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Want to raise pay? Don’t wave a placard, invest in capital and skills

I’ve written a couple of times now about the Citizens League’s recent report on the introduction of the minimum wage in Saint Paul. The Citizens League makes no recommendations, but as I wrote yesterday, it is clear from their findings that the burden will fall hardest on the city’s smaller employers.

OK, so what about the workers? 

But what of the workers? The Citizens League spoke to them as well

Through an interpreter, the Citizens League interviewed a low-wage worker who provides cleaning for a large retailer in St. Paul. When she started this job there 14 years ago, her starting hourly rate was $7.25. Her current rate is $10.75. She does not receive any benefits. She was initially given four hours a day but now she works five hours a day, seven days a week. She does not get an opportunity to work overtime.

Some of her co-workers work fewer hours. She likes her job because she can walk to work. The worker informed me that she does not work directly for the retailer but for a cleaning company that has been contracted to provide cleaning services. Because cleaning companies often get selected based on cost, it is to their advantage to hire workers for as little as possible. She added that since the cleaning company is not based in St. Paul, she does not have earned sick and safe time.

This worker, like all the low-wage workers we met with, and the organizations that support them, are advocating for a minimum wage increase to $15 with the shortest phase-in time as possible. Some did not think $15 was enough but agreed it was a good place to start. They also felt strongly that no one should be exempted including youth workers, believing teens should be able to make the same as adults, knowing that some support their families.

There are several interesting points to make about this.

Productivity and wages

First, as I’ve written before, a worker will not be paid more than the employer estimates that that worker will add to their revenues. If they did, the employer would be adding more to their costs (the wage) than their income (the revenue). An employer who operated like that wouldn’t be employing people very long.

No doubt, this worker contributes to the turnover of this “large retailer in St. Paul”. Who wants to go in a dirty shop? By cleaning the place and making it more likely that people will come in and buy stuff, the cleaner is generating a real economic benefit for her employer. This is her ‘productivity’ and she should be remunerated for that.

But this worker, currently on $10.75 an hour, is advocating for a raise to $15 an hour, an increase of 39.5%. Has she become 39.5% more productive? Is she going to become 39.5% more productive in the next couple of years?

If not, there is a grave danger that the law she is agitating for will push her wage above the employer’s estimate of her productivity and she will be let go. This is one explanation for the empirical finding that minimum wages reduce employment.

Capital and human capital: How to really raise wages

If we really want to raise wages there are a few things we can do. They all amount to increasing the worker’s productivity.

One, is to give the employee better tools to work with. This is capital investment, whether you are talking about a new tractor for a farm or mop for a retailers floor. But, while this tends to make workers more productive, it often leads to fewer workers. After all, generally speaking, with each one producing more output you need fewer of them. There are now robotic vacuums and mops which could do much of the job the Citizens League’s cleaner is currently doing. If she operates a fleet of these the employer might be able to lay off any colleagues she has and some share of their old salary will come to her to reflect her increased productivity, thanks to the capital investment in a robot.

Another way to raise your wage is to invest in your human capital. When we talk about investing in things like machines it makes sense. A baker buys and oven and it generates an income level higher than the baker would have had without it. But so, also, does his baking course. Where the oven is an investment in capital, learning the skills to bake is an investment in human capital. One of the most useful investments you can make in human capital, and one of the cheapest, is to learn the language prevalent where you live and work. We are told by the Citizens League that after 14 years this worker has not done this. Of course, there is much we do not know about this particular case. But, with so little investment in her human capital, why would she expect a wage increase of 39.5%?

Experience and education > Skills > Productivity > Wages

All of us are born unskilled. We accumulate skills through experience and education and these show up in our increased productivity. This, in turn, drives our wages up. This is how it is supposed to work and how it does for a great many people.

For those for whom it does not, the low wage is just the symptom, not the problem. The problem is a lack productivity driven by a lack of skills. If we want to cure the symptom of low wages, we need to tackle the problem of low productivity.

John Phelan is an economist at the Center of the American Experiment. 

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