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Wages: Expense or Investment?

December 27, 2020 (2,022 words)

Try to imagine a scenario in which a big, successful, publically-traded company – say a tech giant such as Amazon, for example – might decide on its own to pay its low-wage workers – in this case warehouse “fulfillment” employees – more than the going rate.

“Why would any business do that,” is probably the first response that comes to mind.

There are many factors preventing this pipe dream from becoming a reality. Chief among them is a piece of conventional wisdom we are all familiar with: wages paid to employees with no leadership role or ownership stake are just another expense on the balance sheet, like rent or utilities. Such wages should be managed and minimized wherever possible, to improve the bottom line. This is accepted as an immutable law.

Haggling over a federally-mandated increase in the minimum wage distracts the electorate from a larger, more fundamental issue. Wages paid to the rank-and-file should not be thought of as a typical run-of-the-mill expense, but rather as an investment. And not just an obvious investment in the well-being of the lower-tier employees, but also an important investment in the financial health and future growth potential of those businesses forced to meet the higher payroll. Not to mention the carry-over investment in the communities which are home to both sides of this equation: employees and upper management/ownership.

It won’t be easy to change our shared understanding of what constitutes “right order” when it comes to compensation. Successive generations have wrestled with the question, and so far a permanent solution that is consistently fair to “labor” has proved elusive.

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The debate over what is appropriate remuneration for those who toil, relative to a return on capital for those who invest, has raged for centuries. You may recognize it by its fancy, academic name: “the labor theory of value.” Many a big-time thinker has weighed in on the subject.

There is Thomas Aquinas (1225-1274), who states “… value can, does, and should increase in relation to the amount of labor which has been expended in the improvement of a commodity.”

Then we find Ibn Khaldun (1332-1406), the Arab scholar of Islam, who has been called the founder of the modern discipline of economics, among his many other accomplishments. Mr. Khaldun describes labor as the source of value necessary for all earning and capital accumulation.

John Locke’s labor theory of property comes along in 1689, which also sees labor as the ultimate source of economic value. Adam Smith (1723-1790) follows, and identifies a flaw in the application of this theory to contemporary capitalism: if “labor embodied” in a product is equal to “labor commanded” (the amount of labor that can be purchased by selling the product), then profit is impossible.

David Ricardo (1772-1823) responds by pointing out Smith is confusing labor with wages. This more or less brings us to our current impasse over the relative value of labor in the modern-day economy.

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Once the stagflation of the 1970s was swept away by the boom of the 1980s, most everyone now living became a walking, talking disciple of trickle-down economics. That meant allowing the market to determine wages, with supply-and-demand given final say on all decisions related to compensation. There were hardly any complaints, since things were going so well for so much of the workforce. That is to say, the middle-class white population with access to a decent education, and possessed of a modicum of drive, determination, and smarts.

The post-WWII baby-boomers had by now settled into their comfortable, middle class lifestyles. The blue-collar limitations that constrained their parents were but a distant memory. So too were those past affiliations with organized labor, which made their parents’ middle-class existence possible.

Then along came the late-1980s roll-back of anti-trust legislation, and the late-1990s deregulation of the banking industry, both of which altered the employment landscape in ominous ways. Suddenly there was less competition and more monopoly control. Slashing payroll to increase profitability meant fewer options for the skilled workforce. The new private equity firms that leveraged their way to dominance in the retail and service sectors also cut jobs as a matter of principle, and managed to establish something of a hard cap for their remaining low-wage workers, since those people had nowhere else to go.

The great recession of 2008 did not help matters. We all know the financial industry and the stock market have rebounded nicely in the last twelve years. And the new tech giants are also doing quite well, even in the midst of the COVID-19 pandemic. But much of the American workforce is now experiencing what the experts like to call “economic uncertainty.”

Since such uncertainly has been commonplace for a large chunk of our nation’s history, you might wonder why anybody would bother getting overly worked up about it now. I guess the point is everyone who matters has been strutting around for the last sixty years, acting like the equitable distribution problem had been solved, once and for all.

This explains why the current level of stress is catching many commoners by surprise. For that segment of the population things seem to have reverted to a level of day-to-day precariousness not seen since the late 19th and early 20th centuries.

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In hindsight maybe we were a bit too hasty in disowning our family ties to the labor movement. Considering unions were responsible for balancing the scales between the competing interests of workers and owners, if only for what turned out to be a brief shining moment in our history.

In one respect the cold shoulder currently given to organized labor can be chalked up to a subtle sense of superiority, since so many have moved into more highly compensated, white-collar employment. In another respect, it’s a lingering distaste for the “commie” overtones surrounding the union movement that still bother people, overtones that “labor” has never been able to completely shake off.

Speaking to that last issue, mainstream Americans have always been pretty unanimous in their rejection of Karl Marx (1818-1883). The first part of his detailed critique of capitalism dropped in stages between 1867 and 1883, just as the Robber Barons were getting warmed up. One would think his timing would have made for a slightly more receptive audience on this side of the pond. Instead polite company has written the man off entirely.

History strikes me as a series of unrelated events that challenge our ability to work together on a cooperative basis. We in the present are inclined to assume past controversies were settled at the time. It turns out nothing is ever properly thought through, or brought to a conclusion that satisfies all sides. Momentum always carries society forward into the next generation, loose ends and all. The next group is forced to face another set of new controversies, with ever more unresolved baggage from before.

Karl’s contention that any corporate profit whatsoever represents exploitation of labor overstates the case. As does his well-known desire to abolish all private property, and remove ownership of the means of production from private control.

He deserves to be corrected on a few points. Everyone who “participates” in a commercial enterprise is entitled to a slice of the economic pie, even owners and investors. The old 70-30 distribution formula (labor-to-capital) does not necessarily cover every modern contingency. Private property is a pre-requisite for human dignity, especially for those on the lower tiers of the economic ladder.

On the other hand, allowing the means of production to accumulate in private hands, especially when that ownership turns into monopoly power, is just asking for trouble.

For those principled stalwarts intent on blazing a reliable trail forward, it’s not so much debunking one system of thought in favor of another. There is usually a bit of truth in both sides of most of these arguments. It’s more a matter of teasing out that truth, and not allowing oneself to be put off by the shortcomings of a rival’s position, or blind to the limitations of one’s own.

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There is no one perfect, fool-proof policy proscription waiting to be plugged in that will magically smooth out the rough edges. What we are doing now is pretty much all there is to do. We just have to fine-tune some of the particulars, and improve our execution.

The free-market strategy so many insist is superior to “government intervention in the economy” has a lot to recommend it. But the secret sauce that’s supposed to keep everyone honest in such an approach is completion. Yet that’s the very thing today’s most successful entrepreneurs (and yesterday’s most successful “industrialists”) are so good at eliminating.

Under the circumstances, then, allowing employees to bargain as a unit for increased leverage in contract negotiations, rather than being left to twist in the wind on their own, would seem to make sense.

Let’s remember how that brief shining moment of a generation’s worth of balance between labor and capital was set in motion by the landmark National Labor Relations Act of 1935, which established workers’ rights to collective bargaining, and attempted to regulate unfair practices on the part of everybody: employers, employees, and unions.

By 1937 Chrysler and General Motors had agreed to negotiate with the union representing their assembly line workers. Ford was dragged kicking and screaming to the bargaining table in 1941. The story goes that Henry Ford (1863-1947) – who was notorious for hating unions with a passion – only relented after years of bitter opposition when his wife, Clara, threatened to leave if he didn’t get with the program.

Once the old man finally came around, the Ford Motor Company gave its workers more generous terms than either GM or Chrysler. In addition to paying back wages to more than 4,000 workers wrongfully discharged for their organizing activities, the company agreed to match the highest wage rates in the industry and to deduct union dues from workers’ pay.

It’s a shame so many of today’s most successful firms shun unions in favor of an “open shop” mentality. In the car industry the non-union compensation package is roughly half, in case you are interested in that minor tidbit. The auto makers tell us they have been forced in this direction out of a dire need to “remain competitive.” But what has changed? Why was everyone able to prosper for a generation under the previous arrangement, when assembly line auto workers – among many other factory workers toiling in a variety of other industries – were paid a living wage?

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As with everything else in this life, he who has the gold makes the rules. Our wildly successful corporate behemoths, entrepreneurial juggernauts, and private equity king makers must decide of their own volition to address the current adversarial situation, and make improvements. Re-establishing a public forum (collective bargaining) to determine appropriate compensation for line workers would be a good start.

Another step in the right direction would be implementing whatever form of open-book management might be feasible for these huge organizations. The people pulling the strings never like to give out the full story, so expecting them to provide a level of transparency that is uncharacteristic will be a tough ask.

Voluntary compliance is the only way things will ever change. It won’t happen by forcing big shots to the table through some onerous government mandate. Just look at how every attempt at regulation results in yet another clever corporate work-around. The top guns need to find their inspiration in a sustaining vision of long-term and widespread prosperity, instead of short-term executive bonus pay and return on investment.

Along the way these giants might also tap into a sense of simple decency and fair play. Such homespun sentiments may start to resonant with certain people once those with all the leverage stop using “supply and demand” as cover for indulging the all-too-human tendency to avarice.

Even lesser mortals, who spend their entire working lives consigned to the boiler room of our ingenious money-making contraptions, shoveling coal into the furnace so the elaborate apparatus keeps purring along, deserve an equitable share of free-market capitalism’s jaw-dropping largesse.

Robert J. Cavanaugh, Jr
December 27, 2020

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