Paths to Higher Wages or Sharing the Pie with the Bakers

By Bob Gerecke
 
For prosperity – and for fairness – American workers’ share of the economic pie must be increased.  There are other ways of doing that but profit sharing is the best.  And that will need government intervention.
 
Many businesses based in the USA and other developed countries produce, buy and sell goods and services in several countries possessing various levels of development.  It's competitive and profitable for them to produce or buy as much as possible in countries which have lower wages, and to sell it in countries with higher wages and thus higher consumer spending power, and most businesses do so if they can manage it.  Collectively they therefore weaken job creation, wages, consumer spending, business revenues, tax receipts and public services in their own countries.  This is a huge dilemma for them and problem for their countries.
 
 In order to ensure the prosperity of the American people, more production needs to be located in the USA -- at least enough of it to erase our trade deficit, so that money isn't continually sucked out of our country and its people.  Yet if any American business chooses the higher-wage workforce in our country, it's at a disadvantage with competitors who choose the lower-wage workforce offshore.  Therefore, the choice must be made by all, and this requires public intervention to raise working people's share of the pie, which has severely eroded over the last 30-some years.
 
 An increase in the minimum wage benefits those employees at the bottom and just above it, but not most employees.  To benefit most employees, the general level of wages must rise.  However, it's impossible for the government to mandate the appropriate wage for every job, and a general rise in pre-profit wage costs will make American businesses less competitive globally.  Perhaps other measures would work.
 
 One way would be to set US tariffs based on the wage difference between American production workers and foreign production workers for the same product, to reduce imports from low-wage countries.  This would require withdrawing from some international trade agreements. That can be done.  However, it would also create a major obstacle to development in the "Third World", thereby disadvantaging the poorest people on our planet.  For the sake of those poorest, the tariff could be reduced for some countries as a means of foreign aid until a country's economy "takes off".  Simply reducing our trade deficit would keep more money in our country, to the benefit of businesses, households, government at all levels and non-profits.  This would compensate for the rise in prices, but maybe not enough, and it would reduce the economic progress of developing countries.  Therefore, a higher tariff is a mixed bag.
 
 Another way would be to mandate profit-sharing by American companies and by foreign companies which have American workers.  A wage increase is a fixed cost which may increase prices; profit-sharing is not.  Although  it would reduce the retention of profits for further  investment, there is no shortage of capital available from investors to enable a company to modernize, expand production and buy other  companies.   This would draw more capital away from zero-sum trading and into productive investment, which is as socially desirable as is sharing of the pie with working people.  There are options for many aspects of profit-sharing, such as sharing a fixed percent of profits or on a sliding scale based on a measure of profitability, allocating profit  shares equally to all employees or in proportion to their base wage, allocating to company employees only or to individual independent contractors and to employees of sub-contractors as well, allocating profit shares quarterly rather than annually, and so on.  The total amount shared should not be tied to the company's stock price, because that is too volatile in response to traders' sentiment and ambient interest rates, usually over-stating or under-stating the company's profitability.  As company profit fluctuates, profit-sharing would adjust total compensation costs automatically, minimizing layoffs while increasing workers' share of the pie.  It would also incentivize employees to improve their employer's success.  Everyone would benefit.
 
 Another way would be to increase the Earned Income Tax Credit (EITC) and expand it to employees with middle as well as low income.  This would have no negative effect on business profits or on the retention of those profits for further investment.  However, it would transfer the cost back to the general public who are supposed to benefit from it, unless it were paid for entirely by a tax surcharge on high-income individuals and/or by a tax on accumulated wealth above some reasonable level.  It would also require workers to apply for it, and those whose income is now too low to owe income tax would have to file a tax return, which many may be unable to do without assistance.  On the other hand, this might entice some people out of the underground economy.
 
 On balance, better pay would be better than an expanded EITC, because generally people feel better about themselves when they are paid well for their work, more so than when they need to ask for a government benefit. Public morale is an important factor in quality of life, social stability and the economy.  And profit-sharing would be better than higher fixed wages because of the incentive factor and the automatic adjustment as profits fluctuate.
 

 

 Something must be done to increase wages.  Working people, retired working people and their dependents are the vast majority of our people and therefore of our consumers.  The well-being of American businesses and therefore of the investor class (to use George W. Bush's terminology), as well as of the employee/consumer class, depends on it.  More profit-sharing may be our best solution.  If national, state and local governments have the authority to mandate a minimum wage, they can also mandate a share of profits.