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The Flurry of Minimum- and Living-wage Initiatives

05/20/2014 09:35 pm ET | Updated Jul 20, 2014

The surprise is not that the Swiss voted down, 76-24, a minimum wage of $25, which would have been the highest in the world. It is also no surprise that the Swiss voted down a 12-to-1 maximum ratio of top salaries to those at the bottom.

The surprise is that these initiatives got to be voted on at all.

Why are we seeing a surge of momentum for higher minimum wages, a living wage and limits to executive compensation?

Piketty's Pirouette

Credit the rising concern about inequalities in wealth and wages to Prof. Thomas Piketty (pronounced PEA-kettee) of the Paris School of Economics. He figured out how to beat the dogma of the free market with the stigma of out-of-control plutocracy. 

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In early May he was carried aloft by the U.S. media, to promote the best-selling new translation of his book Capital in the Twenty-First Century. Paul Krugman reviewed it in the May 8 NY Review of Books and picked out three trends Piketty first identified: (1) Since the mid-1970s, wealth inequality has been rising. (2) Those getting richer represent one-tenth of one percent of the population. (3) Members of this tiny elite are getting richer the fastest.

Piketty fears the emergence of a new anti-democratic Gilded Age. His arguments support policies that would:

  • Place a floor on the wages of those at the bottom (or reduce their payroll taxes).
  • Limit the compensation of those at the top (or raise their taxes). 

Raising the Minimum Wage

Europe's largest economy, Germany, has agreed to a minimum wage of about $11.75/hour in 2015.

Germany exempts from the minimum wage the groups often described as being hurt by it:  minors, interns, trainees, long-term unemployed people for their first six months at work and, at least for the first two years, temporary or seasonal workers.

Denmark has the most equal incomes of the OECD countries. Its strong unions have negotiated a minimum wage of $20/hour. The UN rated it as the "happiest" country in the world in 2013. Its unemployment rate is lower than that of the United States and its labor force participation rate is higher.

The United States is far behind. The current law is the Fair Labor Standards Act of 2009, which introduced a minimum wage of $7.25.  President Obama proposes to raise it to $10.10, which would reportedly cut in half the number of U.S. residents with a poverty-level income.

2014-05-20-minwagepcopy.jpgIt was once orthodox economic doctrine that a minimum wage must raise labor costs and thereby force employers to lay off workers to keep down spending. But in the mid-1990s, David Card and Alan B. Krueger looked at what actually happened after a 1992 hike in the minimum wage in New Jersey. Yes, fast-food chains in the state did respond to rising costs. But they did not lay anyone off. They raised prices -- by a manageable average of 3 percent. The researchers found similar results for increases in the U.S. and California minimum wages. 

Ensuring a Living Wage in Industrialized Countries

In 2014, workers have become more insistent about raising the floor for wages, and are seeking to extend their campaign to ensure local living wage, i.e., enough income to pay for a decent standard of living for workers and their families.

  • In Seattle the adequacy of the minimum wage is being questioned in relation to a local living wage.
  • McDonalds workers have been protesting in 150 cities, in 33 countries, to demand that they be paid a living wage.  
  • The Scottish Parliament has defeated a Labour proposal to require that all public-sector employees be paid a living wage.

Ensuring a Living Wage at the Other End of the Supply Chain

Meanwhile, U.S. and European consumers have become more vocal in demanding that popular brands ensure that their suppliers in developing countries pay workers a living wage, which is considered by the UN to be a fundamental human right, enshrined in the 1919 Constitution of the International Labour Organization and the 1948 Universal Declaration of Human Rights. 

The two main problems with a supply-chain living wage have been: (1) Persuading suppliers to disclose their salary schedules and (2) Defining what a living wage is in each production area.

Some brands are insisting on workers being paid a living wage. Some companies are aggressively committed to this goal. To provide benchmarks, expertise is being invested in initiatives to calculate a living wage for different areas:

  • At MIT's program in Urban Studies, Amy Glasmeier has released tables showing calculations of a living wage in parts of the United States for different family sizes. In New York City, for example, a living wage would be27,000 for one adult and51,000 for one adult and one child.
  • Good World Solutions posts the Fair Wage Guide, which provides living-wage guidelines for 100 countries, based on minimum-wage laws and poverty-line calculations.
  • A group of standard-setting bodies has been working with Richard Anker, former Senior Economist at the ILO, and Martha Anker, former Senior Statistician at the World Health Organisation, on measures of a living wage in different countries.  The group includes Fairtrade International, Forest Stewardship Council, GoodWeave, ISEAL Alliance, Sustainable Agriculture Network/Rainforest Alliance, Social Accountability International and UTZ Certified.

The Ankers calculate a living wage by adding together the cost of a nutritious local diet, decent housing and other essential needs, plus a small increment to ensure enough money for incidents such as illnesses that cannot be predicted. This total local cost is then applied to different family sizes and number of earners. For example, a Fairtrade-SAI report on the Dominican Republic concludes that the D.R. living wage for farms is RD$13,869, much higher than the minimum wage in agriculture (RD$5,577) and the prevailing wage on Fairtrade-certified farms (RD$5,944).

Limiting Compensation at the Top

The other away to address inequality is to work on capping the top of the wealth pyramid. Plato in The Laws argued that democracy suffers if the incomes (of free men) of the best-paid workers exceed four times those of the lowest-paid workers. Aristotle extended this range to five times, which was an early objective of Ben & Jerry's until 1995, when the company was recruiting a new CEO.

FDR proposed in 1942 that Federal income taxes be stepped up to 100 percent on compensation exceeding ten times the lowest-paid workers. In the early post-WWII period, the ratio among large corporations was about 30 times. Today, executive compensation has soared to 400 or more times the minimum wage. In the fast-food industry, the ratio of top salary to lowest-paid workers is 1,000 to 1.

Last week more than 75 percent of shares were voted against a generous Chipotle executive-compensation package.  It was just reported that shareholders at Target successfully protested against the pay package of its prior CEO and it was reduced by $7 million, more than 35 percent.