power. This book concentrates on the relationship between wage policy and the distribution of income and the maintenance of a sustainable democracy. Whereas economists have looked at this issue in relation to labour markets, this book aims to reset the balance by focusing on issues such as equality and democratic theory.

This book makes an important contribution to the literature of public policy, political philosophy and political economy. Levin-Waldman argues that wage policy is an important component in the maintenance of democratic society and that a reduction in income inequality can have a positive effect both on personal autonomy and empowerment.

1
Introduction

This is a book about the relationship between wage policy, whether in the form of a wage floor or other policies that serve to bolster wages, the distribution of income, and ultimately how that distribution impacts democratic theory. It is about the types of policies that are critical to the maintenance of a sustainable democracy. Why wage policy? Because wage policy has largely been ignored by democratic theorists. And yet, it impacts on the meaning of equality to the extent that it can impact on the overall income distribution. Equality is also core to democratic theory. While democratic theory doesn’t assume wage policy, or any type of public policy for that matter, it does assume equality. But it isn’t always clear just what is meant by equality, and depending on how it is defined, there may be different implications with regards to what is required.

Democracy assumes, and in fact requires, individual autonomy. For individuals to be able to participate as full-fledged citizens, they need to be autonomous. Autonomy, however, may require more than the absence of constraints on human agency; it may in fact require policies that enable them to realize that agency, thereby enabling them to live independent lives. Therefore, to the extent that wage policies may achieve greater equality and more autonomy, wage policy must be viewed as being consistent with a broad definition of democratic theory. Because wage policy is able to impact on income distribution and ultimately equality, as well as impact on autonomy, it has a role to play in the maintenance of democracy.

Wage policy

Wage policy can be broadly defined as a set of institutions designed to bolster the wages of workers, especially for those workers who lack what James Galbraith (1998) refers to as monopoly power when it comes to negotiating. Wage policy, in effect, confers monopoly power on workers who seek to bargain with management on an equal playing field. Historically these institutions assumed the form of labor policies that allowed for unionization and collective bargaining, and specific wage floors. Traditionally, wage floors assumed the form of federal and state minimum wage legislation. More recently, they have assumed the form of Living Wage ordinances at the local level, as well as broader proposals for basic and/or minimum incomes.

It may strike some as odd to think in terms of a history of wage policy in the United States, but the United States has long had one even if only in its most negative form of protecting individual rights to bargain for themselves over their own wage rates. In the early days of the republic wage policy assumed the form of contractual enforcement of indentures, apprenticeships arrangements, and other guild protections. During industrialization and the advent of wage labor, it assumed the form of “liberty of contract” – the notion that there should be no barriers to one’s ability to negotiate one’s terms of employment. This meant that the state could not use its police power to legislate either maximum hours or minimum wages because that would intrude upon the individual’s right to negotiate terms different from those legislated. It also meant that the state would use its police power to break up unions, as they were considered to be a collusion in restraint of free trade. Following the demise of this doctrine during the 1930s, wage policy was expressed in the form of institutions designed to bolster wages, most notably unions and statutory minimum wages. Later on, during a period of anti-labor antagonism, wage policy found expression in negative income taxes, most notably the Earned Income Tax Credit (EITC) which would effectively subsidize those who worked and who also had children. Only in the last couple of decades, amidst the decline of unionism and the erosion in value of the federal minimum wage, has wage policy been expressed in the form of grass-roots campaigns at the local level to pass Living Wage ordinances. Although wage policy has assumed various forms over the years, it has essentially been evolutionary. Arguably its evolution has been incidental to economic growth and development.

For the purpose of this study, I define wage policy as either a set of institutions and or legislation that serves to bolster wages. An expansive view of wage policy could include more general welfare state policies that impinge on labor. In some cases, as is true in other OECD countries, and what might be referred to as social market economies (SME), wage policy actually involves a system of centralized wage setting. A narrow view of wage policy could similarly be construed as a putative policy of laissez-faire when it comes to wage regulation. Not included in my definition of wage policy, or at least as it would pertain to the United States, is the more corporatist version found to a greater extent in Europe where the state effectively regulates wage and labor agreements through negotiations and agreements between big business, big labor, and government, although it would certainly fall within the purview of wage policy. Rather, I’m taking a narrower view of wage policy to encompass institutions like unions and the legal framework that allows for unionism, as well as wage floors such as minimum wages and Living Wage ordinances. When I talk about the evolution of wage policy, I specifically refer to a trajectory from laissez-faire, usually expressed in the form of liberty of contract, through unionization to minimum wage legislation. Underlying this evolution is a theme that will be developed later that because wages aren’t natural per se and because the balance of power between employers and their employees is asymmetric at best, wage policy is necessary for workers to have a measure of voice that allows them to live in dignity and out of poverty.

An argument for wage policy also assumes something else. It effectively rejects the neoclassical view of wage determination found in most economics textbooks, and which has underpinned much of economic policy in the United States. And, if it wasn’t the basis of policy, it certainly formed the basis of opposing policy. The neoclassical synthesis essentially maintains that in purely competitive markets, market clearing wages are achieved when the demand for labor is exactly equal to the supply of labor. Wages, then, are determined by market forces. At the wage at which demand equals supply, all those willing and able to work at that wage will be employed. Those whose demands exceed what employers are willing to pay will be unemployed. It is up to the worker through his/her wage demands to determine whether s/he will be employed rather than unemployed. More people willing to work will induce the wage to fall further, thereby inducing firms to demand even more labor and hire more workers. Wage policy in the form of a floor or other institution that serve to artificially inflate wages, prevents the cost of labor from dropping to the point that more workers would be hired. As a result, fewer workers will be hired and consequently there will be greater unemployment. Wage policy is in part a response to the assumption of neoclassical economics, but it rejects this argument on the premise that wage setting is affected by institutions. Moreover, it recognizes that externalities do arise from markets that are allowed to operate totally unfettered. One such externality may be income inequality. Active wage policy also categorically rejects the premise that individuals are free to negotiate over wage rates. Rather, employers through their market power set rates, and the only negotiation open is to either accept or reject. Wage policy, by contrast, recognizes the asymmetrical power balance between employers and workers.

There are, of course, some that would couch these differences in wage policy form in terms of differences in welfare state development, or welfare capitalism. Gosta Esping-Andersen (1990) offers three welfare state regime types: the “liberal” welfare state, the “corporatist” welfare state, and the “social democratic” welfare state. A liberal welfare state is relatively narrow and is founded on means-tested assistance, modest universal transfers, or modest social-insurance plans. The corporatist welfare state is a bit more expansive, and is found mostly in Austria, France, Germany, and Italy. It is this type that is characterized by the preservation of status differentials in a state ready to displace the market as the provider of welfare. In this vein, it differs from the liberal welfare regime, which might be characterized as a limited welfare state, in that private insurance and occupational fringe benefits play a marginal role. The state provides more. And the social democratic state is found in those countries whereby the principles of universalism and decommodification of social rights have been extended to the new middle classes. The social democratic regime might be considered the most egalitarian and characterized by greater levels of redistribution precisely because workers are no longer considered faceless commodities, but rather, individuals possessing equal rights to the benefits of universalism.

As commodities, workers are replicable, atomized and redundant. It was the commodity status of individuals that lay at the heart of nineteenth-century debates and conflicts over the “social question.” The old feudalistic system, by contrast, was actually antagonistic to commodity status. Markets weren’t considered to be important, and wage labor was only marginally important to human well-being. Corporatist societies emerged in towns among the artisans and craftsmen as a means of controlling entry, membership, prices, and production. It was the corporatist model that was the early and most prevalent response to commodification. But it was socialism that emerged in response to capitalism’s commodification of labor. Contrary to liberalism which seeks to protect property rights, and even corporatism that seeks to protect the rights of the privileged few, socialism’s aim is the maximization and institutionalization of rights (Esping-Andersen 1990). The social democratic welfare state regime would, especially if pursuing a wage policy, seek to couch policy as a necessary vehicle for the attainment of rights. Given the variation in welfare capitalism, it isn’t too difficult to see that there would similarly be variation in the types of wage policies, as it is the nature of the welfare state type of regime that will very much determine the scope of wage policy. And yet, if we can understand that it is the liberal welfare regime that characterizes the United States, we can also understand why relative to other nations wage policy in the United States has been underdeveloped.

Income inequality

Income inequality has in recent decades been on the rise. Those at the top of the distribution have seen their incomes increase while those at the bottom have seen their incomes decrease in real terms. This has effectively narrowed the middle class, whose wages have stagnated in aggregate terms since the 1970s (Phillips 1990; Newman 1993; Hungerford 1993; Wolff 1994; Danziger and Gottschalk 1995). To talk about income inequality is somewhat problematic because it isn’t entirely clear just what we mean by it. What does it mean to say things are unequal in terms of distribution? The concept of income inequality is often viewed as a problem in a market economy, which allocates income on the basis of several factors including education, experience, innate abilities, incentive, and risk. On the contrary, when these factors are considered income is by and large distributed on the basis of desert. More educated individuals, and those possessing greater abilities, are entitled to earn higher incomes than those who do not. That one is poor, especially in a society where everyone is presumed to enjoy equal opportunity, is ultimately that individual’s responsibility. And yet, the capacity to have greater income exists if there is a willingness to obtain the requisite education and training to command it. Although there may be some agreement that a more equitable distribution of income ought to involve a move to greater equality of income and greater equality of opportunity, the prevailing view, at least in the United States, is that there is equality of opportunity (Robinson and Dervis 1977). Moreover, the concept of equal opportunity has effectively enabled us to ignore the fact that we don’t all have the same thing. But part of why it has been so prevalent in the United States is because of the dominance of the neoclassical model. To interfere in the operations of the marketplace, if even for noble reasons such as achieving greater equity, is to bring inefficiency.

Income inequality and poverty are both greater in the United States than in other industrialized nations (Smeeding and Sullivan 1998; Smeeding et al.1990). While inequality in the United States has been increasing for decades now, the sharpest increase appears to have occurred during the early 1980s, and then again during the 1990s (Bernstein and Mishel 1997). But it was also during this period that the United States saw a decline in unionism and deterioration in the minimum wage. Those declines weren’t nearly as great in other countries where income inequality has tended to be less. Between 1963 and 1989, for instance, the wages of the least skilled, those in the bottom 10th percentile fell by 5 percent while the wages for the most skilled, those in the 90th percentile, increased by 40 percent (Juhn et al. 1993). The net result of this divergence was an enormous increase in wage inequality. More to the point, as I will argue later, it is because of the greater deterioration of wage policy in the United States than in other countries during this period, that inequality has been greater in the United States than elsewhere.

The neoclassical model holds rising income inequality to be a function of structural economic transformation. Technological change has tended to be biased towards those with higher levels of education and skills. As the economy has evolved from industrial-based manufacturing to post-industrial service, there has been a growing mismatch between good paying jobs and the skills available to workers. According to this school of thought, the labor market is divided into a primary market where high premiums are placed on skilled workers, and a secondary market where unskilled workers are trapped in the lowest-wage service sector of the economy. The growth in wage inequality between the primary and secondary labor markets has been caused by increasing skills differentials between the two (Katz and Murphy 1992; Katz and Krueger 1992).

Institutionalists, on the other hand, and a tradition from which the concept of active wage policy is derived, hold rising income inequality to be a function of deliberate policy choices biased towards the interests of business. Those choices included an assault on the institutions that long served to bolster the wages of those at the bottom of the distribution, as well as the working class: mainly the minimum wage and unions (Card and DiNardo 2002; Howell and Huebler 2001). During the late 1970s, the United States began experiencing a sharp ideological shift towards a preference for competitive market outcomes and solutions, and this ideological shift did have direct effects on bargaining in the workplace (Moody 1988). Those countries with the greatest increases in income inequality also had the most decentralized labor markets, whereas those countries with centralized wage-setting institutions tended to have less income inequality. The institutionalist school will argue that in the absence of institutions to prop up the wages of those at the bottom of the distribution, income inequality is bound to increase. The larger point, however, is that income inequality has increased in part due to the deterioration of wage policy (Volscho 2005). Among the arguments that I intend to make is that income inequality has been greater in the United States relative to other countries because wage policy has been less extensive in the United States than in other countries.

Democratic theory

Democratic theory assumes a society of free, equal, and autonomous individuals. These individuals enjoy the same rights of citizenship as others and must enjoy their autonomy so that they can participate as full-fledged citizens in the democratic process. The greater their autonomy, the more likely they are to participate in the democratic process. Also, core to democratic theory is a conception of equality, but questions remain over just what it means to be equal. Equality could be defined in substantive terms, i.e. individuals who are equal to one another will all have the same things. Equality under the law, as Stuart White (2007) points out, does not necessarily entail equality in the process of making the law. At issue is the extent to which inequality in resources affects one’s ability to stand on an equal footing with others. The demand for legal, political, social, and economic equality are effectively demands for certain kinds of social arrangements. Economic equality, for instance, might be valued because it is seen as instrumental to other aspects of social equality – the absence of domination in everyday social relationships. Or stated differently, economic equality might be viewed as an essential step towards achieving a society where individuals aren’t exploited. The principal assumption being that exploitation occurs when inequality between two people results in one being able to dominate the other.

Equality in the United States and other liberal market economies, however, has generally tended to be conceived of in procedural terms, which are also the defining characteristics of American democracy. Individuals born with equal rights are all equal before the law. Each individual enjoys the same right to cast an equal vote for those in government who will represent them. Each individual has a right to speak freely and openly against the actions of the government. Each individual enjoys an equal right to pursue his or her interests. Procedural equality is critical to democratic society because it serves to secure another essential condition: personal freedom, which is also a necessary condition for individuals to function autonomously. In order for there to be freedom, certain political conditions must be met, and equality, particularly equality of opportunity or procedural equality, is one of them. Individuals are free to pursue their goals and objectives – i.e. self-interests – so long as their pursuit does not interfere with others’ ability to pursue their own goals and objectives. In a very basic sense, and certainly within the context of classical political thought, this is what it means to talk about personal independence or autonomy. Equality, then, is not conceived of in terms of how resources, wealth and income are distributed – that everybody has the same amount – but in terms of standing – that each and every individual enjoys the same standing. No individual, in other words, enjoys greater access or privilege, or treatment on the part of the state than do others.

A major concern of this book is whether access is affected by income. That we conceive of equality in procedural terms effectively absolves us of respons ibility for addressing the fact that in the United States there is considerable income inequality. Income inequality is generally considered to be the purview of the marketplace. But does it not have an impact on the political universe and ultimately the meaning of democracy? Unequal distribution in wealth and income could result in unequal access. Do individuals enjoy the same standing in situations of extreme inequality of resources? And is not the first step towards achieving greater equality of resources...

Table of contents

• Routledge frontiers of political economy
• Contents
• Tables
• Preface
• 1 Introduction
• 2 Democratic theory
• 3 Evolution of wage policy
• 4 Post-New Deal era and the demise of wage policy
• 5 New living wage movement
• 6 Wage policy for the middle class
• 7 Wage policy and the path towards democracy
• Bibliography
• Index