Believe and Obey

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Is Labor Subsidized By The Taxpayer?

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Lately an argument has been going around social media regarding whether or not labor is being subsidized by the taxpayer.  The argument runs as follows: large corporations such as Amazon, Wal-Mart etc. have a large proportion of their workers receiving welfare benefits, such as food stamps and other cash and non-cash transfers.  The presence of these benefits, the argument says, allows these companies to pay these workers less than they would otherwise, thereby creating a taxpayer provided subsidy. That is wages would rise in the absence of these benefits and/or if companies only paid more there would be less be need for these benefits. This argument has recently been advanced by Bernie Sanders on the Left as well as Tucker Carlson on the Right.  


The question is; does this argument make sense; are corporations being subsidized by the taxpayer via welfare benefits?  I do not think that this argument can carry the day for several reasons.  First the argument misunderstands how wages are set in a market economy.  Second, there is no consideration of other factors at work holding down real wage rates and third, there is scant attention given to the incentives that these benefits create.


First, wages are not set by corporations by diktat.  The economically challenged like to think so but this really is not how it works.  I discussed this last Labor Day.  Briefly, the only way to raise real wages is to make labor more productive.  Keep in mind that, as a species, we can only consume what we produce.  That being true, it is clear logic that if we produce more we can consume more.  This is true on an individual level as well.  The more we produce, the more we can take into the market for exchange, the more we can consume, therefore the more materially wealthy we are.  This is not changed a bit just because we introduce money into the calculation.  We can express all these things monetarily but the logic is the same.  


The way to make labor more productive is to put in their hands more and better tools.  We call these tools capital.  Therefore if there is a rising level of per capita capital invested we will see increased productivity and therefore increased growth in real wages.  The way this is expressed in a business is the notion of marginal revenue product, which is simply the amount of increased production that an additional worker brings to the operation.  If, say an Amazon warehouse worker adds $10/hour of extra revenue to the operation then the prevailing wage for that position will tend to be about $10/hour. No business will employ labor that produces $10/hour for $15/hour, the math simply does not work.  So if you force the wage rate up beyond the marginal revenue product all you get is unemployment.  So business does not just set wages willy nilly, they have a concrete set of criteria that produces signals that make continued employment viable or not.


This being the case we have to look to other factors than corporate whim to see why labor is not more productive, i.e. earning a higher real income.  It is a fact that labor has tended to do poorly this century, the median real income for families is barely above where it was in 2000.  We primarily need to look at Federal Reserve activity to see how this distorts the capital market and starves the real economy of the resources it needs to make labor more productive.  No need to rehash that here as I discussed this in this post.  This is the real reason that wage rates are stagnating is not “greedy” corporations or something endogenous to the market, it is the clear result of an external interference with the free market to benefit some at the expense of others.


Added to this is the panoply of regulation, from minimum wage to OSHA to union friendly policies, to mandated benefits that raises the cost of labor and creates systemic unemployment and suppressed real wages.


Finally we need to review what incentives that the current welfare benefits (such as food stamps, W.I.C., unemployment insurance, etc.) provide to both the providers as well as the recipients.  On the receiving end, these payments, will provide a disincentive to work.  If the benefits are worth $500/month and the recipient could find a job for $2000/month you are really asking them to work for $1500/month.  You will end up with less work than would otherwise be the case.  From the point of view of the taxpayer there is created a disincentive to capital formation.  The money transferred could have been, in part at least, used for capital (remember capital = tools) that would make labor more productive and raise real income. So a damaging set of incentives is provided at both ends of this arrangement.  Just to be clear the amount of these kinds of benefits is dwarfed by middle and upper class benefits as I outlined here.


So what can we conclude? If you take way these benefits wages will not go up as we have shown this is not what drives the setting of wages. In the absence of these benefits workers would likely have to work additional hours, get a second job, etc.. Clearly the longer-term solution to raising real wages and lessening the need for these benefits, is to raise the level of per capita capital invested thereby making workers more productive.  Only by allowing for the emergence of a truly free market can we hope to unleash the God-given productive power each of us possess.


Praise Be to God

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