Why have wages been allowed to stagnate?Wages

By Dr Steven Hail

I recently wrote an article for Renegade Inc pointing out that people in minimum wage jobs today in America, Australia and the UK are doing much worse, relative to the well-off, than they were 50 years ago. The article argues for an increase in the minimum wage in each country, to restore to the low paid their fair share of national income, combined with an employment guarantee at that wage.

One of our readers wrote in, asking us to explain why minimum wage rates have been allowed to stagnate.

I can’t answer this question fully within a few hundred words. If you want a very full answer, and have some background in economics, I invite you to track down the electronic version of my thesis in the Flinders University library. Otherwise, the soon-to-be-published book of Claire Connelly, Renegade’s own editor-in-chief, is recommended. But in the meantime, here are a few hints:

Firstly, it isn’t just about minimum wage rates, and I don’t want to raise the minimum wage just for its own sake. It is about the whole distribution of income. Within most, but by no means all, high income countries, the distribution of after-tax income has become far less even since the 1970s. The US is just an extreme case of this phenomenon.

There are so many other ways in which I could demonstrate the same thing. The rewards of economic growth have increasingly gone to those at the very top of the pile, and increasingly in the form of capital income. Those bang in the middle of the distribution in the US, for example, haven’t done all that well, and the share of labour income in national income has fallen inexorably. It is obvious.

How has this been allowed to happen? It has been in part a consequence of a deliberate plan, but also in part just an evolutionary development.

That it has been partly deliberate is shameful: that is has been partly just the way economies have evolved, does not mean it cannot be reversed.

An increase in the minimum wage is just one of the mechanisms for reversing extreme inequality. Changes in tax systems are another. The reversal of various forms of financialisation are a third. Technology has played a role, but it isn’t the whole story. Globalisation has played a role, but it isn’t the whole story. The power of the already rich to influence political processes and government policies, and the media and public opinion, has been a big part of it, but it isn’t the whole story.

The deplorable failure which is modern orthodox macroeconomics has played a major role.
Worst of all, the total surrender of the political Left, nearly everywhere, in the 1970s, and the utter failure of so-called progressives to stand-up for the ideals on which their parties were founded over the last forty years, led to a long series of neoliberal triumphs, of which the abandonment of those on minimum wage rates was just a small part.

This has fulfilled the wildest dreams of those who formed the Mont Pelerin Society in 1947, with the aim of rolling back the progress of equality and social equity which was emerging from the ruins of War. Its members have accounted for at least eight Nobel prizes in economics since 1969, founded numerous well-funded think-tanks and research institutes, and made major contributions to the partial transformation of the discipline of economics into a tool for misleading the masses, intimidating politicians, and the promoting inequality and privilege.

I say ‘partial’ because there have always been at least some economists like Hyman Minsky, Paul Davidson, Renegade contributors Professors Steve Keen, Michael Hudson, Bill Mitchell and Stephanie Kelton, who have explained how those who were inspired by Milton Friedman and his colleagues have misled the world; how there is a better, more realistic approach to understanding economic systems, which suggests a very different set of economic policies; and how these policies are far more consistent with the principles of which the major left-wing political parties were founded, more than a century ago.

A Friedman neoliberal would oppose any minimum wage, on the basis that it would inevitably cause unemployment. A Friedman neoliberal would advocate for drastic cuts in marginal tax rates on the wealthy, on the grounds that such tax cuts would provide an incentive for investment and risk taking. A Friedman neoliberal would argue for reductions in employment protection, to ensure employers were not deterred from hiring workers in the first place. A Friedman neoliberal would ignore income distribution and would punish the unemployed, on the basis that income depends on productivity, and the unemployed need an incentive to work.

Milton Friedman received a Nobel prize in economics. He was also an incompetent economist, There is no credible evidence that any of the recommendations in the previous paragraph are true. Of course, you could set a minimum wage rate too high, and of course taxes can discourage activities under some circumstances. But the neoliberal project of Friedman and his fellow members of the Mont Pelerin gang, when evaluated in terms the gang themselves would have accepted as a test, has been a failure. Their ideas have been pursued in most places most of the time since the 1970s. Economic growth has not increased, over 1950s and 1960s levels. It has fallen.

What has increased is inequality, social immobility, relative (and in the case of the US absolute) poverty, household indebtedness, financial fragility, and a series of indicators of creeping social failure, one of which is the election of President Donald J. Trump.

Why have minimum wages stagnated? Ideology, ignorance, selfishness, delusion and intellectual fraud.
Call it neoliberalism if you must. But it isn’t just about minimum wages.
What can you do about it? Insist on the reversal of much of the misleading political economic agenda of the last two generations.

What can members of my profession do about it? We have to overthrow orthodox, neoclassical, general equilibrium macroeconomics, and replace it with a better guide for policymakers. What should be in such a new economics? You’ll need to look up the thesis I mentioned above for more on that issue.

Originally published at renegadeinc.com