Social Democratic America (22 page)

Compare this, however, to how we think about health insurance, pensions, unemployment insurance, and sickness/disability insurance. Like income, these contribute to economic security and material well-being. In all affluent nations, they are financed at least partly by taxpayers, and few object to the fact that firms are not the sole funders. Why, then, is it objectionable for taxpayers to provide part of the funding for what amounts to insurance compensation for low earnings? In addition, if firms bear the full cost, via mandatory moderate-to-high wages, they will pass some of it on to consumers. But if taxpayers bear part of the cost, prices for eating out, clothes cleaning, home cleaning, and similar services will be lower. This is akin to provision of public services.

3.
A generous wage supplement allows employers to keep wages low
. An EITC-style employment-conditional earnings subsidy may lead to reductions in low-end wage levels, offsetting the improvement in income.
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This can happen in two ways. First, if the subsidy pulls more people into work, the increased competition for jobs will put downward pressure on wages. Second, regardless of labor supply, employers will be tempted to incorporate the value of the subsidy into the wages they offer.

The solution is a decent wage floor—perhaps higher than the current US minimum, though not as high as in Denmark. As long as the minimum wage is high enough, these problems will be minor or irrelevant.

4.
Low wages reduce employers' incentive to improve productivity
. This argument has some appeal, but I'm not convinced it matters much for long-run productivity trends. Even in the United States, which has a comparatively low wage floor, employers regularly
seek out ways to increase productivity, via new technology or by making changes in the work process.
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They have had limited success for tasks such as cleaning offices and hotel rooms, waiting tables, and stocking shelves in supermarkets. But it is not for lack of trying.

5.
Low-wage jobs are less likely to come with employer-provided benefits
. In the United States, employees in low-wage jobs seldom get employer benefits such as health insurance and a private pension plan. But that doesn't mean increasing the wage floor would result in more workers receiving such benefits. If anything, it might have the opposite impact. If employers' wage costs go up, some will respond by cutting costs in other areas, such as benefits.

6.
A low wage floor would disrupt the social democratic gestalt
. As I've suggested throughout this book, the Nordic countries come as close as any nation in history to having a set of institutions and policies conducive to a good society. On one view, those policies and institutions work well precisely because they reinforce one another. They are complementary—a coherent mix, a gestalt. The whole, in this view, is greater than the sum of the parts.
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Jonas Pontusson identifies six core features of the Nordic social democratic model: (1) universalism in the design of social insurance schemes, (2) direct public provision of social services, (3) solidaristic wage bargaining (including a high wage floor), (4) active labor market policies, (5) policies that promote female employment and gender equality in the labor market, and (6) high levels of investment in public education and policies to equalize educational opportunity.
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How might a lower wage floor with household incomes boosted by an employment-conditional earnings subsidy threaten the Nordic gestalt? I see three possibilities. First, reliance on an EITC-type benefit means greater targeting in government transfers, and that could weaken the solidarity that underpins policy generosity.
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Second, allowing a low-wage segment of the labor
market to emerge might reduce social equality, a mainstay of the social democratic model.
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Third, unions would be weakened, and in the absence of strong unions, these countries might be less likely to continue their high levels of government services and transfers.

Each of these worries is plausible. Yet history suggests grounds for optimism about the robustness of the social democratic model. In Sweden, the past half century has witnessed a continuous stream of alterations and adaptations: family-friendly programs were created and steadily expanded beginning in the 1960s and 1970s; centralized wage bargaining collapsed in the early 1980s; financial markets were deregulated in the 1980s and 1990s; the 1990s and 2000s have featured growing use of private competition in services (schools, childcare); an employment-conditional earnings subsidy was introduced in 2007. Any one of these changes might have been predicted to trigger the demise of the model. And yet it persists, as successfully as ever.

Moreover, the social democratic model varies across the Nordic countries. Large-scale active labor market policy was confined to Sweden until Denmark began in the 1990s, and Finland and Norway make limited use of it even today. Finland and Norway also have a different childcare arrangement: a home-care allowance to parents during the first three years of the child's life. And these four nations differ in the degree of universalism of their transfer programs.
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It is difficult to know beforehand whether a particular element of an institutional configuration truly is or is not a lynchpin. What seems vital may turn out not to be. I suspect the United States can emulate much of what works well in the social democratic countries—in particular, generous public provision of goods, services, and transfers—without needing to also have a high wage floor.

Is there any reason to
prefer
a modest wage floor? I think there are two.

1.
A high wage floor may reduce employment
. The degree to which high wages are bad for employment often is overstated. Yet there
is
a tipping point; no one disputes that. The question is where the tipping point lies and how large the effect is once that point is crossed.

For low-end service positions, the wage level in Denmark is high enough to discourage employment. In fact, in private-sector low-end service jobs, the Nordic countries have both lower employment rates and less employment growth than countries with lower wage floors.
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The reason is straightforward: productivity in such jobs tends to be relatively low and difficult to increase.
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Some feel that if low productivity prevents decent wages in low-end service jobs, a good society ought to reduce the prevalence of such jobs. This position is related to the core notion behind the Swedish Rehn-Meidner model, which aimed to raise wages in order to force inefficient employers out of business, thus creating both healthy wages and a highly-productive economy—the best of both worlds. But there is a difference between forcing out the least efficient employers in a particular industry, as in the Rehn-Meidner model, and discouraging particular types of jobs.

The argument in favor of allowing low-end service jobs that pay low wages is that there is both a demand and a supply. As we get richer, we are more willing to outsource childcare, food preparation, cleaning, repair work, and related activities. And there are people willing to do such jobs. This is especially relevant for the young and immigrants, two groups who already struggle in the labor market.

But then why impose any wage floor at all? If there is someone willing to work for a very low wage, why not let an employer hire at that wage? The answer is that most of the time there are more people seeking jobs than employers seeking workers. The resulting power asymmetry tends to force wages down to a very low level. Legislation (a statutory minimum wage) or collective bargaining can impose a wage floor with no employment-reducing impact, and so it is a good idea to do
so. The trick is to figure out the tipping point—the level above which employment is impeded—and set the wage floor at or near that point.

The optimal wage floor will differ across regions. In the United States the federal government sets a minimum wage, but many states and some cities establish a higher minimum. That's a sensible arrangement. The optimal floor also will differ across industries. This is something collective bargaining is ideally suited to address, but America's unions are so weak that at some point government may have to play a more active role.

2.
As a practical matter, in the United States efforts to supplement low wages are likely to get farther than efforts to impose a high wage floor
. Earlier I asked you to imagine a rise in the US minimum wage to $15 per hour. In reality, this is extremely unlikely to happen.
Figure 4.25
shows the evolution of America's minimum wage and EITC, expressed in annual (rather than hourly) values. The minimum wage increased steadily until the 1970s, but it then fell and has been flat since. As of 2013 the federal minimum is $7.25 per hour, less than half the Danish (collectively bargained) minimum. We certainly can afford a higher minimum wage, yet recent history offers no reason to believe it will get close to the Danish level.

More likely is a moderate increase in the minimum wage coupled with an increase in the EITC. In 1993 the EITC was indexed to the inflation rate, so it, unlike the minimum wage, always keeps up with price increases. In the past several decades it has risen faster than prices, due to legislated increases in the late 1980s, the early 1990s, and 2009.

Past is not always prologue, of course. Extrapolating from developments in recent decades doesn't necessarily tell us what will happen in the future. But it does suggest that a big jump in the minimum wage is unlikely. We're much more likely to get a modest rise in the minimum wage and an expansion of the EITC.

FIGURE
4.25 The minimum wage and the Earned Income Tax Credit (EITC)

Federal minimum hourly wage multiplied by 2,000. Average yearly EITC benefit per recipient household. Federal minimum wage and EITC only; many states have a higher minimum wage and/or an additional EITC. 2011 dollars; inflation adjustment is via the CPI-U-RS.
Data sources
: Bureau of Labor Statistics; Tax Policy Center.

Despite getting paid a much higher wage, a typical low-end service worker in Denmark ends up with a posttransfer-posttax income that is only a little higher than that of her American counterpart. This doesn't, however, mean their living standards are similar. Denmark does a better job than the United States at three things that boost material well-being but don't show up in income statistics.

Public goods and services
. Governments in affluent nations provide or subsidize a host of services and public goods. Here is a partial list:

• Physical safety: policing, the military

• Assurance of basic liberties: freedom of thought, speech, political participation, and religious practice

• Money

• Enforcement of property rights and contracts

• Financial safeguards: limited liability for passive investors, bankruptcy, bank deposit insurance, protection against unauthorized use of credit cards

• Clean air and water

• Street cleaning, removal and disposal of sewage and garbage

• Housing

• Healthcare

• Disability services

• Elderly services

• Workplace safety

• Consumer safety

• Disaster prevention and relief: firefighting, levee building, cleanup, compensation to uninsured victims

• Schooling: early education, K-12, university

• Childcare

• Job training

• Job search and placement assistance

• Antidiscrimination enforcement

• Public transportation

• Facilitation of private transportation: roads, bridges, stoplights, enforcement of speed limits, air traffic control

• Public spaces: roads, sidewalks, museums, parks, sports fields, forests, campgrounds, beaches, oceans, lakes, swimming pools, zoos

• Communication, information, and entertainment: support for phone lines, broadband, the Internet, public television and radio programming, subsidization of free private television and radio networks, libraries, festivals

• Free time: work-hours regulations, paid holidays, paid vacation days, paid parental or family leave, paid sick leave

When governments provide or subsidize public services and goods, they expand the sphere of consumption for which the cost to households is zero or minimal. This lifts the living standards of those on the low rungs of the income ladder, and it frees up their limited income to purchase other goods and services.
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Work conditions
. Many low-end jobs offer limited mental stimulation or opportunity to participate in decision making, and many
are stressful.
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There is a limit to the amount of stimulation that some low-end jobs will ever be able to provide, but most could do better, and efforts to figure out how and to push firms in that direction are well worth undertaking. Indeed, we should aim to improve working conditions in
all
jobs, rather than assuming that higher-skilled, better-paying positions automatically have decent work quality.
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