The Golden Era of Profitability

An article from today’s New York Times1 discussing the recent decline in real wages and the increase in worker productivity. First of all, what does real wages mean, real wages is not just the amount of money that you earn, but what that money can actually buy. To give a relevant example, let’s say for simplicity you work a job that earns you a $10 an hour, and every year you get a 2% raise. This means that after your first year of working you will make $10.20 an hour, the second year $10.404 an hour, and so on. Now in our imaginary world inflation rises at 3% a year, which is a fairly standard inflation rate in the real world for the United States. This means that a majority of goods will cost 3% more than last year, now obviously this is just an average as some goods will drop in price, some will stay the same and some may increase in price more that just 3% or so. However you only received a 2% raise so now your wages are actually worth 1% less then they were last year. Real wages is thus the actual purchasing power of your net income.

 

Now why is this important, well if you read the NYT article, you will see that corporate profits are at their highest level that they have ever been. So while corporations as a general rule are making a profit they are sending that extra profit either back to the company or to their top 10% (in terms of pay scale) or so of employees. This means that the bottom 90% of employees are not receiving enough of a pay increase through either benefits or actual salary to offset inflation. A particularly worrying situation considering the rapid increase in volatile commodity markets such as oil.

 

The other problem is that the minimum wage is at it’s lowest purchasing power in 51 years2. The question on politicians minds and on the voters is what should the government proceed to do about this. I am conflicted on this question, I feel that the government should try to limit it’s interference in the market as much as possible, yet at the same time I do feel that people should at least be able to survive on the minimum wage. If you worked 40 hours a week for 52 weeks, a full year of working with no time off, you would manage to earn, before taxes of course, $10,712, just barely above the poverty line for a single person3. Now if you work 60 hours a week for 52 weeks, you would eek out $16,068 below the poverty level for 3 people. A minimum wage job in my humble opinion should not automatically force someone to being in poverty status. No, it should not be a handout out to people, but at the same time people at least deserve the decency of having a life.

 

I believe that the best solution would be to number one raise the minimum which hasn’t been done in 10 years. The minimum wage has to be increased or the business owners will wind up spending more money on taxes, then they ever would on salary increases, when you have more people unable to provide for their families and more people fall deeper into poverty as their wages stay the same and everything begins to cost more and more. You can only cut out oh so much before you start cutting back on necessary items. I do not see the free market correcting this imbalance before it gets out of hand, in instances such as this the government must step in to protect the people it is supposed to serve.

 

The Declaration of Independence lists as one of it’s unalienable rights is the right to pursue Happiness. When the Declaration of Independence was written Happiness was interpreted to mean the pursuit of property and material wealth. Even using a modern day translation of Happiness, our government should provide each person the ability to pursue his or her dream. Part of being able to pursue a dream is to be able to have time and money to devote towards that project. The more I consider this issue the more I come to accept the position that the government needs to step in and correct this imbalance between wages and purchasing power, not by taxing the corporations as some have proposed4 but rather by giving the lowest earners in society a nudge up.

 

References:

 

  1. http://www.nytimes.com/2006/08/28/business/28wages.html?_r=1&th=&emc=th&pagewanted=print

  2. http://www.infoplease.com/ipa/A0774473.html

  3. http://aspe.hhs.gov/poverty/06poverty.shtml

  4. http://news.bbc.co.uk/2/hi/business/4383296.stm

P.S. – I do understand and realize that by raising the minimum wage that it may increase the price of goods due to having to pay more in salaries and also that some people may loser their jobs over this increase. However every study that I have seen shows that most goods and services do not increase in price enough to cancel out the benefits of the salary increase. The majority of cost built into products is the advertising (hence generic products are cheaper even though they are sometimes identical to the brand name products) and in the materials needed to make the good. Also you can only get rid of so many people before your business can not function properly. Small business which would be disproportionately hit by a minimum wage increase already do not tend to have too many extra employees that can be reduced.

Justin Yost is a full-time Software Engineer and a part time educator. A graduate of Texas Tech University with a bachelor's degree in computer science, Justin relishes programming and learning more about anything and everything. When not working, Justin occasionally gives talks at the local PHP Meetup. In his free time, Justin enjoys backpacking and reading science fiction books.


Posted in Economics, Politics
Short Link: https://justinyost.com?p=22

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