Implementing Rerum Novarum in Seattle

July 4, 2017

Three years ago, Seattle raised its local minimum wage to $15 per hour. [1] Under the plan, employers with more than 500 employees who do not provide them with health insurance would have to reach $15 per hour level by this year. Employers with more than 500 employees who do provide health insurance would have until 2018. The new minimum would “be phased in through 2021 for smaller employers.” Tips would count toward the required minimum at first, but that would be “phased out over time.”

Now, two studies have been conducted to determine the effect the increase. [2] As the New York Times reports,

“The first study, by a team of researchers at the University of California, Berkeley, supports the conclusion of numerous studies before it, that increasing the minimum wage up to a level that is about half or less of an area’s typical wage leads to at most a small reduction in employment.

“That roughly describes Seattle, which first increased its minimum wage to $11 an hour from $9.47 for large businesses in April 2015, then to $13 an hour for many of those businesses in January 2016. (Small businesses, and large ones that provide health insurance for workers, had lower increases.)

“The Berkeley study focused on the restaurant industry because of the high proportion of restaurant workers who are paid the minimum wage. It found that for every 10 percent that the minimum wage rose, wages in the industry rose nearly 1 percent, and that there was no discernible effect on employment.

“By contrast, the second study, which a group of researchers at the University of Washington released on Monday, suggests that the minimum wage has had a far more negative effect on employment than even skeptics of minimum-wage increases typically find. (Neither study has been formally peer-reviewed.)”

But the focus of the University of Washington researchers was somewhat different. They focused, not just on employment as such, but on “hours worked, a potentially more complete indication of the effect of a minimum-wage increase than the employee head count that many studies use.” The result?

“The University of Washington researchers found that the minimum-wage increase resulted in higher wages, but also a significant reduction in the working hours of low-wage earners. This was especially true of the more recent minimum-wage increase, from as high as $11 an hour to up to $13 an hour in 2016. In that case, wages rose about 3 percent, but the number of hours worked by those in low-wage jobs dropped about 9 percent — a sizable amount that led to a net loss of earnings on average.”

Now, as has been mentioned, neither study has been peer-reviewed, and the University of Washington study is not without challengers. But we can take it as a given that business owners will do what they can to reduce labor costs, and if wages are legally required to be higher than they would otherwise pay it should not be surprising if they keep those costs down through such measures as layoffs, hiring less, or reducing hours.

That doesn’t mean that employers should be allowed to pay whatever they want, of course. Certainly, we might get to near full employment if businesses were permitted to pay their workers a dollar a day, but that wouldn’t be conscionable. But somebody might try to do it, so we need laws to keep unscrupulous employers from gaining a competitive advantage.

The question arises, then, as to what the minimum wage should be. Should it be the $15 per hour required by the City of Seattle? Or should it be the $7.25 required by the federal government? Pope Leo XIII had this answer in his encyclical, Rerum Novarum:

“Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well-behaved wage-earner. If through necessity or fear of a worse evil the workman accept harder conditions because an employer or contractor will afford him no better, he is made the victim of force and injustice….

“If a workman’s wages be sufficient to enable him comfortably to support himself, his wife, and his children, he will find it easy, if he be a sensible man, to practice thrift, and he will not fail, by cutting down expenses, to put by some little savings and thus secure a modest source of income. Nature itself would urge him to this.” (Secs. 45-46) [3]

Now it was this very consideration that gave rise to the $15 per hour minimum wage in Seattle. But it just might be the case that it has actually resulted in an overall net loss of earnings because of reduced employee hours. That possibility has to be addressed, with solutions consistent with Pope Leo XIII’s living wage mandate.

Let us, then, take into consideration the following objections to a living wage being governmentally mandated:

(1) Fewer businesses would be able to afford to hire;

(2) Those businesses who could hire would hire fewer people, and

(3) Businesses which had employees would reduce employee hours, potentially diminishing overall compensation (as may have happened in Seattle).

So how do we make wages sufficient for people to live on while addressing these concerns? An answer that has a lot of currency, what we might call the distributist answer, and one that has been advocated in these pages, is to broaden the base of capital ownership. To the extent that employees are also owners of the means of production, the conflict in the interests of employers and employees will be resolved. As Pope Pius XI said in Quadragesimo anno, “We consider it…advisable…, in the present condition of human society that, so far as is possible, the work-contract be somewhat modified by a partnership-contract, as is already being done in various ways and with no small advantage to workers and owners.” (Sec. 65) [4] 

But that doesn’t mean that there is something wrong with the employer-employee relationship as such. As the pontiff also said in the same encyclical,

“First of all, those who declare that a contract of hiring and being hired is unjust of its own nature, and hence a partnership-contract must take its place, are certainly in error and gravely misrepresent Our Predecessor whose Encyclical not only accepts working for wages or salaries but deals at some length with it [sic] regulation in accordance with the rules of justice.” (Sec. 64) 

With that in mind, and giving serious consideration to the likelihood that business owners might put up a measure of resistance to employees becoming fellow owners without having experienced the risk associated with initial capital outlays, it is worthwhile to investigate the possibility of alternative solutions.

On such possibility is exemplified by Ben & Jerry’s, the Vermont ice cream company, which originally had a policy that no employee could make more than five times what the lowest compensated worker was paid.  That meant that the CEO could make no more than $81,000.00 per year. Unfortunately, that practice came to an end when founder Ben Cohen retired as the top executive, and the company had to search for a new chief. [5] But it provides an answer to the conflict between the social requirement of fair employee compensation and the need to avoid disincentivizing both hiring and business start-ups.

This is how it would work:

There would be no minimum wage set. Any business would be able to hire anyone who agrees at a rate it could afford.

But there are already people working for wages that don’t rise them above poverty level. Wouldn’t this make that problem worse?

It would, except that, under the plan being proposed here, government would supply the deficiency, so as to effectively raise every wage to a living wage. To illustrate how this would operate, we will refer to the poverty guidelines put out by the U.S. Department of Health and Human Services. [6] I realize the guidelines are viewed by many as inadequate for measuring actual poverty, but here the focus will be on method, leaving the question of what amount actually constitutes a living wage for another discussion.

The 2017 guidelines set the minimum annual income for a family of four at $24,600. So for a family of four where neither adult is working, that amount would be supplied by the government. But since we’re going to supply that to four person families if they are not working, we have to build in an incentive to obtain employment. The poverty guidelines start at $12,060 per year for one person and increase the amount by $4,180 for each additional person. So, to incentivize employment, we will add an extra $4,180 to be guaranteed our family of four where one of the adults is employed, bringing the yearly guaranteed amount to $28,780 (the same that a family of five would receive if no one in the household was working). Translating that figure into a 50 week year (because we want to give people at least two weeks off per year) at 40 hours per week, we arrive at an effective $14.39 per hour. I say “effective,” because, under this plan, the employer is not necessarily covering the entire wage. If the employer is paying our employee from a four person household less than $28,780 per year, the government, again, makes up the difference. This would be done whether both adults are working, or just one of them, because we do not want to discourage one parent staying at home with children.

So far, this works out well for small employers who can’t afford to pay living wages, and for employees, specifically unskilled employees, who won’t have to worry about being paid poverty wages. And we have ensured that finding work will always be more profitable than simply receiving transfer payments.

But how do we protect the taxpayers? Particularly, how do we keep employers from cheating the system and paying at a rate lower than they can otherwise afford, relying on the fact that the government will supply the remainder? To answer that, we move to the second part of the plan.

CEO compensation in relation to the rest of the workforce has become a concern in recent years. An “April 2013 study by Bloomberg finds that large public company CEOs were paid an average of 204 times the compensation of rank-and-file workers in their industries. By comparison, it is estimated that the average CEO was paid about 20 times the typical worker’s pay in the 1950s, with that multiple rising to 42-to-1 in 1980, and to 120-to-1 in 2000.” [7] Indeed, some CEOs make “more than 300 times the median salary of their employees – just in cash (base pay, bonuses, profit sharing, etc.).” [8]

Now we certainly don’t want executives making more than a hundred times the median salaries in their companies while the taxpayers are subsidizing the wages of those at the bottom of the organizational charts. So, to prevent that, we will need to impose an income tax that is based on the difference between the total compensation of the CEO (or whoever enjoys the highest compensation in the company) and that of the lowest paid employee. Since CEOs were making only 20 times the typical worker’s pay in the 1950s, during the “golden age of capitalism” [9], let us speculate for present purposes that they were making about 40 times that of the lowest paid employees at that time. Let’s use that as a base, then, and say that a company where the CEO makes 40 times that of the lowest paid employee will pay income tax at the rate of 10 percent, which is lower than even the lowest tax rate for U.S. corporations at the present time. [10] And we will say that if the CEO compensation in relation to the lowest paid employee goes up by 40 times, 10 percent is added to the tax, and, if it goes down by 40, then 10 percent is removed. If the CEO makes 80 times that of the lowest paid employee, the company’s income tax will be 20 percent. If the CEO’s compensation is only 20 times that of the lowest paid employee, the income tax will be 5 percent. And so on.

These numbers are provided for illustration purposes only. It is not being insisted here that they are the correct ones to use. They may not be. They would have to be determined with the aim of providing adequate compensation for employees while disincentivizing the practice of companies paying employees less than they can afford so as to avail themselves of what would amount to a government subsidy. But the basic proposal here is a combination of a kind of negative income tax and the implementation of what is called a “maximum ratio” [11], and it is to be noted and emphasized that I am not even close to being the originator of either idea.  

The tension built into capitalism between the compensation requirements of labor and the need not to discourage businesses from hiring, or even starting, has presented something of a conundrum for some time. Herein is contained one suggested resolution, where the government makes up the difference in wages that would otherwise be inadequate, while companies that could pay better than they do would bear a significant share of the burden in financing the operation. On the other hand, companies that cannot pay as well as others, but render the service of providing some employment, can avail themselves of subsidized labor until they can expand to the point where they no longer need the help. Honest participants in the business community would benefit, while employees would be guaranteed the living wage called for by Pope Leo XIII. 

Jack Quirk