Wage Policy, Income Distribution, and Democratic Theory [1 ed.] 9780203839041, 9780415779715

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‘For more than twenty years, Oren Levin-Waldman has conducted pioneering work, not only on minimum wages and wage contours, the earned income tax credit, and democratic theory, but also on the living-wage movement in the context of struggles over economic development and conceptions of citizenship. Wage Policy, Income Distribution, and Democratic Theory is the culmination of that work. Looking beyond the Great Recession, Levin-Waldman draws our attention to the equally serious Great Stagnation, a silent depression in wages that has gripped working families in the United States for decades. And he persuasively argues for a pragmatic solution: a combination of institutions and legislation – a wage policy – that can accelerate aggregate demand, boost employment, and spur economic development. But such a policy also has another, equally vital consequence: it can reduce income inequality in a way that enhances personal autonomy, gives meaning to the notion of personal responsibility, and fortifies democracy by strengthening opportunities for political and civic participation. In short, Levin-Waldman has put his finger on what may be the central domestic political issue of our time and the book deserves the widest possible audience in academic, practitioner, and policy circles’. Charles Whalen, Visiting Fellow, School of Industrial & Labor Relations, Cornell University, USA

Wage Policy, Income Distribution, and Democratic Theory

This book explores the relationship between wage policy, distribution of income, and ultimately how that distribution impacts on democratic theory. In doing so, it examines the types of policies that are critical to the maintenance of a sustainable democracy. Wage policy, long the domain of economists (particularly neoclassical economists whose focus has been their impact on labor markets and income distribution), has largely been ignored by democratic theorists. Levin-­ Waldman argues that because wage policy can shape overall income distribution, it has a significant effect on equality levels and is therefore core to democratic theory. Its potential to enhance individual autonomy, which is a necessary condition for democratic participation, is another reason why wage policy should be at the centre of democratic theory. This book argues that the evolution in wage policy has paralleled economic transformations, which democratic theory has evolved to accommodate. Through a careful analysis of democratic theory and empirical analysis of the impact of wage policy on income distribution, this book concludes that wage policy is an important component in the maintenance of democratic society. A wage policy that raises the wages of those at the bottom can give workers more independence and power as they are placed on more equal footing with managers. This, in and of itself, can be a source of empowerment, effectively enhancing their autonomy. By doing so, workers feel less exploited and income inequality is reduced. This significant contribution explores the meaning of democratic theory and how it has evolved along with the meaning and specific forms of wage policy, providing invaluable new insights into their connections. This book will be of interest to postgraduates and researchers in economics and political science, as well as policy practitioners interested in issues of income inequality or democratic theory. Oren M. Levin-­Waldman is Professor of Public Policy and Public Administration in the School of Management at Metropolitan College of New York, USA.

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Wage Policy, Income Distribution, and Democratic Theory Oren M. Levin-­Waldman

First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2011. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.

© 2011 Oren M. Levin-­Waldman All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Levin-­Waldman, Oren M. Wage policy, income distribution, and democratic theory/by Oren M. Levin-­Waldman. p. cm. Includes bibliographical references and index. 1. Wages–Government policy–United States. 2. Living wage movement– United States. 3. Income distribution–United States–History. 4. Democracy. I. Title. HD4975.L429 2010 331.2′10973–dc22 2010020095 ISBN 0-203-83904-8 Master e-book ISBN

ISBN: 978-0-415-77971-5 (hbk) ISBN: 978-0-203-83904-1 (ebk)

In loving memory of my mother Saula Waldman Imi Morati Saula bat Shmuel Z’Chrona L’Vrocha

Contents

List of tables Preface

xvi xvii

1 Introduction

1



2 Democratic theory

20

3 Evolution of wage policy

48

4 Post-­New Deal era and the demise of wage policy

81

5 New living wage movement

108

6 Wage policy for the middle class

140

7 Wage policy and the path towards democracy

169



Bibliography Index

192 208

Tables

4.1 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9

Household income inequality Listing of cities Demographic distribution Changing demographics 1950–1990 Income inequality in living wage, non-­living wage and all cities Logistical regression coefficients for variables likely to affect passage of living wage ordinances Logistical regression coefficients for changes in variables likely to affect passage of living wage ordinances Individual income in the United States by contour Share of labor market earning in each contour Ratio of top fifth (median) of income distribution to bottom contour Demographics of wage earners by wage contour groupings Comparison of minimum wage to non-­minimum wage years by unemployment Unemployment comparison of minimum wage to non-­minimum wage years by contour Annual unemployment rates Variables likely to affect whether one is unemployed by decades Variables likely to affect whether one is unemployed by years of increase

100–101 120 122–123 124–125 127 130 132–133 147 148 150 152–153 154 155 156 158 160–164

Preface

As this book goes to press, the US economy is in the throes of a deep recession. Unemployment still remains close to 10 percent, people have lost their homes to foreclosure, and many more are “under water” – meaning that their mortgages exceed their homes’ value. Although there are claims of beginning signs of recovery, most companies aren’t hiring. The newest phrase to enter our lexicon has become the “jobless recovery.” The government stimulus plan, perhaps modeled in part on the 1930s Work Progress Administration (WPA), has not yielded the promised results, mostly because much of the stimulus money remains unspent. And that which has been spent, has gone to pork-­barrel projects rather than construction and repair of infrastructure. A jobs program might appear to be a logical response to sustained unemployment, but it ultimately fails if it cannot account for the causes of unemployment – that people aren’t demanding goods and services. Arguably, more people working will result in an increased demand for goods and services. And yet, the simple cause, and often overlooked because it is so simple, is that people lack sufficient income and so are unable to demand goods and services. Although John Maynard Keynes (1964) has been out of fashion for years, on this he was correct. In response to the neoclassical model that held unemployment in a competitive market to be due to wage rigidity, Keynes was able to state the obvious: If consumers are not demanding goods and services, it really does not matter how low workers reduce their wage demands. Firms will not hire because they have no need to. The current recession was precipitated by the financial meltdown beginning in the fall of 2007, and this was precipitated by the sub-­prime mortgage crisis. In a nutshell, many consumers were sucked into mortgages for whatever reason, they couldn’t afford to make their payments, and the banks foreclosed. The glut of houses only reduced the value of others’ homes. In some cases, mortgages were made at low teaser rates on the assumption that as the variable rate mortgages rose, so too would the consumer’s income. In many cases, consumers were led to believe that they would be able to afford these mortgages when they could not. In all fairness to borrowers, many may have believed that according to the natural order of things their incomes would rise and that they in turn would be able to afford the payments as their adjustable rate mortgages increased. Historically, this was the natural order of things. It is only in the last

xviii   Preface few decades that wages have been stagnant. Almost all the mortgages were securitized, meaning the loans were sold to investors as securities. As a consequence of this practice, mortgage companies had no incentive to work out payment plans with struggling consumers. Rather, having already made their money up front they had every incentive to simply foreclose and try to unload the housing stock in fire sales. Intuitively, the answer would appear to again have been simple: provide workers with the wherewithal to pay off their mortgages. Public policy in the United States and elsewhere is anything but simple. Fraught with interest groups and the inability to reach agreement, at best we attain incremental policy. Charles Lindblom (1959; 1965) famously referred to this as the science of muddling through. Moreover, it was good for democracy because it meant that government could not move precipitously on anything, meaning that individual rights couldn’t easily be trampled on. And yet, because the outcome would be the result of partisan mutual adjustment, it was assumed that the policy process would involve the broadest participation of the public through policy networks, organizations, and interest groups. In the end, then, everybody would be broadly represented. The case of the sub-­prime crisis, however, is perhaps an example of policy not being made in this fashion. Rather, the response was for the US Treasury, in conjunction with the Federal Reserve Board (Fed), to offer banks a bailout for the purposes of shoring up the financial system. The approach was top-­down as opposed to bottom-­up. It also followed an elitist approach to policy in that it was assumed that issues were so technical in nature that only the so-­called experts could understand the issues. Consequently, there couldn’t be any room for the input of others. A policy from the Fed in the service of the financial industry should come as no great surprise. By statute, the Fed’s primary constituency is the banking industry. Employment has only become a secondary ideal, and only by default. Because Congress would rather not take responsibility for fiscal policy, it has fallen to the Fed as an implied responsibility, whose basis lies in the Employment Act of 1946. That Act established that it would be the “continuing policy and responsibility of the Federal Government to use all practicable means . . . to promote maximum employment, production, and purchasing power” (Employment Act 1946, p. 23). A “practicable means” of fulfilling its maintenance function might be accomplished through monetary policy, especially as the principal maintenance function was to control for both inflation and recession. The Act clearly implied a role for monetary policy. My purpose here is not to argue the failure of American economic policy, or even to argue how democratic governance effectively failed to be responsive to the needs and interests of ordinary citizens. Rather it is to focus on a long neglected topic, and one which has bearing on the current state of the economy. While there is discussion about minimum wages and wage rigidity from time to time and plenty of discussion about the fairness of the current tax system, there is precious little discussion about substantive wage policy. The idea is nothing new. Sidney Weintraub (1972) almost four decades ago argued that an income policy would serve as a necessary complement to the fiscal and monetary tools

Preface   xix traditionally used to manage the economy. The argument was actually quite simple: It wouldn’t matter how many jobs might be created either through tax reductions or lowering of interest groups if people’s incomes failed to keep up with inflation. My purpose in this book is to take the argument a step further. Not only would a wage policy, if it resulted in arresting wage stagnation, better provide workers the wherewithal to demand more goods and services, it would also result in less income inequality, which over the last few decades has increased tremendously, and be in the service of enhancing democracy. Therefore, I assume a couple of things: First, the stagnation of wages which we have observed over the last three decades, would not have happened had there been a viable wage policy. Second, if we had a credible wage policy, the level of income inequality would be considerably less. Many European countries have lower levels of inequality because they have more social provision and centralized wage setting mechanisms, i.e. wage policies. I would even suggest that had there been a viable wage policy, the financial meltdown following the sub-­ prime crisis might not have occurred, or would have been less likely to have, because people would have been in a better position to pay off their mortgages. In the pages that follow, I argue that wage policy is essentially a middle class issue and ultimately is critical to sustaining democratic society. Consider that rising wages throughout the distribution will have the intended macroeconomic effects of increasing demand for goods and services. If the wages of those at the bottom rise along with those at the top, or even increase at a higher relative percentage, the gap between the top and the bottom will be narrower, thereby resulting in less income inequality. Obviously, this will not mean that we all have the same thing, but a narrowing of the gap between the two extremes of the top and the bottom means that there are fewer people at the very bottom and the very top, and more concentration in the middle. Less income inequality effectively means a broader middle class, and a broad middle class is critical to democratic governance. It isn’t just a question of achieving a more equitable distribution of income; it is ultimately about enhancing personal autonomy. As workers see their wages rising, rather than eroding through stagnation, their morale is boosted, and they in turn become more productive. But that they are less likely to become dependent, means that they have achieved greater independence. Therefore, I argue that wage policy is essential to enhancing the personal autonomy of individuals, which is a fundamental prerequisite to participating in democratic society. In previous works, I have focused on both the minimum wage and the living wage, both of which are examples of wage policy. Both, however, have been limited policy responses to poverty and insufficient wages. Here I focus on the broader topic of wage policy as a concept that policy makers ought to give greater thought to. Wage policy would ultimately be a middle class issue, as it would effectively bolster the wages of those in the middle class. But wage policy is critical to democracy because it would accomplish three necessary objectives. First, by enabling workers to earn livable wages they are better able to be self-­ sufficient and keep themselves and their families out of poverty. This then

xx   Preface becomes a matter of individual autonomy. While democratic society is one that allows its members to live autonomous lives, it also requires that they be autonomous so that they can think critically and be active participants in the political process. Second, to the extent that wage policy reduces income inequality, it effectively makes society more equal insofar as the result is a broader middle class. And third, to the extent that it serves to bolster the middle class, it becomes a necessary ingredient in the continued economic development of society. Democratic society requires autonomy, equality, a broad middle class, and a measure of economic development. As I have spent much of my academic career grappling with these issues, this project might well represent the culmination of my work. In that vein, it certainly has been many years in the making. I actually had the opportunity in the fall of 2007 to participate in a workshop on work and social justice at the University of Zurich where I was able to explore the relationship between a minimum wage and democratic ethos. The paper for that workshop was later published in Advances in Industrial and Labor Relations, and it forms the basis for some of the arguments in this book. I thank Carsten Kollmann for organizing the workshop, as well as his gracious invitation to participate. Portions of this manuscript were read by Charles Whalen and Aryeh Botwinick. Working in the area of democratic theory this time actually afforded me the opportunity to rekindle a relationship with Aryeh Botwinick who many years ago taught me political philosophy in graduate school. The theoretical pieces of this work are no doubt better because of his input. I wish to thank Thomas Sutton, my editor at Routledge, for seeing this as a worthy project. I also benefitted from the comments of several anonymous reviewers. All comments received have no doubt made this a better manuscript, but I bear sole responsibility for the errors or omissions remaining. I also would like to thank the editors of the Journal of Socio-­Economics, the International Encyclopedia of Public Policy, and Advances in Industrial and Labor Relations – Morris Altman, Phil O’Harra, and David Lewin and Bruce Kaufman respectively – for permission to reprint pieces that first appeared in their pages. “Urban Path Dependency Theory and the Living Wage: Were Cities that Passed Ordinances Destined to Do So?” constitutes the core of Chapter 5 and was first published in the Journal of Socio-­Economics 38, 4 (August 2009). “Income Inequality and the Distribution of Power” of which portions are reprinted mostly in Chapter 7 was first published in Volume 2: Economic Policy (GPERU: Perth 2008). And “The Minimum Wage and Competing Ethical Conceptions” was first published in AILR 16 (2009). I also thank the Emerald Publishing Company, the publisher of AILR, for its permission to reprint. A work like this is always a solitary enterprise, but it nonetheless would not have been possible without my family’s support. My two sons Avi and Ariel, of course were themselves. Though both grown now, they still provide their father a sense of purpose. And my wife Renee provided the love and support necessary to see this project through to completion. Finally, just a few months before this work went to press, my mother Saula Waldman passed away. My mother was

Preface   xxi raised in an environment where social justice was a core value. She was at heart a socialist, although never a pure Marxist. Her father, although he loved Franklin Roosevelt, nonetheless voted for Norman Thomas three times. I am sure that whatever values are contained in this work owe to her influence. She was certainly passionate in the view that communities have a responsibility to take care of their members, whether it is done privately through charitable organizations or publicly through public policy. Therefore, it is in loving memory of my mother, Z’Chrona L’Vrocha, that I dedicate this book.

1 Introduction

This is a book about the relationship between wage policy, whether in the form of a wage floor or other policies that serve to bolster wages, the distribution of income, and ultimately how that distribution impacts democratic theory. It is about the types of policies that are critical to the maintenance of a sustainable democracy. Why wage policy? Because wage policy has largely been ignored by democratic theorists. And yet, it impacts on the meaning of equality to the extent that it can impact on the overall income distribution. Equality is also core to democratic theory. While democratic theory doesn’t assume wage policy, or any type of public policy for that matter, it does assume equality. But it isn’t always clear just what is meant by equality, and depending on how it is defined, there may be different implications with regards to what is required. Democracy assumes, and in fact requires, individual autonomy. For individuals to be able to participate as full-­fledged citizens, they need to be autonomous. Autonomy, however, may require more than the absence of constraints on human agency; it may in fact require policies that enable them to realize that agency, thereby enabling them to live independent lives. Therefore, to the extent that wage policies may achieve greater equality and more autonomy, wage policy must be viewed as being consistent with a broad definition of democratic theory. Because wage policy is able to impact on income distribution and ultimately equality, as well as impact on autonomy, it has a role to play in the maintenance of democracy.

Wage policy Wage policy can be broadly defined as a set of institutions designed to bolster the wages of workers, especially for those workers who lack what James Galbraith (1998) refers to as monopoly power when it comes to negotiating. Wage policy, in effect, confers monopoly power on workers who seek to bargain with management on an equal playing field. Historically these institutions assumed the form of labor policies that allowed for unionization and collective bargaining, and specific wage floors. Traditionally, wage floors assumed the form of federal and state minimum wage legislation. More recently, they have assumed the form of Living Wage ordinances at the local level, as well as broader proposals for basic and/or minimum incomes.

2   Introduction It may strike some as odd to think in terms of a history of wage policy in the United States, but the United States has long had one even if only in its most negative form of protecting individual rights to bargain for themselves over their own wage rates. In the early days of the republic wage policy assumed the form of contractual enforcement of indentures, apprenticeships arrangements, and other guild protections. During industrialization and the advent of wage labor, it assumed the form of “liberty of contract” – the notion that there should be no barriers to one’s ability to negotiate one’s terms of employment. This meant that the state could not use its police power to legislate either maximum hours or minimum wages because that would intrude upon the individual’s right to negotiate terms different from those legislated. It also meant that the state would use its police power to break up unions, as they were considered to be a collusion in restraint of free trade. Following the demise of this doctrine during the 1930s, wage policy was expressed in the form of institutions designed to bolster wages, most notably unions and statutory minimum wages. Later on, during a period of anti-­labor antagonism, wage policy found expression in negative income taxes, most notably the Earned Income Tax Credit (EITC) which would effectively subsidize those who worked and who also had children. Only in the last couple of decades, amidst the decline of unionism and the erosion in value of the federal minimum wage, has wage policy been expressed in the form of grass-­roots campaigns at the local level to pass Living Wage ordinances. Although wage policy has assumed various forms over the years, it has essentially been evolutionary. Arguably its evolution has been incidental to economic growth and development. For the purpose of this study, I define wage policy as either a set of institutions and or legislation that serves to bolster wages. An expansive view of wage policy could include more general welfare state policies that impinge on labor. In some cases, as is true in other OECD countries, and what might be referred to as social market economies (SME), wage policy actually involves a system of centralized wage setting. A narrow view of wage policy could similarly be construed as a putative policy of laissez-­faire when it comes to wage regulation. Not included in my definition of wage policy, or at least as it would pertain to the United States, is the more corporatist version found to a greater extent in Europe where the state effectively regulates wage and labor agreements through negotiations and agreements between big business, big labor, and government, although it would certainly fall within the purview of wage policy. Rather, I’m taking a narrower view of wage policy to encompass institutions like unions and the legal framework that allows for unionism, as well as wage floors such as minimum wages and Living Wage ordinances. When I talk about the evolution of wage policy, I specifically refer to a trajectory from laissez-­faire, usually expressed in the form of liberty of contract, through unionization to minimum wage legislation. Underlying this evolution is a theme that will be developed later that because wages aren’t natural per se and because the balance of power between employers and their employees is asymmetric at best, wage policy is necessary for workers to have a measure of voice that allows them to live in dignity and out of poverty.

Introduction   3 An argument for wage policy also assumes something else. It effectively rejects the neoclassical view of wage determination found in most economics textbooks, and which has underpinned much of economic policy in the United States. And, if it wasn’t the basis of policy, it certainly formed the basis of opposing policy. The neoclassical synthesis essentially maintains that in purely competitive markets, market clearing wages are achieved when the demand for labor is exactly equal to the supply of labor. Wages, then, are determined by market forces. At the wage at which demand equals supply, all those willing and able to work at that wage will be employed. Those whose demands exceed what employers are willing to pay will be unemployed. It is up to the worker through his/her wage demands to determine whether s/he will be employed rather than unemployed. More people willing to work will induce the wage to fall further, thereby inducing firms to demand even more labor and hire more workers. Wage policy in the form of a floor or other institution that serve to artificially inflate wages, prevents the cost of labor from dropping to the point that more workers would be hired. As a result, fewer workers will be hired and consequently there will be greater unemployment. Wage policy is in part a response to the assumption of neoclassical economics, but it rejects this argument on the premise that wage setting is affected by institutions. Moreover, it recognizes that externalities do arise from markets that are allowed to operate totally unfettered. One such externality may be income inequality. Active wage policy also categorically rejects the premise that individuals are free to negotiate over wage rates. Rather, employers through their market power set rates, and the only negotiation open is to either accept or reject. Wage policy, by contrast, recognizes the asymmetrical power balance between employers and workers. There are, of course, some that would couch these differences in wage policy form in terms of differences in welfare state development, or welfare capitalism. Gosta Esping-­Andersen (1990) offers three welfare state regime types: the “liberal” welfare state, the “corporatist” welfare state, and the “social democratic” welfare state. A liberal welfare state is relatively narrow and is founded on means-­tested assistance, modest universal transfers, or modest social-­insurance plans. The corporatist welfare state is a bit more expansive, and is found mostly in Austria, France, Germany, and Italy. It is this type that is characterized by the preservation of status differentials in a state ready to displace the market as the provider of welfare. In this vein, it differs from the liberal welfare regime, which might be characterized as a limited welfare state, in that private insurance and occupational fringe benefits play a marginal role. The state provides more. And the social democratic state is found in those countries whereby the principles of universalism and decommodification of social rights have been extended to the new middle classes. The social democratic regime might be considered the most egalitarian and characterized by greater levels of redistribution precisely because workers are no longer considered faceless commodities, but rather, individuals possessing equal rights to the benefits of universalism. As commodities, workers are replicable, atomized and redundant. It was the commodity status of individuals that lay at the heart of nineteenth-­century

4   Introduction debates and conflicts over the “social question.” The old feudalistic system, by contrast, was actually antagonistic to commodity status. Markets weren’t considered to be important, and wage labor was only marginally important to human well-­being. Corporatist societies emerged in towns among the artisans and craftsmen as a means of controlling entry, membership, prices, and production. It was the corporatist model that was the early and most prevalent response to commodification. But it was socialism that emerged in response to capitalism’s commodification of labor. Contrary to liberalism which seeks to protect property rights, and even corporatism that seeks to protect the rights of the privileged few, socialism’s aim is the maximization and institutionalization of rights (Esping-­Andersen 1990). The social democratic welfare state regime would, especially if pursuing a wage policy, seek to couch policy as a necessary vehicle for the attainment of rights. Given the variation in welfare capitalism, it isn’t too difficult to see that there would similarly be variation in the types of wage policies, as it is the nature of the welfare state type of regime that will very much determine the scope of wage policy. And yet, if we can understand that it is the liberal welfare regime that characterizes the United States, we can also understand why relative to other nations wage policy in the United States has been underdeveloped.

Income inequality Income inequality has in recent decades been on the rise. Those at the top of the distribution have seen their incomes increase while those at the bottom have seen their incomes decrease in real terms. This has effectively narrowed the middle class, whose wages have stagnated in aggregate terms since the 1970s (Phillips 1990; Newman 1993; Hungerford 1993; Wolff 1994; Danziger and Gottschalk 1995). To talk about income inequality is somewhat problematic because it isn’t entirely clear just what we mean by it. What does it mean to say things are unequal in terms of distribution? The concept of income inequality is often viewed as a problem in a market economy, which allocates income on the basis of several factors including education, experience, innate abilities, incentive, and risk. On the contrary, when these factors are considered income is by and large distributed on the basis of desert. More educated individuals, and those possessing greater abilities, are entitled to earn higher incomes than those who do not. That one is poor, especially in a society where everyone is presumed to enjoy equal opportunity, is ultimately that individual’s responsibility. And yet, the capacity to have greater income exists if there is a willingness to obtain the requisite education and training to command it. Although there may be some agreement that a more equitable distribution of income ought to involve a move to greater equality of income and greater equality of opportunity, the prevailing view, at least in the United States, is that there is equality of opportunity (Robinson and Dervis 1977). Moreover, the concept of equal opportunity has effectively enabled us to ignore the fact that we don’t all have the same thing. But part of why it has been so prevalent in the United States is because of the dominance

Introduction   5 of the neoclassical model. To interfere in the operations of the marketplace, if even for noble reasons such as achieving greater equity, is to bring inefficiency. Income inequality and poverty are both greater in the United States than in other industrialized nations (Smeeding and Sullivan 1998; Smeeding et al.1990). While inequality in the United States has been increasing for decades now, the sharpest increase appears to have occurred during the early 1980s, and then again during the 1990s (Bernstein and Mishel 1997). But it was also during this period that the United States saw a decline in unionism and deterioration in the minimum wage. Those declines weren’t nearly as great in other countries where income inequality has tended to be less. Between 1963 and 1989, for instance, the wages of the least skilled, those in the bottom 10th percentile fell by 5 percent while the wages for the most skilled, those in the 90th percentile, increased by 40 percent (Juhn et al. 1993). The net result of this divergence was an enormous increase in wage inequality. More to the point, as I will argue later, it is because of the greater deterioration of wage policy in the United States than in other countries during this period, that inequality has been greater in the United States than elsewhere. The neoclassical model holds rising income inequality to be a function of structural economic transformation. Technological change has tended to be biased towards those with higher levels of education and skills. As the economy has evolved from industrial-­based manufacturing to post-­industrial service, there has been a growing mismatch between good paying jobs and the skills available to workers. According to this school of thought, the labor market is divided into a primary market where high premiums are placed on skilled workers, and a secondary market where unskilled workers are trapped in the lowest-­wage service sector of the economy. The growth in wage inequality between the primary and secondary labor markets has been caused by increasing skills differentials between the two (Katz and Murphy 1992; Katz and Krueger 1992). Institutionalists, on the other hand, and a tradition from which the concept of active wage policy is derived, hold rising income inequality to be a function of deliberate policy choices biased towards the interests of business. Those choices included an assault on the institutions that long served to bolster the wages of those at the bottom of the distribution, as well as the working class: mainly the minimum wage and unions (Card and DiNardo 2002; Howell and Huebler 2001). During the late 1970s, the United States began experiencing a sharp ideological shift towards a preference for competitive market outcomes and solutions, and this ideological shift did have direct effects on bargaining in the workplace (Moody 1988). Those countries with the greatest increases in income inequality also had the most decentralized labor markets, whereas those countries with centralized wage-­setting institutions tended to have less income inequality. The institutionalist school will argue that in the absence of institutions to prop up the wages of those at the bottom of the distribution, income inequality is bound to increase. The larger point, however, is that income inequality has increased in part due to the deterioration of wage policy (Volscho 2005). Among the arguments that I intend to make is that income inequality has been greater in the

6   Introduction United States relative to other countries because wage policy has been less extensive in the United States than in other countries.

Democratic theory Democratic theory assumes a society of free, equal, and autonomous individuals. These individuals enjoy the same rights of citizenship as others and must enjoy their autonomy so that they can participate as full-­fledged citizens in the democratic process. The greater their autonomy, the more likely they are to participate in the democratic process. Also, core to democratic theory is a conception of equality, but questions remain over just what it means to be equal. Equality could be defined in substantive terms, i.e. individuals who are equal to one another will all have the same things. Equality under the law, as Stuart White (2007) points out, does not necessarily entail equality in the process of making the law. At issue is the extent to which inequality in resources affects one’s ability to stand on an equal footing with others. The demand for legal, political, social, and economic equality are effectively demands for certain kinds of social arrangements. Economic equality, for instance, might be valued because it is seen as instrumental to other aspects of social equality – the absence of domination in everyday social relationships. Or stated differently, economic equality might be viewed as an essential step towards achieving a society where individuals aren’t exploited. The principal assumption being that exploitation occurs when inequality between two people results in one being able to dominate the other. Equality in the United States and other liberal market economies, however, has generally tended to be conceived of in procedural terms, which are also the defining characteristics of American democracy. Individuals born with equal rights are all equal before the law. Each individual enjoys the same right to cast an equal vote for those in government who will represent them. Each individual has a right to speak freely and openly against the actions of the government. Each individual enjoys an equal right to pursue his or her interests. Procedural equality is critical to democratic society because it serves to secure another essential condition: personal freedom, which is also a necessary condition for individuals to function autonomously. In order for there to be freedom, certain political conditions must be met, and equality, particularly equality of opportunity or procedural equality, is one of them. Individuals are free to pursue their goals and objectives – i.e. self-­interests – so long as their pursuit does not interfere with others’ ability to pursue their own goals and objectives. In a very basic sense, and certainly within the context of classical political thought, this is what it means to talk about personal independence or autonomy. Equality, then, is not conceived of in terms of how resources, wealth and income are distributed – that everybody has the same amount – but in terms of standing – that each and every individual enjoys the same standing. No individual, in other words, enjoys greater access or privilege, or treatment on the part of the state than do others. A major concern of this book is whether access is affected by income. That we conceive of equality in procedural terms effectively absolves us of respons-

Introduction   7 ibility for addressing the fact that in the United States there is considerable income inequality. Income inequality is generally considered to be the purview of the marketplace. But does it not have an impact on the political universe and ultimately the meaning of democracy? Unequal distribution in wealth and income could result in unequal access. Do individuals enjoy the same standing in situations of extreme inequality of resources? And is not the first step towards achieving greater equality of resources to be found in wage policy, which at a minimum, could serve to assist those at the bottom of the wage scale? Income inequality, however, affects more than outcomes. It also affects one’s ability to participate. Democracy does not require that all participate, but it does require that there be no barriers to participation. Therefore, an argument might be made that guaranteeing individuals a minimum income is akin to what Robert Goodin (2003) describes as a “participation income” because it effectively enables more people to participate in the affairs of the community (p. 199). More fundamentally, however, income inequality may affect our ability to function autonomously, as it exerts a barrier to freedom. It is a bedrock principle of democratic theory that all individuals as citizens enjoy the same consideration of their preferences and interests. All citizens have the same access to governing institutions, and at the most nominal level, this access finds expression in “one person one vote,” equality before the law, and equal rights when it comes to speech, press and assembly. But can there be true equality before the law amidst income inequality? Does one not affect the other? Voter turnout, for instance, is much higher among the wealthy than among the poor. Unequal distribution of wealth and income, however, does affect access and may adversely affect individuals’ ability to participate in the democratic process on the same footing as equals. Those lacking in wealth and income do not always enjoy the same access to political and policy officials as those who possess wealth and income may enjoy. And in the United States where politics and money are greatly intertwined, those with lower incomes tend to experience less responsiveness by representatives in Congress. Two extremes in the distribution of income, with great concentrations at the top and great concentrations at the bottom, effectively distort opportunity. The ability of those at the top to attain their policy and other ideological objectives is greater (Bachrach and Botwinick 1992, pp. 4–5; Bartels 2008). To the extent that this is true, the democratic state cannot possibly be treating its citizens as though they are on an equal footing. Consequently, inequality affects our ability to be free if it effectively results in some being able to make choices that others cannot. Those with more resources may be better positioned to pursue their goals and objectives, while those with fewer resources may find that their ability to pursue their goals and objectives are limited as a result. The ability to pursue goals and objectives is important to democracy for yet another reason. A democracy, especially as its legitimacy and power are derived from popular consent, assumes that individuals have the capacity to reason for themselves, i.e. to deliberate in the public square, and to act on that capacity in a responsible manner. They cannot effectively

8   Introduction participate, whether it be in full policy discussions or selecting their own representatives, if they cannot deliberate in a rational manner. As democracy requires that individuals act on their agency, human agency must be protected. As Pablo Beramendi and Christopher Anderson (2008) put it, inequality affects the democratic process more broadly and fundamentally, including the choice of political regime, the selection of fiscal structures, parties’ mobilization strategies, and the decision to turn out to vote. Inequality is not only political and institutional in its origin, but also its consequences. Research streams on the political economy of inequality have tended to revolve around three elements: the median voter model of redistribution; the partisan motivation of incumbents and their impact on fiscal policy and distributive outcomes; and the role of institutions, particularly corporatism. The most influential model for understanding the democratic politics of redistribution and inequality has been the median voter model, based on Anthony Downs’ model of political competition (1957). According to this model, as income distributions are skewed to the right, the preferred amount of redistribution is a function of the relative position of the median voter on the income scale. The greater the distance between the median voter’s income and society’s average income, the greater is the preferred amount of redistribution. And yet, the perceived need for redistribution on the grounds that the distance between the median voter’s income and the average of society, only speaks to the role that wage policy can play. Beramendi and Anderson point out that the median voter model’s inability to explain differences in income inequality across industrial societies is really symptomatic of the larger theoretical and empirical problem that there are many dimensions to the politics of redistribution. Similarly, Ian Shapiro, Peter Swenson, Daniella Donno (2008) discuss the politics of distribution and redistribution. Although they too use the median voter theorem as a point of departure, they also seek to situate differences between the United States and other countries, which in turn shape different politics, in the differences between welfare regime types discussed by Esping-­Andersen. The politics of distribution tend to revolve around issues of redistribution and those forces likely to push for redistribution in the face of increasing inequality. This book, however, is not intended to add to the current literature on the politics of distribution, or even redistribution. Wage-­setting institutions may have direct distributive effects, but they are also shaped by the will and ability of citizens to pursue alternative strategies and reconcile competing macroeconomic outcomes. The American focus on procedural equality, however, has not been completely blind to some minimal level of economic equality. It has long been a staple of the political science literature, and increasingly in some of the more econometric treatments of democracy, that democracy requires the maintenance of a broad middle class. To talk about a broad middle class is to talk about a more evenly distributed income, or at least a bell-­curve distribution, whereby few people occupy the extremes at the top and the bottom, and the majority falls in the middle. Therefore, to the extent that democracy requires the maintenance of a broad middle class, the maintenance of democracy requires economic devel-

Introduction   9 opment (Lipset 1959). This theme has in recent years found expression in the literature on emerging democracies, particularly in Eastern Europe that were for so long part of the eastern Communist bloc (Mostov 1992; Maharaj and Ramballi 1998). But the concept of economic development was also associated with the minimum wage during the 1930s, particularly in the American South where the overall wage structure was lower than in the more industrialized and developed North, and political life was effectively dominated by one-­party politics (Schulman 1991; Nordlund 1997). Economic development is important because it results in the generation of a broader middle class in which there is relative equality of condition among its members. Moreover, it establishes the foundation for individuals to function economically in a way that leads to their independence. Even some of the contemporary writings on living wage campaigns view it as an essential ingredient in democracy (Pollin and Luce 1998). The more well-­to-do the nation is, the greater are the chances that it will sustain democracy. Rather a successful democracy requires a minimum level of aggregate wealth, a certain degree of industrialization, urbanization and a certain level of education that will result in relatively few of its citizens living in poverty (Lipset 1959). But it also requires the maintenance of a middle class in order that the gap between the top and the bottom is not so wide that it leads to potential social unrest. To say that there cannot be wide disparities in wealth and income is to say that some measure of equality is essential. And yet, to the extent that democracy requires economic development as a means of preventing wider disparities in wealth and income, it presupposes wage policy as part of that development. Development, after all, is about more than simply growth; it is about investing in people and their communities. It also involves an improvement in the basic living standards of the great majority of people. According to Amartya Sen (1999), development is about enabling individuals to enjoy more fully the freedoms that they have. One means by which these improvements can be achieved is through a relatively equal distribution of income, or policies that effectively achieve that objective. Another means by which these standards can be improved is through the broad participation in decision making about the political, social, and economic affairs of the community. This, of course, would imply policies that effectively result in workers obtaining a measure of voice, particularly those workers who have never had one (MacEwan 1999, p. 1). Andrea Brandolini and Timothy Smeeding (2008) go even further and maintain that low inequality in the income distribution needs to be seen as a prerequisite for the workings of democracy because extreme concentrations of resources effectively limit the poor persons’ ability to exercise their political rights, and could lead to political instability. This view, however, is not shared by all. The implication is that democracy cannot flourish among poverty and that poor people are unable and unwilling to participate in democracy because they have very little time and money to spare. Individuals’ preferences for democracy are expected to rise together with their incomes. According to a hierarchy-­of-needs hypothesis, poor people make poor democrats. It is only when they break out of poverty that they begin to demand a

10   Introduction role. But as Anirudh Krishna (2008), points out, there isn’t any available evidence to show whether poor individuals in poor democracies care any more or less for democracy than their wealthier counterparts do. On the contrary, data suggesting a linkage, in line with the Lipset thesis, assumes that it is democratic participation in the form of voting that increases with wealth. Poor people’s affinity for democracy, however, may not be confined to voting. Rather poor citizens might participate in a variety of democratic activities. Lipset found that economic underdevelopment was associated with unstable democratic government or dictatorship, but his main focus was on system-­level democracy. The thrust of the critique, however, is that a study of impact on democratic participation must gather data on the values of all citizens – not just the active ones, or the politically “important” ones. John Booth and Mitchell Seligson (2008) suggest that Lipset’s general hypothesis could be restated: “Economic development/wealth should correlate positively with citizens’ political participation.” Lipset’s hypothesis about political participation, however, fares better when the measure of individual resources is education. He correctly predicted that the educated would be more politically active. And yet, Booth and Seligson are distinguishing between feeling democratic and actual participation. Moreover, participation is the key issue. If the goal is to encourage more active participation, simply having positive feelings about democracy will not alone suffice. The solution for many contemporary democratic theorists is to have what is often referred to as either “perfect” democracy, participatory democracy, or what Kenneth Dolbeare (1986) has referred to as full democracy, which assumes individuals to have full control over all those circumstances affecting their daily lives. The United States is not a full democracy because the interests of property, often expressed in terms of individual rights, effectively limit democratic rule. Democratic rule typically does not extend into economic institutions because they are considered to be private property and thus outside the bounds of majority rule in a capitalist system (Bowles and Gintis 1986). In a more complete democracy, by contrast, the equal voice that citizens enjoy in the political realm would be enjoyed in the economic, whereby workers would be able to participate in the operations of the firms for which they work (1986). But aside from the equal voice that citizens enjoy, they might also be more equal in terms of the distribution of income. They would be equal because they could use the political mechanism to legislate a more equitable distribution of income. According to Karen Wendling (1997), participatory democracy is probably the most completely egalitarian form of democracy, as it seeks to extend beyond simple universal suffrage and the right to influence political leaders to the collective self-­management of society as though there were no leaders. People, in other words, control all the circumstances that affect their daily lives and their destinies, which include the economic sphere as well. Participatory democracy addresses itself to institutional structures that will ultimately have bearing on questions of political equality. Goodin (2003) suggests that when participatory democracy works well, among its accomplishments is that it breaks down concentrations of power. This is because when political power is widely extended,

Introduction   11 elites are unable to insulate themselves from the consequences of their actions. They are forced to be more accountable. At the same time, to the extent that democracy is about further accommodating diversity and the unequal interference of “special interests,” there is then a role for public policy to play in the process generally. Wage policy can assist in finding accommodation. Economically speaking, we are not all going to be viewed the same. Those of us with fewer resources may not have the same level of autonomy and independence as those with more resources. Raising the wages of the working poor is not even going to make them feel less exploited. In relative terms, they are still doing menial work for barely subsistence wages. Still, the democratic process serves as a mechanism by which a balance can be struck between competing and often unequal claims. And policy is the tool used to secure that balance. But in securing that balance, public policy may serve to bring to fruition core principles underpinning democratic society. In the past, wage policy, both in terms of unions and minimum wages enabled workers to see themselves as full-­fledged citizens – again, another key ingredient in being able to participate in the democratic process. During the late nineteenth century, the concept of a minimum wage as it was conceived of in terms of a living wage was intimately connected to personal autonomy and ultimately formed the basis of giving legitimacy to labor. Before the widespread acceptance of wage labor, most workers saw themselves as losing their sense of independence when they sold their labor in the marketplace. Men who earned wages lost ownership of themselves to somebody else with greater power over them. As a result of industrialization, men effectively became dependent on their bosses in the same way women had always been dependent on men in patriarchal families. Those working for wages felt the stigma of being second-­class citizens, and it would only be through the language of a living wage, a foundation of wage policy, that they would be able to see themselves more as real citizens capable of participating (Glickman 1997). In essence, then, the broad language of democracy and those elements important to it were being appealed to in order to support the living wage in the past, and similarly the same appeal can be made with regards to the wage policies in contemporary policy debates. But as much as wage policy may find justification in democratic arguments, democracies may indeed need the types of policies that give substance to core principles of democratic theory.

Why wage policy? In the pages that follow, I argue that wage policy is an important component in the maintenance of democratic society. First, there is the potential impact on income inequality. Wage policy may not have a radical effect on the income distribution that those at the bottom are the equals of those at the top. It most likely will not radically affect social standing. It isn’t going to increase their bargaining power by that much, and it certainly would not begin a process towards workplace democracy. But to reduce income inequality somewhat it will still have a small impact,

12   Introduction especially on personal autonomy. That the gap between the top and bottom decreases also implies that the distance between them is narrowed. The distance traveled from the bottom to the top may not appear to be as daunting, which may offer some a sense of hope that they too have the potential to make it. In this vein, it raises their morale, with the effect being that they feel less exploited. Will they necessarily be social equals? No. But that they are less unequal means that a potential barrier to access may be diminished. Also by raising the wages of those at the bottom, a wage policy can effectively give workers a sense of voice by giving them effective monopoly power because they are placed on a more equal footing with managers. This, in and of itself, can be a source of empowerment, with the effect of enhancing their autonomy. Not only, then, does this become a necessary precondition for a well functioning democracy, but for an efficient economy as well, neither of which is mutually exclusive. Second, wage policy is needed for the maintenance of basic autonomy. Autonomy depends on access to and control over economic resources. Wage policy, then, could be viewed as a measure aimed at preserving the framework that allows individuals to function as autonomous citizens. Part and parcel of autonomy is personal freedom. If higher wages enable individuals to live in dignity and to do more, the freedom that they enjoy politically has only been enhanced. Moreover, autonomy is an essential ingredient in democratic theory. A democratic polity operates on the premise that individuals will be politically autonomous – that they indeed will be citizens. Although a democratic polity does not necessarily have to entail economic equality, it perhaps needs to ensure that conditions for participation in that democracy are available to all individuals, for by doing so it guarantees a universal application of citizenship. On a practical level, this might mean providing the poor with the requisite training and skills for conducting democratic government (Gaffaney 2000). Beyond that it may mean providing them the basis upon which they can achieve economic independence. Various thinkers in recent years have picked up on this notion of autonomy and have advocated more expansive wage policies that would provide a basic minimum income (Van Parijis 1995; White 2003). Everybody would be guaranteed a minimum income and each and everybody would be equal in this regard. A requirement that individuals be furnished with the skills to lead independent lives and a basic minimum income are two different things. A basic minimum certainly falls within the rubric of wage policy as it seeks to bolster people’s income with an eye towards enhancing equality and autonomy. But a wage policy, as I intend to argue here, need only prop up the wages of those who are earning wages in the labor market. A wage policy along these lines, then, differs from a negative income tax, where those who are poor and don’t work would receive a certain minimum benefit from the state. But it also differs from income supports in the form of childhood allowances found in many European countries. Still, it isn’t clear that democracy requires the type of economic equality that would appear to be implicit in a basic minimum income. Rather, democratic equality in which individuals enjoy the same standing and access, is really about

Introduction   13 abolishing socially created oppression. Democratic equality, then, does not require the elimination of income inequality once all citizens enjoy a sufficient set of freedoms to function as equals in society. Society does not have to compensate for inferior natural endowments, but it does have to ensure that conditions are such that individuals can function as equals. In this vein, a wage type policy might well be in keeping with the requirements of democratic equality because it establishes a condition necessary to function as equal and autonomous citizens (Anderson 1999). And third, wage policy is part and parcel of economic development, which is essential to the maintenance of democracy to the extent that it maintains a broad middle class. The maintenance of a middle class is similarly connected with achieving economic equality. It is also related to personal actions to the extent that development enables more people to enjoy more fully their freedoms. But as I will also demonstrate later, wage policy is very much about shoring up the middle class. Contrary to pervasive conventional wisdom that wage policy in the form of unions and wage floors distorts market efficiency and only benefits a small segment of the labor market, wage policy, particularly in the form of wage floors does benefit a sizeable percentage of the labor market because it impacts median wages through several levels of the wage distribution. Consequently, wage policy also reduces income inequality, which is again connected to both personal autonomy and development. To a large extent the rise in income inequality and the increasing threat to individual autonomy have been a function of the demise of wage policy, as evidenced by the deterioration of unions and the erosion of minimum wages. The emergence of the living wage movement has been but one response, as have been proposals for basic minimum incomes. What is important is that wage policy, in one form or another, has always been part of the political landscape, especially as the nation underwent a period of industrialization. Even neoclassical economists who talk about unfettered markets must recognize that the absence of such institutions also reflect a wage policy of sorts, albeit in negative form. During the late nineteenth century and early twentieth century, this was referred to as “liberty of contract,” epitomized in American constitutional history by Lochner v. New York, or simply the Lochner era. Following the demise of Lochner during the 1930s, wage policy was expressed in both legislation that allowed for unionization and collective bargaining and the minimum wage. Although in more recent years the value of the minimum wage has eroded and unionism has greatly declined, the minimum wage is still but one form of wage policy. Wage policy in the last decade has assumed two principal forms: first in the form of the Earned Income Tax Credit (EITC), essentially a negative income tax that rewards work by effectively adding 40 percent to low-­wage earners’ income. And second in the form of local Living Wage ordinances, which have been brought about by grass-­roots campaigns at the local level primarily in response to the failure of the minimum wage to keep pace with inflation and the tendency to outsource municipal jobs to private contractors who will do the same work for less.

14   Introduction My argument, then, is that the United States has always relied on a wage policy in some form or other, and the extent of this policy has largely been dictated by a conception of democratic governance. With rising income inequality, wage policy becomes an essential ingredient in the maintenance of basic democratic principles. Wage policy has a role to play in enhancing the equal standing of individuals, as that which is essential for them to function more autonomously. Not only does it improve their standing, but it serves to enhance their autonomy as individuals, thereby enabling them to have greater participation in the democratic process. By enhancing their autonomy, wage policy also enables low-­wage workers to make greater claims to citizenship as both a process that furthers the equal dignity of all citizens and also as an essential ingredient for participation in the democratic process. Although my primary emphasis is on US wage policy, I do situate US wage policy within the larger context of other countries’ experiences. Therefore, all empirical data that I use is on the US labor market, but I do compare it to elements of other labor markets, especially how they impact low-­wage work.

Study of wage policy? In the pages that follow I intend to argue the importance of this topic in large measure because very little has been done in this area. In economics, issues of unions and/or wage floors are often considered from an efficiency standpoint. From a political science view, the issue centers on power relations and those whose interests are served or perhaps not served. I have (2001; 2005) in two previous works addressed both the minimum wage and the more recent living wage. In the former, I argued that the minimum wage, having received short shrift from political science, needed to be viewed as primarily a political issue. In the latter, I argued that the phenomenon of Living Wage ordinances is essentially an urban issue and has to be understood within the context of urban theory predicated on development and the failure of development to improve the lot of those at the bottom of the income distribution. In this work, I seek to go further and situate the issue of wage policy in more general terms within the context of democratic theory. Still, there are others who have attempted to address the issue of particular forms of wage policy. Jerold Waltman (2000; 2008) has written on the politics of the minimum wage in the United States and the history of the minimum wage program in both the United States and Britain. He chronicles the evolution of the minimum wage, which might be said to parallel the evolution of more general wage policy, as it rests on similar assumptions. While he addresses the empirical question of what would constitute a living wage and how various thinkers have addressed this issue, he doesn’t address the more normative question of the extent to which wage policy accords with democratic theory and whether the maintenance of democratic society requires the types of policies that will enable individuals to live autonomous lives and enjoy equal opportunity. While there have been those who address the issue of the minimum wage in terms of congressional politics (Pool and Rosenthal 1991), most treatments have

Introduction   15 been by economists. My purpose, however, isn’t to rehearse the history of the minimum wage, as has been done by Nordlund (1997) and Waltman (2008); nor is it to discuss the history of a quest for achieving a living wage, i.e. a wage that would allow one to live in dignity (Glickman 1997). This is not another study on comparative income distributions and the politics of distribution. Many of those studies on inequality and distribution do have import for democracy to the extent that how income is distributed may determine the extent to which there is democratization. Moreover, many of the studies of democracy and the political economy of income distribution also tend to revolve around the median voter theorem. Assuming that policy in democratic society will seek to match the preferences of the median voter – that they will be in the middle of the spectrum – the median voter theorem also assumes that if the income distribution becomes so skewed to the right, the potential unrest that will arise will ultimately destabilize democracy. The median voter model simply assumes the remedy to income inequality to be redistribution, as that is the logical implication of a widening gap between the income of the median voter and the average income of society. The argument that I make is that if a wage policy were in place, there would be little need to even talk in terms of redistribution. Whereas the median voter model assumes that inequality will lead the masses to apply democratic pressure for redistribution, my notion of wage policy is that it is a necessary condition for sustained democracy because it furthers some of the attributes of democratic society. Therefore, while the median voter theorem might be useful for understanding the pressures that income inequality, especially wide disparities, can have on democracy, my argument is ultimately more normative. Because democracy requires that certain criteria be met, it then follows that some policy routes are more likely to meet them than others. The approach that I take to wage policy also differs from an argument that Sidney Weintraub (1972) made almost four decades ago about what he referred to as “incomes policy.” The term “incomes policy” has often been a euphemism for wage restraint. Milton Friedman actually advocated a steady growth of roughly 3 percent in the money supply to maintain balance, because it was assumed that money wages would be constrained. In short, wages would increase to match productivity (which was roughly rising at 3 percent per year overall), but faster wage growth would be harder to achieve. For Weintraub, the traditional tools of economic management, fiscal and monetary policy, simply weren’t enough by themselves. Fiscal policy involves huge expenditures of public monies which, if not properly targeted, will not necessarily have the desired effects. True, various interests will benefit from grants and contracts, but the impact will not be widely dispersed. Moreover, increased spending eventually necessitates new taxes. Monetary policy also comes with a cost. By law, the Federal Reserve serves the banking interest and its primary responsibility is to ensure the solvency of banks. As inflation rises, the Fed typically applies the breaks with higher interest rates and reserve requirements, which produces unemployment. And yet, increased taxes due to increased spending will only lead workers to seek higher wages to pay the increased tax, thereby exacerbating

16   Introduction inflation. Weintraub was only too quick to point out the immorality of economists applying the brakes to control for inflation, as they themselves were unlikely to lose their jobs. As he put it: “The unemployed are thus the innocent lambs led to the slaughter through conventional tactics” (Weintraub 1972, pp. 117–118). Therefore, Weintraub was suggesting that if wages could be stabilized, then price stability would avert economic damage occasioned by conventional stabilization tools. That is, if these traditional tools were to be employed, so too would an incomes policy as a necessary complement. Whereas Weintraub saw wage policy as a necessary complement to other tools of economic policy aimed at achieving greater employment, I argue that wage policy thus stands on its own merit. Wage policy is an essential component if we as a society are seeking to achieve a more equitable distribution of income and shore up the middle class. Wage policy can maintain economic security through its potential to arrest wage stagnation. It has the potential for furthering the ends of democratic society. Wage policy, in short, might exemplify a set of societal priorities. The argument that I make about the importance of wage policy to democratic theory, and the implications it has for practical policy solutions, also differs from the more comprehensive labor policy likely to be found in the corporatist or social democratic welfare regimes. An example of such a comprehensive approach is the Rehn–Meidner model, named after Swedish Labor Movement economists Gosta Rehn and Rudolf Meidner. It is an important model because it long shaped labor policy in a country hailed as exemplary of social democracy. The Rehn–Meidner model contained three essential components: full employment; a fair income distribution and higher standard of living; and higher efficiency and greater democracy in the economy. Later it incorporated what came to be known as “solidaristic wage policy” (Wadensjo 2001). It was both an economic and wage policy program and theory of wages, profits, inflation and growth. Restrictive economic policy would curb the rates of inflation. Meanwhile, fiscal policy, rather than monetary policy, would be the policy of choice, and it should be predominantly tight over the business cycle (Erixson 2001). Solidaristic wage policy, on the face of it, implies equal pay for equal work regardless of the profitability of the companies, but the aim was to establish fair wage differentials rather than general wage equalization. While the differences between wage earners were certainly acceptable, those differences should reflect objective differences in the working environment, responsibility, experience and education; not short-­run profits or labor conditions. Rehn and Meidner believed that solidaristic wage policy would encourage economic growth, mainly through structural change and the alleviation of wage–wage races. As Lennart Erixson explains: By solidaristic wage policy, a pull mechanism is replaced by a push mechanism, or better, a rationing mechanism, in labour markets. Labor mobility is maintained by the threatened unemployment in unprofitable sectors but also by greater number of vacancies in profitable sectors. (2001, p. 19)

Introduction   17 A labor market policy was thought to prevent unemployment, and thus wage reductions during a recession. Labor market policy would also play a role in the effort to achieve greater equity. Solidaristic wage policy in particular would be facilitated through government measures intended to shift labor from stagnating sectors to expanding sectors. And by effectively guaranteeing full employment, labor market policy would also alter the functional income distribution in favor of labor. While the Rehn–Meidner model embraced the post-­war economic policy objectives of full employment, price stability, growth and equity, it is comprehensive and is really situated in the realm of economic planning characteristic of social democracies. My argument really isn’t that comprehensive. On the contrary, my argument for wage policy, as a tool in the service of democratic values, still relies heavily on relatively free and competitive markets. But it also assumes, in line with liberal market theorists going back to Adam Smith, that some measure of government regulation is necessary to preserve the fairness and competitiveness of the marketplace. And by examining it within the context of normative political theory, I seek to restore political economy in the more normative tradition of moral philosophy than the formal theory that has characterized the field over the last few decades. That ultimately is why it is imperative to study this within the context of political philosophy. My purpose is to situate an important policy issue within the rubric of democratic theory. While many studies discuss income inequality from the standpoint of variance from the mean and how it might fuel a rift between the haves and have-­nots, what is needed is an understanding of how inequality may threaten democratic society. And yet, this is an important question, to which we can only get an answer by combining issues of political theory with empirical public policy. Public policy, after all, tells us about what we as a political community value. In this vein, I seek to offer a unique approach not only to this issue specifically, but public policy more generally. Because political theory as an enterprise contains a vision of what the ideal society might look like, and public policy represents a practical means of bringing that vision to fruition, it only seems logical to approach public policy from the vantage of normative political theory. Sheldon Wolin (2004), for instance, argues that political philosophy has long represented a special tradition of discourse, in which the principal concern was with the nature of the good life for the individual. This question has also been connected with the nature of the good community. While political theory has been concerned with attaching meaning to a set of political arrangements, as well as the ideal set of arrangements, political theory attempts to state necessary and sufficient conditions for the attainment of those ends deemed good or desirable. As political theory consists of a set of concepts such as order, peace, justice, law, etc. it contains a vision by which society ought to be ordered. Beginning with Plato and continuing through the centuries with thinkers like Hobbes, Locke, and Comte, for instance, the centerpiece of the political theory enterprise was an ordering vision of what the political system ought to be and what it might become. Democracy is certainly an example of such a vision, which in turn may require certain policy actions. In

18   Introduction this book, I am arguing that contained in a vision of a truly democratic society is a vision of individuals living fully autonomous lives in equal relations of standing to one another. Because it may not come naturally, it ultimately relies on policy. In the pages that follow, I argue that wage policy, whatever its form, not only affects the wage distribution, but because it affects people’s standing in relation to others it affects democratic theory. To the extent that democratic theory rests on equality, autonomy, and the ability to function without being dominated by others, the maintenance of democracy requires the type of policy that will enable individuals to live autonomous lives. In Chapter 2 I look at the basic foundations of democratic theory in general and the specific evolution of democracy in the United States. Though there are different conceptions of democracy, the ethical foundations of American political identity were hardly democratic. Rather, democracy evolved out of strong liberal roots with deep commitments to free, and, most of the time, unfettered markets. Chapter 2 traces that evolution and demonstrates that despite the propensity that democracy conceptually might have to the adoption of wage policy, it has been weighed down by a liberal tradition in America that has been predicated on protecting rights generally and property rights specifically. In economics, this tradition has only found a receptive ear in neoclassical economics that has viewed wage policy as being responsible for unintended consequences, which by extension can be violative of others’ rights. Chapter 3 then traces the evolution of wage policy in the United States and shows how this evolution also parallels the economic transformation from a feudal economy to an industrial economy, and then a post-­industrial economy. Wage labor in the United States has also evolved from slave labor to indentures to wage labor. This chapter specifically looks at the history of wage policy in the United States beginning with the New Deal and the need to inflate wages as a matter of macroeconomic policy. Here the focus is on the first attempt at a federal minimum wage through the promulgation of codes in the National Industrial Labor Relations Act. Though this was ruled unconstitutional, Congress later adopted the National Labor Relations Act, which effectively legitimated unions because it required employers to engage in collective-­bargaining. Following passage of the National Labor Relations Act (NLRA), which might be viewed as the first example of positive wage policy, Congress passed the Fair Labor Standards Act, which established the nation’s first minimum wage. This evolution has required the development of institutions in the form of labor unions, minimum wages, and more recently living wages. To the extent that such institutions had the sanction of public policy, they could be said to reflect a stage in the evolution of wage policy. Even the concept of “liberty of contract,” pervasive during the early part of the twentieth century, bespoke a certain type of wage policy. Chapter 4 examines the post-­New Deal era and the demise of unions and the minimum wage in the United States. With the decline of labor market institutions has come a corresponding rise in income inequality. This chapter effectively argues that wage polices, regardless of their form do make a difference – that

Introduction   19 they do affect the income distribution and are essential to the maintenance of a broad middle class. Chapter 5 shows how the decline of wage policy during the 1980s and its impact on the middle class has led to attempts to revive wage policy most recently through living wage campaigns at the local level. In addition to local living wage campaigns, wage policy has been receiving new voice in the form of various state efforts to raise their own respective minimum wages. While such efforts represent new social movements aimed at resurrecting the labor movement, the key point is that the new living wage movement, and even state initiatives to boost their own minima, represents grass-­roots efforts to revive wage policy. Then in Chapter 6 I look at how wage policy is above all a middle class issue, and not simply a matter for the poverty population. Were we to understand its import to the middle class, it would most likely also be the case that the minimum wage and other types of wage policy could achieve a broader measure of public support. Here I demonstrate that the minimum wage, in particular, affects the middle class through its wage contour effect, and that what is important is the “effective” minimum wage; not the statutory minimum wage. Moreover, I demonstrate its impact on middle class wage levels by looking at census data from the Integrated Public Micro-­use Data Series (IPUMS) for 1962–2008. In years when minimum wages were raised, the median wages of workers on several rungs of the distribution also rose. Finally, in Chapter 7, I offer concluding comments and argue that through wage policy, we can achieve greater democracy, and that wage policy is essential to the maintenance of democracy. Here I discuss the relationship between inequality and democracy, as well as review the basic income proposals that have been floated as a basis of achieving a more just and equitable society.

2 Democratic theory

Democracy is by no means a static concept. It isn’t a steady state, rather demo­ cratizations are open-­ended processes (Ciprut 2008). Indeed, democracy has evolved through several different permutations. In its simplest terms, democracy is a political system in which the policy-­making process is ultimately controlled by the people, because the government that makes policy is selected by the people. Policies are made on a majority basis by representatives who are subject to popular control through periodic elections, and these elections are also to be conducted according to the principle of political equality and under conditions of political freedom (Mayo 1960). Robert Dahl (1985) suggests that the basic cri­ teria for a democratic process include: equal votes; effective participation; enlightened understanding; public control over the agenda and inclusiveness (p. 59). Or as Seymour Martin Lipset (1959) suggests, a democracy can be defined as a political system that affords its citizens regular constitutional oppor­ tunities for changing governing officials. But it is also a social mechanism for the resolution of conflicts among conflicting interest groups that also permits the largest possible part of the population to influence public decisions through their ability to make electoral choices. Democracy is ultimately about authorship of collective decisions. Citizens must have some actual impact on the form and content of those laws that will affect them (Green and Cornell 2005). And democratic politics means that diver­ gent groups who are often contesting one another must be able to present their claims, be heard, and ultimately affect the policy process. The consensus that emerges from that process can then be said to be the end product of the demo­ cratic political process, which also reflects the collective will of the community in its broadest sense. Therefore, a democratic community that opts to pursue a wage type of policy in the name of achieving a more just, fair, and equitable society, that policy could be said to reflect the collective will of that community and indeed is a form of democratic expression (Stone 2002). Democracy perhaps could be conceived of in two broad fashions: procedural whereby individuals participate in only political decisions that affect their lives, and substantive where they have a voice in all decisions that affect their lives. Procedural democracy is limited to the political universe or matters affecting the state. Substantive democracy, however, tends to encompass both economic and

Democratic theory   21 political decisions, as it extends to matters affecting society in addition to the state, and goes to the very heart of what it means to talk about self-­determination. A substantive conception of equality, then, would require a degree of economic equality alongside political equality. Still, core to both conceptions is the assumption that legitimate authority is based on the people, and that the people are indeed sovereign. This does indeed require that the people be in control col­ lectively, and for the people to be in control collectively each individual must enjoy full autonomy. Core to democracy, then, is the notion that the people are in control of their lives, i.e. matters that affect their destiny. To the extent that this is true, the ques­ tion arises as to the essential preconditions for this control. Democracy does assume that individuals will be equal. Democracy also assumes that individuals will be autonomous – that they will be able to act and do things free of external constraints. It assumes that they will be able to chart a course of action consist­ ent with human agency – their ability to think for themselves what best consti­ tutes the best life for them and then act accordingly. Both concepts, of course, have different meanings and are very contextual. But as I intend to argue in this chapter, the requirements of equality and autonomy ultimately have implications for public policy. A policy that in any way creates an environment that is more equal and in which individuals are able to live more autonomously, is not only in keeping with democratic theory, but may also be the source of greater democrat­ ization. The purpose of this chapter is to establish the requirements that policy would need to meet to be consistent with the ends of democratic theory. After which, I will in subsequent chapters attempt to demonstrate how wage policy generally, and minimum wages more specifically, do in fact meet the require­ ments. But, it is also my purpose to demonstrate that to the extent that wage policy does meet those requirements, it is only because our thinking about demo­ cracy has similarly evolved. Democracy has essentially evolved from what Ben­ jamin Barber (1984) classifies as “thin” democracy – the liberal procedural version predicated on rights, especially property rights – to a “strong” one, where greater participation is in fact required. And yet, despite this evolution in thinking, individual autonomy is no less important. Whereas the former assumed the promotion of autonomy to be a goal which would be protected through prop­ erty rights, the latter assumed autonomy to be a prerequisite for individual citizenship.

Equality Among the core values in democratic theory is equality, or at least a particular conception of it. Equality, however, has meant different things to different people; four common meanings are legal, political, social, and economic. Legal equality usually means that when any member of society is subject to a law all are subject to the same law. Political equality is then an extension of legal equal­ ity – that each individual has the same vote and the same access to political insti­ tutions. In many respects, legal and political equality speak to bare minima, in

22   Democratic theory which case social and economic equality attempts to go beyond the minima. Social equality refers to a person’s standing within society, which has to do with how a person is regarded by both public institutions and other individuals. And economic equality means that individuals not only enjoy the same economic resources as one another, but that they are not in a position to be exploited. Stuart White (2007) suggests that demands for legal, political, social, and eco­ nomic equality are in essence demands for certain kinds of social arrangements. Economic equality might be valued because it is viewed as being instrumental to other aspects of social equality – the absence of domination in everyday life. Democratic political systems are based on the principle of political equality. A democratic political system, however, is not the same as a democratic social system. According to Anne Phillips (2000), work on equality has assumed two differ­ ent foci. The first focus has been on those principles that ought to regulate the distribution of goods between individuals. It specifically challenges the efficacy of market allocations and assumes inequality to be a function of unfair distribu­ tion between individuals. The second focus has been on inequities arising from the unequal allocation of natural endowments. Whereas egalitarians used to question the unfair consequences of family background on people’s future devel­ opment through future life, contemporary work has come to question those injus­ tices associated with natural talents, i.e. one’s talents and abilities that are now viewed no differently than luck. Philip Petit (1987) argues that it is in fact axio­ matic that democratic theories of the state agree on one crucial matter; that the social ideal of equal respect for all persons ought to be central to the organiza­ tion of society. What makes them democratic is that every citizen enjoys, or at least ought to, equal respect. Liberal democratic theory is distinguished from social democratic theory by the assumption that equal respect applies to indi­ viduals in the former whereas it applies to the state in the latter. The liberal dem­ ocrat thus asks how ought institutions to be structured so that the equal value of individuals can be brought to fruition. The social democrat, however, seeks for the state to promote equal respect overall by trying at once to ensure equal per­ sonal respect, as well as arousing equal institutional respect. The social demo­ crat, then, not only assumes the state to be a reliable and respectful agent, but assumes it to be an agent that ought to be assigned responsibility for the promo­ tion of equal dignity. This no doubt begs the following question: if the state assumes responsibility for promoting equal dignity, does it not have a respons­ ibility to not only protect negative individual rights, but to actively adopt pol­ icies that will ensure that individuals will in fact enjoy equal dignity? In Western industrial democracies, such as the United States, equality has tended to be conceived of more in procedural terms. Individuals born with equal rights are all equal before the law. Each individual enjoys the same right to cast an equal vote for those in government who will represent them. Each individual has a right to speak freely and openly against the actions of the government. And in a democratic society, each individual has an equal right to pursue his or her interests. Equality, then, is not conceived of in terms of how resources, wealth

Democratic theory   23 and income are distributed – that everybody has the same amount – but in terms of standing – that each and every individual enjoys the same standing. No indi­ vidual, in other words, enjoys greater access or privilege, or treatment on the part of the state than do others. Ronald Dworkin (1985) refers to this as “the liberal conception of equality,” which holds that every individual is entitled to “equal respect and treatment.” By this conception, the state may not choose between competing conceptions of the “good” – that is, it may not favor one’s preferences over another, for to do so is to effectively not afford one equal respect and treatment. Government, if it truly respects equality must maintain a stance of neutrality, at least when it comes to comprehensive conceptions of what constitutes the good life, i.e. how indi­ viduals should live their lives in accordance with their own preferences (Rawls 1993). And yet, to the extent that government’s role is to mediate conflict, it does effectively have to make choices between competing conceptions of good or preferences, which may manifest themselves in the form of policy choices. Even adopting a Millian position that a government that respects liberty could always regulate – in effect make choices – how would it decide on what basis to regulate what constitutes harm without effectively violating the neutrality requirements of the liberal conception of equality? After all, would A’s demand for regulation on the grounds that A’s perception of a harm over B’s demand for no regulation on B’s perception that no harm has been caused not in effect repre­ sent a choice of A’s conception of the good over B’s? It is through democratic procedure, however, that the stalemate inherent to the liberal conception of equality’s neutrality can be circumvented. A framework that allows each and every individual the equal opportunity to present his/her claims, i.e. preferences for consideration is one that effectively affords each and all equal treatment (Ackerman 1980). In the end, this is merely procedural demo­ cracy because each individual is in theory, at least, treated the same. That the focus is on fair procedure, the focus of equality is on equality of opportunity. And yet, the opportunity has to exist for individuals to come forth with their claims. There can be no barriers to access. At a minimum, there can be no legal barriers. But legal access may in fact be meaningless if the lack of economic resources effectively blocks one’s access. At the same time, equality of oppor­ tunity isn’t only about being able to bring further claims in the political process, but about one’s ability to pursue one’s interest, i.e. conception of the good in the marketplace as well. But a political system doesn’t ensure equality of opportun­ ity if it has chosen one’s conception of the good over the other, as the effect is to limit that group’s opportunities. By implication, then, government is limited in its function. Procedural equality is critical to democratic society because it serves to secure another essential condition: personal freedom, which is also a necessary con­ dition for individuals to function autonomously. The notion that the state cannot choose conceptions of the good life stems from the basic premise that as rational actors individuals have the capacity to conceive of their own conceptions of the good life and hence choose their own life plans for achieving them. A state that

24   Democratic theory treats individuals with equal respect and does not attempt to force a conception of the good life on them is one that essentially allows them to pursue their own visions of what it means to live a good life. That the state stands back and refrains from imposing its own good, means that the individual is free to pursue his or her own in consonance with his/her own agency. Therefore, in order for there to be freedom, certain political conditions must be met, and equality, particularly equality of opportunity or procedural equality, is one of them. Indi­ viduals are free to pursue their goals and objectives – i.e. self-­interests – so long as their pursuit does not interfere with others’ ability to pursue their own goals and objectives. In a very basic sense, and certainly within the context of classical political thought, this is what it means to talk about personal independence or autonomy. The question, however, is whether it is possible to have true equality in terms of social standing. The purpose of liberal equality is to allow a frame­ work in which individuals will have maximum freedom to make choices. But individuals aren’t equal in terms of their natural endowments and this inequal­ ity of endowment may well affect the choices that individuals are free to make. Moreover, equality of opportunity may simply be a rationalization of economic inequality, and to the extent that inequality is the result it begs the further ques­ tion of whether we can still be autonomous. Equality of opportunity does, after all, effectively support the status quo by placing the onus on the individual. Individuals who are free to make choices have no legitimate claim against the state when their choices go awry. If individuals are free to make choices, what­ ever inequality that results is due to the choices they made. Society is under no obligation to create say jobs that will pay low-­wage workers better; rather they are responsible for taking steps that will enable them to have access to oppor­ tunities to perhaps better themselves so that they can be in a position to command higher wages. A liberal conception of equality, however, does not allow the state to be completely neutral on questions of distribution. Nor does it deny a role for positive public policy. Rather if individuals are going to be free to make choices, a framework in which individuals can make choices as an expression of their human agency must be maintained. At the same time, safe­ guards are needed. Dworkin poses the problem in terms of rough equality whereby according to a general theory of political distribution, which is a theory of how whatever a community has to assign in terms of goods, resources and opportunities ought to be assigned. According to rough equality, resources and opportunities may be distributed roughly so that the same share of whatever is available is devoted to satisfying the ambitions of each individual so far as possible. Any other general aim of distribution will assume either that the fate of some people should be greater concern than others, or that the ambitions or talents of some are more worthy, and should be supported more generously on that account. (Dworkin 1985, pp. 192–193)

Democratic theory   25 To the potential criticism that rough equality may be considered unfair because it ignores the different tastes that people have, Dworkin responds as follows: the tastes that people differ on aren’t afflictions, but are cultivated according to each person’s theory of what his/her life ought to be. Therefore, the most effective neutrality would require that The same share be devoted to each, so that the choice between expensive and less expensive tastes can be made by each person for himself, with no sense that his overall share will be enlarged will be enlarged by choosing a more expensive life. (p. 193) Or that, whatever he chooses, his choice will subsidize those who have chosen more expensively. In practical terms rough equality would require that govern­ ment distribute all that there is to be distributed equally. Government would then arrange for production which would maximize the mix of goods, including jobs and leisure and perhaps even income that is favored by everyone, distributing it equally. Although Dworkin thinks that the liberal should favor this approach in principle, he recognizes the importance of markets, if they can run efficiently, to determine a price for each product that reflects the cost in resources of material, labor, and capital that might have been applied to produce something different that someone else wants. Although the marketplace yields inegalitarian consequences, the market is nonetheless more egalitarian than any alternative of comparable generality under the special condition that people differ only in their preference for goods and services. But the liberal principle of equality is violated if somebody winds up with more than the community had to distribute because s/he or her/his parents had superior skill or luck. The liberal, then, is confronted with the difficult reality that his/her conception of equality requires an economic system that produces certain inequalities. What is the solution, if there is one? According to Dworkin, “the liberal must be tempted, therefore, to a reform of the market through a scheme of redistribution that leaves its pricing system relatively intact but sharply limits, at least, the inequalities in welfare that his initial principle prohib­ its” (p. 196). The liberal, then, might find that the best approach is a system of welfare rights financed through redistributive income and inheritance taxes. How much redistribution? Here he invokes John Rawls (1971) to say to the point at which the worst-­off group would be harmed. But that is the point. For Rawls, a system of rights, which his theory of justice calls for, i.e. priority of the right over the good, requires that those rights work to the benefit of the least advan­ taged members of society. And yet, herein would appear to be a prescription for a wage policy, or any other policies, that creates opportunities for individuals to function on a more equal footing, and which basically views the earning of a livable wage as essentially a fundamental right. Liberalism, Dworkin insists, requires an economic system “in which no citizen has less than an equal share of the community’s resources just in order that others may have more of what he

26   Democratic theory lacks” (1985, p. 206). But the liberal conception of equality does not require equality of result and the type of massive wealth redistribution required to achieve it. The liberal conception of equality argues against equality of result, in favor of opportunity. And the notion of redistribution he has in mind, or could be substituted for traditional income redistribution, would be a reallocation of opportunities and the types of public policies that would allow for those reallo­ cations to occur. A wage policy might also fit his redistribution model because, apart from reallocating money, it is reallocating effective power. A wage policy, after all, speaks to the reality that the bargaining position of workers and their employers is not equal. And it is this reality that leads to inequality of result, or at least exacerbates it. Another dimension to the question of equality, and which makes it difficult to grapple with in substantive terms is the whole question of measurement. Amartya Sen (2008), for instance, argues that the concept of inequality has undergone a radical transformation. Measures of inequality that are used in eco­ nomics typically fall into two broad categories: those that attempt to capture the extent to which there is inequality in an objective sense, that often rely on statis­ tical measures of variation in income; and indices that attempt to measure ine­ quality in terms of some normative notion of social welfare. On the second, a higher degree of inequality is said to correspond to a lower level of social welfare. Sen then suggests that methodological issue concerns the type of meas­ urement being sought. Much of modern welfare economics is concerned with precisely the types of questions that can avoid judgments on the income distribu­ tion. The so-­called basic theorem of welfare economics is concerned with the relationship between competing equilibria and Pareto optimality, which was intended to eliminate the need for distributional judgments. Inequality is a notion that doesn’t have any innate property of “completeness.” But a fixation with Pareto optimality is in keeping with the liberal conception of equality and the neoclassical model more generally. Pareto optimality holds that government cannot act to make one group better off if the effect is to make another worse off. Rather everybody has to be made better off without a cost to anybody. The neoclassical model, in its assumption of purely competitive markets, also holds that an efficient and ultimately fair means of mediating claims in an impartial manner is the market mechanism. As the market is effect­ ively neutral, it doesn’t get bogged down with having to make a choice on the basis of competing values. The good of claim A is chosen because based on competition and price it reflects the preferences of most people. But it also means a couple of other things as well. First, if through competition one group suffers or is otherwise disadvantaged, the system is otherwise numb to their suf­ fering. Their suffering, after all, wasn’t due to deliberate action. The chips were simply allowed to fall where they may. Second, it implies that any interference in the market mechanism will effectively run contrary to the preferences of most people. The end result is an inefficient allocation. The neoclassical model, then, especially when paired with liberal conceptions of equality requires, at a minimum, a framework conducive to the pursuit of

Democratic theory   27 individual choices. Within the political realm, at least, democratic institutions must allow individuals to make choices and to present their own conceptions of good on more or less an equal footing. Within the private realm, a market economy may be considered the most open framework to the making of choices as they manifest themselves in the form of economic self-­interests. But the framework must remain open, and it can only do so when the public sphere is prepared to intervene as necessary to ensure its openness and its ability to gener­ ate further opportunities for individuals to make choices. This ultimately is the role of public policy. Procedural equality, however, has not been completely blind to some minimal level of economic equality. Nineteenth-­century observer of American democracy Alexis de Tocqueville noted that a major ingredient in the maintenance of the social harmony that sustained American democracy was relative economic equality. This meant that individuals confronted one another as equals, whereby each was independent and each was of similar importance (Zetterbaum 1987). But as Terry Karl (2000) suggests, equality of condition meant more than mere political equality. Equality of condition also involved social equality and largely assumed a roughly equal distribution of wealth and income. For Tocqueville, social equality was to be considered a basic building block for political demo­ cracy. What he observed in the United States was for the most part an agrarian society in which individuals were relatively equal in terms of distribution. There­ fore, it was an advantage that the United States began its experiment in demo­ cracy with an exceptionally egalitarian social and economic structure based on small landowners. As a result, material equality in America produced an egalit­ arian sentiment, which also in turn formed the basis for the principle of equal citizenship. And in the absence of an aristocracy and other social privilege char­ acteristic of the “old order” in Europe, individuals were equals in terms of social position and status. On the contrary, any change towards an overly skewed social and economic inequality would, as far as he was concerned, endanger democratic politics. Where inequality is greatest, people are more willing to accept authoritarian rule and less likely to be satisfied with the way democracy works. Consequently, increasing inequality in income and wealth is only bound to spell political trouble, with huge repercussions for democratic regimes (Karl 2000). Daron Acemoglu and James Robinson (2006) suggest that inequality does critically influence a democracy’s propensity to consolidate because the main threat against democracy comes from its redistributionist nature. The greater the redis­ tribution away from elites, the more likely they are to find it in their interest to mount a coup against it. The greater inequality there is, the more likely these elites are to destabilize democracy because the burden of democracy on elites increases the gap between them and the citizens. They even suggest that demo­ cratization requires that societies be sufficiently unequal so that the threat of a revolution will lead governing elites to undertake democratic reform. Once democratized, the maintenance of democracy requires maintaining conditions of equality. Were the Tocquevillian vision of social equality based on simple

28   Democratic theory a­ grarianism applied to contemporary industrial society, would it not in essence be a call for the maintenance of a broad middle class? Tocqueville, however, was not arguing that individuals necessarily had to possess equal amounts of the same thing. As Elizabeth Anderson (1999) suggests, equality is about indi­ viduals’ relations to others. The aim, then, is not to ensure that people neces­ sarily get what they morally deserve, but to ensure that they are in relations of equality to one another. The point of equality is to in essence ensure that indi­ viduals cannot be exploited and oppressed by others. In theory, then, equality prevents one with greater resources from receiving better treatment than the one with less. Both are equal in terms of their respective moral worth. And ultimately this allows for greater personal freedom and autonomy. Ian Shapiro (2003) suggests that it is better to think of democracy as a means of managing power relations so as to minimize domination. The challenge, then, is to devise ways to manage power dimensions of human interaction that limit domination while minimizing interference with non-­power dimensions. In modern times democratic control suggests an independent activity that is subju­ gated to democratic constraint. What differentiates government’s activities from those of other social actors involved in activities such as responding to market failure, building infrastructure, providing education, insuring banks, and provid­ ing welfare, is the specter of legitimate coercive force. If democracy is about structuring power relations so as to limit domination, it then becomes unneces­ sary to think of questions about citizenship as different from questions about any other superordinate constraints. At the same time, a conception of democracy predicated on reducing domination must also pay attention to the relationship between the political system, i.e. participation, and the distribution of income and wealth. The question of particular concern is whether, and under what con­ ditions, democracy redistributes to the bottom quintile of the population those who are living – or are in danger of living – in poverty. Shapiro argues that we have become accustomed to the coexistence of demo­ cracy with substantial inequality. Perversely enough, elites always understood the threat posed by inequality. And yet nineteenth-­century elites initially opposed the expansion of franchise out of fear that a newly enfranchised electorate would exert political pressure to redistribute downward. But there has been no demonstrable relationship between expanding democratic franchise and downward redistribu­ tion. Intuitively one might think that the greater the inequality, the more likely it is that there will be effective demand for downward redistribution, but the opposite would actually appear to be true. As inequality rises and passes a certain threshold, downward redistribution becomes less likely, which no doubt has something to do with the poor being less likely to participate in the process in the first place. And yet, the more extreme the income inequality, the greater the psychic distance between the haves and the have-­nots. Such psychic distance, of course, speaks to the anomie that the less affluent are likely to experience out of a sense that because they are distinctly different, the system will simply be unresponsive. For many contemporary democratic theorists, however, there cannot be real political equality unless there is a measure of economic equality. Unequal distri­

Democratic theory   29 bution of wealth and income may adversely affect individuals’ ability to parti­ cipate in the democratic process on the same footing as equals. Unequal distribution in wealth and income may result in procedural inequality to the extent that those lacking in wealth and income may not enjoy the same access to political and policy officials as those who possess wealth and income may enjoy (Bachrach and Botwinick 1992). Consequently, inequality affects our ability to be free, as unequal distribution may effectively result in some being able to make choices that others cannot. Those with more resources may be better posi­ tioned to pursue their goals and objectives, while those with fewer resources may find that their ability to pursue their goals and objectives is limited as a result. It is for this reason that economic development is so crucial to a demo­ cracy: because it results in a broader middle class within which economic resources are more broadly distributed. Lipset (1959) suggests that one of the most widespread generalizations linking political systems to other aspects of society has been that democracy is related to the state of economic development. Economic development is import­ ant because it results in the generation of a broader middle class in which there is relative equality of condition among its members. Moreover, it establishes the foundation for individuals to function economically in a way that leads to their independence. The more well-­to-do the nation is, the greater are the chances that it will sustain democracy. Rather a successful democracy requires a minimum level of aggregate wealth, a certain degree of industrialization, urbanization and a certain level of education that will result in relatively few of its citizens living in poverty. But it also requires the maintenance of a middle class in order that the gap between the top and the bottom is not so wide that it leads to potential social unrest. In other words, there cannot be wide disparities in wealth and income. But if economic development is the means to the end, then any type of policy which falls under this rubric – perhaps loosely defined as investing in people and/or creating opportunities – is similarly crucial, which would also have to include wage policy. The solution for many contemporary democratic theorists is to have what is often referred to as “perfect” democracy or what Kenneth Dolbeare (1986) has referred to as full democracy, which assumes individuals to have full control over all those circumstances affecting their daily lives. According to John Budd (2004), a democratic society seeks to balance concerns for efficiency with con­ cerns for equity and voice. Voice in particular is about participation. Voice essentially contains two elements: industrial democracy rooted in political theo­ ries of self-­determination and employee decision making which draws its import from autonomy as an essential ingredient of human dignity. The first element of industrial democracy entails having a meaningful voice in determining working conditions based on the political principle of democracy. The most fundamental justification for industrial democracy is “that there should not be an arbitrary dis­ tinction between having a voice in political decisions but not economic ones, especially since economic decisions might impact individuals’ lives more

30   Democratic theory directly” (Budd 2004, p. 25). A full democracy along the lines that Dolbeare speaks about would involve extending political democracy to the workplace. The United States is not considered a full democracy because the interests of property, often expressed in terms of individual rights, effectively limit demo­ cratic rule. Ross Zucker (2001), for instance, maintains that important theories of property can be considered inegalitarian in that they posit a right to highly unequal amounts of income and wealth, or subsume such a right under a broad concept of exclusive individual domain. John Locke, he maintains, made two major contributions to the theory of property: (a) a justification for assigning property rights to individuals rather than collectivities; and (b) a justification for the unequal distribution of economic resources, goods, and money. In Locke’s view, property and inequality are bound by natural law, which is also taken to be a matter of divine law. Though Locke sanctioned government regulation, he ruled out public control or redistribution of property for public purposes, thereby imposing limits on democracy. Democratic rule typically does not extend into economic institutions because they are considered to be private property and thus outside the bounds of majority rule in a capitalist system (Bowles and Gintis 1986). But was Locke really opposed to democratic rule, or was it that he was really opposed to arbitrary rule? Locke’s (1988) conception of property, however, may be broader than that which is tangible and proprietary. For Locke, property is defined as “lives, liberties and estates” (book ii, p. 350). Though he maintains the chief end of government to be the preservation of property, it is not clear that property rights are necessarily natural in the sense that we are born with them in the same way that we are born with human agency. Rather they are natural in the sense that they are special, acquired through the actions and transactions that individuals undertake on their own initiative. Property rights aren’t rights that all individuals have; they are acquired through the occurrence of certain events, with the principal event being the mixing of labor with resources. And yet, the general right to subsistence remains in the background of his theory (Waldron 1988, pp. 120–128, 138). Earlier Locke states “in Government the Laws regulate the right of property, and the pos­ session of land is determined by positive constitutions” (book ii, p, 302). If gov­ ernment is ultimately to preserve society, we can only infer that Locke is speaking to the need for a balance between the interests of the individual on the one hand and those of the community on the other. By using the language of positive consti­ tutions, Locke actually opens the door for the government to regulate on behalf of community interests, thereby denying the absoluteness of property. On the con­ trary, while government action may be constrained by the special right to private property, those property rights themselves are constrained by what Jeremy Waldron (1988) refers to as “a deeper and, in the last resort, more powerful general right which each man has to the material necessities of his survival.” This then forms the basis for the “entitlements of charity in Locke’s system.” For Locke, the raison d’être of property is sustenance (pp. 139, 216). But Locke believes that God has a wider purpose than simply providing for the individual’s self-­preservation. On the contrary, individual labor is seen as

Democratic theory   31 contributing to the improvement and benefit of life in the collective sense. Locke isn’t so much concerned with individual motivation for property development as he is with the moral and social concerns to which property can be put (Ashcraft 1986, pp. 264–266). This isn’t to say that Locke believed that property could be regulated at any time in the name of the community interest, but rather that if there was a serious dispute, the community must ultimately take precedence. Therefore, Locke’s use of property isn’t as much a limitation on democratic expression, as it is on the potential for arbitrary government action (Levin-­ Waldman 1996). Which is to suggest that the Lockean conception of democracy may not be that limited after all. In a more complete democracy, by contrast, the equal voice that citizens enjoy in the political realm would be enjoyed in the economic, whereby workers would be able to participate in the operations of the firms for which they work (Dahl 1985). But aside from the equal voice that cit­ izens enjoy, they might also be more equal in terms of the distribution of income. They would be equal because they could use the political mechanism to legislate a more equitable distribution of income. Does this not in effect require that a democratic state not find other ways to effectively generate greater voice for workers, if even that greater voice is within the purview of an otherwise incom­ plete democracy? And yet, there is a strand of thought that holds property rights to be a key element in procedural democracy. It is a presumption in favor of property rights that has formed the basis of liberal democracy, particularly in the United States, which is also the essence of procedural democracy. Why, then, is property so important? Because it protects the concept of human agency. If property serves as a bulwark against arbitrary exercises of power, government is effectively limited in its functions, thereby freeing individuals to be somewhat autonomous. Democracy, then, cannot be separated from liberalism. Aryeh Botwinick (1997) argues that the most coherent reading of modern lib­ eralism – which we also tend to associate more closely with democracy – derives from Thomas Hobbes and is grounded in skepticism. This might appear to be counterintuitive, as we tend to associate Hobbes with the strong-­man state whose authority can be exercised arbitrarily. How, then, can Hobbes be linked to demo­ cracy? Democracy signifies rule by the people and constitutionalism speaks to a set of norms, which regularize procedures for the mobilization and exercise of power. When both democracy and constitutionalism are fused together the end result is “liberal democracy.” One of the greatest defenses of liberal democracy, then, is that it can envisage the pursuit and enactment of “equivalences” as con­ stitutive of the trajectory of normal life. Skepticism serves as a link that bridges democracy to liberalism. Liberalism, especially with its emphasis on constitu­ tionalism, is preoccupied with process, i.e. the rules of participation, and this process inevitably means that there can never be a final public verdict on any issue. For Hobbes, the individual is basically divided between his vanity and his fear of death. By vanity, we might say the individual’s desire to be in control and recognized for his/her abilities. Death, of course, particularly in a state of

32   Democratic theory nature, can effectively result in others not affording proper recognition along with an equally strong desire to control. When Hobbes depicts the individual, the fear of death is sufficient to rejuvenate his/her character so as to allow him/her to reconstitute him/herself along more rational lines. In order to prevent death, which might assist in fulfilling his/her vanity, the individual then is forced to consider the best means by which that can happen – the individual is forced to engage in rational thought. For Hobbes, democratization assumes a Platonic vision of the philosopher-­king, whereby those parties to the original contract, i.e. the community of citizens, transcend their own interests to create a basis of authority that ultimately serves the public interest. Simply put, individuals are forsaking their immediate self-­interests for the larger public interest in order that the world – the nasty state of nature – will become habitable for them. Liberalism evolved as the first man-­based form of political rhetoric, thought and action. The central tenet of classical liberalism as articulated by Hobbes is that the source of obligation is derived from appropriate and legitimate political authority, i.e. contract based on consent. When Hobbes theorizes about liberal society in Leviathan he is actually assigning the highest priority to the solitary thinker, which is in essence human agency. Liberalism subordinates public to private and substantive justice to procedural justice, which for Botwinick is about “setting society on ‘automatic pilot’ so as to leave the solitary, creative thinker unmolested and undistracted” (Botwinick (1997, p. 127). The liberal emphasis on process and procedure can be viewed as a surrogate for the sanctity of tradition and long-­hallowed consensus in the face of rampant individualism and the skepticism of liberalism. Why, then, is liberalism skeptical? It is because it rejects the absolutism of tra­ ditional authority, as embodied in the pre-­enlightenment idea of divine right of kings. If authority is questioned, it can only achieve legitimacy if it is publicly jus­ tified. Perhaps the whole notion of the state of nature must be viewed as a meta­ phor for rule by passions rather than reason. In the state of nature, man is motivated almost totally by his passions. If so, then the act of entering into a social contract and submitting to the political authority of the sovereign ultimately represents the triumph of rationality over passion. Liberalism is then about negative politics – what government may not do. Government is not identified with a simple transla­ tion of majority rule, nor is it solely identified with the protection of minority rights against majority opinion concerning the pace and content of various protec­ tions. And yet, to disassociate government from pure majority rule in the utilitarian sense of the greatest happiness and to even establish limits on governmental action out of fear that it could become corrupt, is to in effect separate government whose creation is a function of rationality from passions. Although one cannot draw any political or policy implications from skepticism, there is nonetheless room to draw rhetorical affinities between skepticism and other areas of human thought and action. Botwinick (1998) explains it as follows: The liberal state’s self-­identification as a neutral, proceduralist state often belies the role of bureaucratic regimes of power-­knowledge in “normaliz­

Democratic theory   33 ing” the population so that a liberal ethos and bureaucracies officially favor­ ing neutrality and fairness entrench themselves. A generalized agnosticism as the metaphysical backdrop to liberalism gives the liberal state a critical perspective on itself. If what undergirds it is skepticism, and a consistent skepticism requires it to be skeptical of its own skepticism, then any institu­ tional translation of the ideal of skepticism (any particular balance of power or equilibrium between opposing classes or groups within the state) can be skeptically challenged. (p. 93) In practical terms, then, from a skeptical perspective no one person’s or group’s superior position is epistemologically impervious to to an effective challenge. Skepticism, in other words, rejects the notion of absolutes, which is consistent with William Galston’s (1991) definition of liberalism as rejection of absolutes and tolerance for diversity. Liberalism in its pure form is an institutionalization of skepticism. With skepticism, no particular group can make the claim to pos­ sessing superior knowledge. No one can put forth a claim that can in any way be said to be incontrovertible. Rather, liberalism as skepticism ultimately justifies the inclusion of as many people as possible in public decision making. Because the results cannot claim unreserved epistemological sanction, liberalism has braking mechanisms so that democratic outcomes can be reconsidered and revised. Therefore, liberalism’s preoccupation with process in all the manifold constitutional and institutional aspects leads to a continual replenishment and adjustment of democratic content. In a “liberal democracy,” then, no public verdict on any issue can be conceived as final. This clearly has implications for wage policy, especially one that represents a challenge to the pervasive neoclas­ sical theory of wage setting. In short, the neoclassical position isn’t inherently superior to others, and alternatives to the orthodoxy must be included in the debate. To a large extent, this understanding might mirror Ackerman’s (1980) argu­ ment that procedural equality ultimately gives legitimacy to political authority that on the face of it may be violating liberal neutrality. If procedures are in place to allow for everybody to present his/her claims and to make a reasoned argument for why the political authority ought to support the preferences of Person A over Person B, the outcome is said to be legitimate and not violative of liberal neutrality. In other words, to act without the procedures in place allowing for participation in the debate would be akin to legislating on the basis of passion, whereas requiring the debate to occur represents the triumph of reason – rationality – over passion. This, of course, is the essence of skepticism and its relationship to democracy. Democracy, particularly liberal democracy, only achieves legitimacy if the actions coming from the state can be publicly justified to an otherwise skeptical public. Liberalism is above all a doctrine of public jus­ tification. But it is also the means of achieving equality, albeit procedural. This would imply that democratic governments can pursue any line of public policy so long as it can be justified on rational grounds. Simply put, a democratic

34   Democratic theory g­ overnment expressing the collective will of the people could legitimately enact a wage policy if said policy could be justified on the basis of rationality – that there is a demonstrable relationship between means and ends. The concept of rationality is key here because it goes to the heart of what it means to talk about the next key principle in democratic theory: autonomy.

Autonomy Autonomy is very much assumed by Dworkin’s liberal conception of equality. The notion that the state would effectively not be treating individuals equally by favoring one conception of the good over another is essentially the notion that individuals cannot be autonomous agents unless the state is in fact restricted. Perhaps the central quality attributed to individuals by liberalism is the idea of autonomy formulated by Emanuel Kant (1970), which may be understood as the condition in which individuals are free from external determination such as force or coercion. Individuals are free to act on the choices they have made of their own volition. Kant speaks the language of rights, which he defines as the “sum total of those conditions within which the will of one person can be reconciled with the will of another in accordance with a universal law of freedom” (p. 133). Even at the core of egalitarian liberalism is autonomy, and a fundamental requirement of autonomy is that agents be able to reasonably believe themselves to have the capacity and opportunity to make significant choices. Autonomy, however, is more than just a question of choices regarding the good life and how to make such conceptions a reality; it is a requirement of moral responsibility. One cannot be held responsible if one is not in control. Only if one is in control can one be held responsible for the choices that one has made (Kekes 1997). Rousseau (1988) framed this in terms of the transcendent general will. One could effectively be liberated from one’s chains by placing the general will over and above one’s own self-­interests. This person would essen­ tially be forced to be a responsible citizen. This, of course, has implications for one’s place in society: only if individuals are in control of all circumstances that affect their existence can they be held responsible for the choices they were apparently free to make. Therefore, if subject to economic forces beyond our control, we cannot be held responsible for a choice which may have resulted in say less prosperity relative to others. Moreover, if we are not in complete control, it is not at all clear that we have free choices. This certainly implies a role for policy on the grounds that we are vulnerable to forces beyond our control, and as such we can be exploited. But then, what has happened to the concept of human agency? Within the logic of liberalism, or the liberal tradition out of which democracy in America has emerged, there can be no possibility of democratic politics unless the power of the state is circumscribed by institutionally guaranteed rights (Schwartz 1996). The principal right associated with individual autonomy has been that of property. The liberal basis of autonomy out of which property flows, rests on a concept of personal self-­determination and the separateness and dis­

Democratic theory   35 tinctiveness of each individual. To protect individuals from the predatory inter­ ests of others – what otherwise might be considered exploitation, individuals must have their rights protected. One such arena in which individuals exercise this self-­determination is the economy, i.e. the marketplace. Institutions of prop­ erty and exchange consequently take on significance in relation to normative ends of freedom. One, after all, cannot exchange what one doesn’t own, and in order for individuals to be able to pursue their self-­interests as a tangible and concrete expression of the human agency – their personal self-­determination and autonomy – they must be able to freely enter into exchange relations which entail no less than being in full control of what they own, i.e. property (Levine 2001). As David Levine (1995) explains: We have property rights over things when we use or dispose of them accord­ ing to our own ends (at our will). We have rights in relation to other persons when our interaction with those persons is up to us and follows from our decisions. The key terms in understanding rights are initiatives or agency and self-­determination, autonomy, and freedom. And while property rights may secure autonomy, they can also encourage inequality between persons, whereas other economic rights might actually foster greater equality. Warren Samuels (1989) explains that “government does not protect some­ thing as property because it is property, but property is property because it is protected by government. ‘Property’ is the name given to certain already pro­ tected interests.” It is this designation as property that gives certain protected interests a privileged status “insofar as property is distinguished from functional equivalents to property as a basis for further policy” (p. 430). As Yoram Barzel (1997) notes, property rights carry with them two distinct meanings in the eco­ nomics literature. The first meaning is essentially the ability of an individual to enjoy a piece of property, such as land or some other tangible good that one is able to possess. The other, which is also more prevalent, is essentially what the state assigns to a person, which involves the legal definition of property rights. Whereas economic property rights involve an individual’s ability to consume a good either directly or indirectly through exchange, and to in fact have control over those goods, legal rights are those that are recognized and enforced by the state, i.e. government. As a rule, legal rights enhance economic rights, but the former are neither sufficient nor necessary for the existence of the latter. And while the meaning of property is by no means absolute, and is subject to change, the concept of property rights is nonetheless closely associated with the concept of transaction costs – an essential ingredient in exchange. Still, the concept of property is problematic because it is the concept of a system of rules governing access to and control of material resources. In such a system, rules governing access to and control of material resources are organized around the idea that resources are on the whole separate objects (Waldron 1988). On the one hand, it preserves additional zones of freedom for individuals by erecting effective buffers between individuals and the state. Waldron (1988)

36   Democratic theory notes that a rights-­based argument for private property holds that some indi­ vidual’s interests or even some individuals’ interests collectively serve “as a suf­ ficient justification for holding others (usually government) to be under a duty to create, secure, maintain, or respect an institution of private property.” The indi­ vidual interest is in fact taken to be sufficiently important that others – particu­ larly the state – must be obligated to respect the institution of private property (pp. 87, 115). It also limits democratic expression. According to Robert Dahl (1985), framers of the American constitution were concerned that democracy would menace economic liberty, as the unpropertied masses would seek to strip the propertied classes of their property for the purposes of achieving a more equitable distribution through the mechanism of democracy. Similarly, the Mad­ isonian legacy of checks and balances was designed to create a bulwark against egalitarian incursions on the rights of property (Nedelsky 1990). James Ely (1998) observes that economic liberty was considered to be an essential component of constitutionalism throughout much of American history. The framers were certainly concerned with the need to safeguard property rights, which in their minds was in no way inconsistent with a major theme of constitu­ tionalism: restraining government power over individuals. Generally they did not distinguish between property and personal rights. From the very beginning, the North American settlement was linked to economic liberty. The American constitutional underpinnings of property rights were forged during the colonial era. The defense of property was a major force in unifying the colonies in their struggle for independence. While the Declaration of Independence was intended to justify the American revolution, it was also intended to demonstrate the strong relationship between political liberty and private property. Respect for economic rights did not necessarily encompass unfettered liberty to use property in any matter, as the theory of republicanism subordinated private interests to the pursuit of public welfare. Nevertheless, the doctrine of property ownership was considered to be essential to the enjoyment of liberty, which had also long been a fundamental tenet of Anglo-­American constitutional thought. Of paramount importance was the right to own and acquire property. Such rights were only indispensable because property ownership was closely associated with liberty. In contemporary American law, the Fifth Amendment has emerged as a principal bulwark of property rights. The larger point, however, is that property and con­ tractual arrangements are what constitute the legal foundations of a free-­market system. Moreover, a defense of economic rights serves the cause of individual liberty. And while property may effectively limit democracy, it also strengthens individual autonomy from the control of government because it serves to diffuse political power. Still, property rights have been widely believed to trump labor rights, but Budd (2004) maintains that both are crucial to the maintenance of human rights (p. 33). Therefore, a claim against a wage policy on property rights grounds, and one that was traditionally made, is that such a policy may violate the property rights of employers by forcing them to pay a specific amount. S/he is no longer at liberty to dispose of his/her property – to set the working conditions as an exten­

Democratic theory   37 sion of his/her right to dispose of his/her property as s/he sees fit. Consider Milton Friedman’s argument that political freedom means the absence of coer­ cion. By separating economic activity from political authority, the market has eliminated the source of coercive power. Government’s role is merely to do what the marketplace cannot: maintain, arbitrate and enforce the rules of the game. When government intervenes, it limits freedom. The excuse over the last few decades for governmental intervention has been what Friedman (2002) calls “full employment” and “economic growth.” Contrary to enhancing employment, gov­ ernment interference only results in greater unemployment, thereby justifying even more interference, which in turn only limits further individual freedom. As he sees it, the greatest achievement of capitalism lies not in the accumulation of property and wealth, but in the opportunities it has afforded individuals to develop and improve themselves. If a minimum wage, for instance, has the opposite effect of what was intended, which Friedman clearly believes that it does, poor people and/or otherwise low-­skilled workers who are displaced from their jobs as a result will no longer be able to improve themselves. And in the name of helping those people who will be hurt the most, all that government will have achieved is a precedent for further intervention and infringement of per­ sonal freedom and autonomy. Moreover, the assault on autonomy is deemed to be even more egregious because it was in essence inefficient. Because this model emphasizes well-­defined property rights and the freedom to use them as the crucial foundations of efficient markets, government regulations and institutions that might artificially boost wages are viewed not only as restrictions on property rights but also as measures that undermine efficiency. The neoclassical economics model, then, looks to free markets to both maxi­ mize efficiency and provide “marginal productivity justice”, and the solution to the so-­called labor problem – that workers should be treated with dignity rather than as mere commodities – is competitive markets and freedom of contract (Budd 2004). Marginal productivity justice holds that factors of production are to be rewarded according to their marginal productivity. More productive workers earn more because they work harder, and less productive workers earn less. This is considered to be fair and just because it is also efficient. Con­ sequently, the low wages of low-­wage workers are justified on the grounds that their productivity is low. Workers, in other words, get what they deserve, which means that low-­wage workers by definition deserve no more. A minimum wage, by establishing a floor that might be more than they deserve clearly runs contrary to this neoclassical notion of “marginal productivity justice.” At the same time, there is a question about the workers’ property rights in their labor, and whether they can truly have freedom if the effect of low wages that are insufficient to support themselves is tantamount to depriving them of their property rights in their labor. In other words, the foundations of their desert is based on their prop­ erty rights in their labor One of the arguments for a wage policy, à la the minimum wage for instance, is that it effectively confers on low-­wage workers a degree of monopoly power they otherwise lack. As James Galbraith (1998) points out, the only real freedom

38   Democratic theory that low-­wage workers – especially those lacking skills – have in the market­ place which is also consonant with human agency is the freedom to accept or reject the job. For those without any real negotiating power, this is tantamount to a choice between eating and starving. And in fact the central premise of institu­ tional economics and earlier calls for industrial democracy which would enable workers to have greater voice was the belief that there was indeed an inequality of bargaining power. Without individual equality, there would be little to prevent the economic coercion of workers (Budd 2004). Indeed, New Deal policies during the 1930s stressed the need for countervailing powers, as noted in the preamble to the National Industrial Labor Relations Act, otherwise known as the Wagner Act: The inequality of bargaining power between employers who do not possess full freedom of association or actual liberty of contract, and employers who are organized in the corporate or other forms of ownership association sub­ stantially burdens and affects the flow of commerce, and tends to aggravate recurrent business depressions, by depressing wage rates and the purchasing power of wage earners in industry, by preventing the stabilization of com­ petitive wage rates and working conditions. (Costello and Miller 1997, p. 4) The Wagner Act may have been ahead of its time, as it was conceiving of worker rights in terms of human rights. The act effectively guaranteed workers the right to bargain collectively and in the process laid the seeds of industrial democracy (Gross 2003). But the argument could also be made that the failure to pay workers a wage that enables them to sustain themselves – to be fully autono­ mous – is akin to depriving them of their property rights. And by extension, it is depriving them of freedom and opportunity. David Lametti (2003), for instance, proposes a new metaphor for property – that it be conceived of as a relationship between or among individuals through objects of social wealth. If private property is viewed as a social institution, which also comprises “a variety of contextual relationships among individuals through objects of social wealth and is meant to serve a variety of individual and collective purposes,” the definition of property is by no means a static one. On the contrary, it is subject to social construction, and when change does occur implicit in that change is that the object of property relations has some impact on the property relationship itself. The notion of property as a relationship refers to the ways or modalities in which objects of social wealth are held. Private prop­ erty is often viewed as that which demarcates individual space and powers against the community. Property as a relationship must extend some form of human control over social wealth. If property is generally about the use and allo­ cation of resources, private property is about one specific mode of allocating resources and governing their use. Private property at bottom places ultimate control over some scarce and valuable resources in the hands of the individual, but private property is also about social allocations of control to affect other

Democratic theory   39 members of the community. Private property is necessarily social because of its structural asymmetries and underlying value and purpose. Private property is composed of entitlements to varying degrees and collective rights and duties that individuals have towards others with respect to the objects of social wealth. Private property is the result of societal decisions to allocate large measures of control over certain resources to certain people. Does the democratic state that protects the property rights of owners/managers, i.e. employers, not have an obligation to protect the property rights of workers? Does the right to earn a livable wage not in effect constitute a social property right, especially as their work effort contributes to the success and profitability of the firms they work for? Robert Castels (2002) has observed that in the late eighteenth century the question of equality could only be considered within the framework of a system of private property. Then it was believed that private property was indispensable to the founding of individual autonomy. Without it, the individual was con­ demned to permanent insecurity and dependency on others. But as individual autonomy became subject to more threats, the answer to individual autonomy essentially lay in a new conception of property: “social property.” With the advent of wage labor, the worker in the factory was very much dependent on his or her employer. The problem with wage labor is that once one is in wage labor, one is in wage labor for life, and the conditions of wage laborers would have a profound effect on the conditions of industrial society. The answer to this dilemma, then, laid in the invention of social property. While the wage laborer does work for somebody else in a relationship of legal subordination and can be characterized as alienated, he also works in part for himself and his dependents and/or beneficiaries. Social property consists of ensuring the participation of non-­property owning individuals in the collective services which are also placed under the responsibility of the state. Social property never abolished private property, as it was entirely different from the collectivist alternatives, but it did manage to limit its hegemony by ensuring non-­property owners security and by providing them with access to services that don’t necessarily follow market logic. In other words, owners of private property have a responsibility to the non-­property owners whose efforts have contributed to the value of their prop­ erty. A means by which that responsibility can be extended is by extending some of their private property in the form of social property. Or as Stephen Barton (1983) argues, the dominant tradition in US political thought has been Lockean liberalism, and this tradition has long maintained private property to be essential to individual freedom and democratic government. Private property rights, however, are a form of power created by government but insulated from demo­ cratic control precisely because it is private. The only way to equalize that power is by extending property rights to others in the form of community property rights and predicated on some conception of human rights – that community property rights are essential to the protection of broader human rights. Still, the freedom to conceive of one’s own conception of the good and to subsequently act upon it is also important to democracy for yet another reason.

40   Democratic theory A democracy, especially as its legitimacy and power are derived from popular consent, assumes that individuals have the capacity to reason for themselves, i.e. to deliberate in the public square, and to act on that capacity in a responsible manner. They cannot effectively participate, whether it be in full policy discus­ sions or selecting their own representatives, if they cannot deliberate in a rational manner. This means that human agency has to be protected. That is, individuals must be afforded the space to do so, which is precisely what personal freedom allows them to do. But can one truly participate if one isn’t truly autonomous? Are there not certain economic conditions essential to autonomy? And might the requirement of autonomy not necessitate a redefinition of property rights? If workers enjoy a property right in their labor, they cannot be exploited, as exploi­ tation might be viewed somewhat analogously to a seizure of property or a taking without just compensation.

Democratic evolution Henry Richardson (2002) suggests that democracy might be viewed from the vantage point of three perspectives: liberalism, republicanism, and populism. Each has a rich tradition in the United States, and each might to some extent be said to represent an expansion of the other. For Richardson, the core of demo­ cratic theory is individual autonomy, free and unfettered by bureaucratic or other types of institutional constraints. And he builds his argument on the central ideals of liberalism, republicanism, rationalism, and populism (Klosko 2005). Democratic reasoning must be regarded as truly collective reasoning about public ends – the ends of policy. But in achieving those collective ends, the democratic state must also respect individual freedom and equality. Democracy in the United States has largely evolved from a conception essen­ tially grounded in liberal and republican thought to a more populist/pluralist con­ ception. At the root of the liberal conception has been the emphasis on individual liberty. Individuals should be free to pursue their self-­interests as a concrete expression of their human agency. The republican ideal was the notion that the polity, based on popular sovereignty, would pursue the public interest which is transcendent of the summation of individual self-­interests as conceived by the liberal conception. But the republican ideal was also a representative one and very much parallels Goodin’s (2003) characterization of democratic elitism, whereby free autonomous individuals elect representatives to make decisions on their behalf and where their participation is principally in the domain of voting. Benjamin Barber (1984) essentially characterizes liberal democracy as “thin” democracy. It is based on premises about human nature, knowledge and politics that are liberal, but not necessarily democratic. In a “thin” democracy, demo­ cratic values are provisional – they are optional and conditional, as they are means to individualistic and private ends. Autonomous individuals occupy private and separate spaces, while at the same time the characteristic mode of interaction is conflict. The political community, then, isn’t an intrinsic good unto itself, rather it is instrumental. As Barber characterizes it, to the liberal democrat

Democratic theory   41 the citizen is an individual who applies personal truths to human relations. Liberal politics is essentially the logic of a certain form of radical individualism – “atomism wearing a social mask” (1984, p. 68). The liberal psychology of human nature is founded on the radical premise that the individual is essentially alone. A key feature of this perspective, then, is that human existence can essen­ tially be characterized as alienated. Liberal theory of human nature defines the individual in ways that deprive him or her of the potential strength of mutuality, cooperation, and common being. While liberal democracy has been very suc­ cessful, it has also contributed to the molding of individuals defined by their privacy and their property. An individualistic conception of liberty keeps indi­ viduals free only because it keeps them apart. Because liberal democracy makes an ideology of radical individualism, it depends heavily on the idea of private property, held both by individual and corporate persons. Private life is secured for some, but public life in which all would participate becomes impossible. (Barber 1984, p. 110) Joseph Schwartz argues that democratic politics requires a certain measure of conflict between divergent interests and groups whose identity is derived from their social relationships in a civic society that is relatively autonomous from state control. But democratic politics also demands a shared commitment on the part of these relatively autonomous interests to the democratic political process and to those public goods that the polity determines to be essential to ensure the equal worth of citizenship. (1996, p. 11) Democratic principles, however, can at times conflict with those of liberalism, especially its libertarian strand. Classical liberalism, with its emphasis on human agency and its resultant individualism, contributed to the growth of human freedom through its critique of absolutism and established religion. But as Schwartz suggests, later democratic theorists steeped in the radical tradition, like Rousseau, Marx and Hegel, neglected the politics of democracy because of their preoccupation with the belief that individual autonomy was in fact undermined by the undemocratic structure of liberal society. In their view the creation of a society predicated on solidarity would transcend the need for political institu­ tions. Solidarity would in fact eliminate the need for politics because it would eliminate conflict. So long as there was conflict, which would find expression in a property based system of exchange, there could be no true autonomy. The radical critique of liberalism has deep roots in Rousseau’s commitment to self-­determination through collective sovereignty. For Rousseau, there would be a tendency by interest groups to use politics as an instrumental means of advancing their own interests at the expense of the general will, i.e. the larger

42   Democratic theory public interest. The problem, however, is that the construction of the public interest in a modern democratic society involves arriving at a democratic con­ sensus among divergent interests. For Rousseau, true freedom is being liberated from one’s self-­interest. While Rousseau was adamantly opposed to economic inequality, especially to the extent that some might be rendered dependent on others, he was also opposed to equality of results. He defended individual auton­ omy within civil society, but he was also opposed to civic associations having any political influence on the state (Schwartz 1996). And yet, the important point is even if the radical tradition did neglect the practical aspects of democratic pol­ itics, it nonetheless had a vision that has served to inform more contemporary versions of democracy predicated on greater participation and self-­determination – what might be termed as voice. Democratic theory has over the years evolved from a more liberal one struc­ tured on limited participation and property rights to more radical notions. Our thinking about democracy has certainly evolved from a notion that democracy should only be political – that it should only be thought of in procedural terms – to more participatory forms. The more participatory forms have certainly been influenced by radical notions. The theory of participatory democracy is built around the central assertion that individuals and their institutions cannot be con­ sidered in isolation from one another. National level representative institutions aren’t enough. Rather, in order for there to be maximum participation, especially at the national level, there must be socialization – a type of “social training” for democracy, which is only possible by participating. A democratic polity requires a participatory society (Pateman 1970, pp.  42–43). Contemporary democratic theorists talk about participatory democracy which gives citizens greater voice in decisions in a society that would impinge on autonomy. It is essentially through this evolution in thinking about democracy that it also becomes clear that wage policy has a role to play. Economic democracy is perhaps best characterized by a set of organizing principles that effectively join together the public and private spheres into a “full” democracy whereby economics and politics are considered to be one (Dol­ beare 1986). There is greater substantive equality between peoples, as well as equality in terms of rights. Because decisions made in the private sphere do pro­ foundly affect what happens in the public square, individuals must have a say in the private realm, just as they do in the public. In economic democracy, the public is essentially entitled to participate in corporate decisions. In its most con­ crete form, economic democracy finds expression in workplace democracy, which is the notion that workers ought to have equal rights to participate in the decisions of their companies. To a certain extent, this is more critical than the procedural political democracy that we are accustomed to because the decisions made in the workplace could have a much more profound impact on our lives than the seemingly distant decisions made in the nation’s capitol. And yet, the implications of generalizing from the workplace to the capitol are unmistakable. Public concerns and interests are of equal weight to those of private managers. Carole Pateman (1970) notes that widespread demand for participation at lower

Democratic theory   43 levels of management does exist among ordinary workers, although it doesn’t appear to be the case when higher level decisions are concerned. Participation at higher levels needs to be linked to opportunities for participation at lower levels. Participation in the workplace may serve as a training ground for participation in the wider political sphere, because the experience of participating in the decision-­making process can be valuable training for participating in decision making at higher levels, i.e. the national level (pp. 85, 97). To achieve this type of full democracy would obviously require some radical steps. Many have attempted to get around this problem of property imposed limits to democracy by proposing workplace democracy. The idea behind work­ place democracy is that individuals have a voice in the operations of the firms they work for because the decisions their employers make will ultimately affect their ability to live autonomous lives. The thought here is that democratization of the workplace will ultimately lead to participatory democracy. The workplace is not necessarily the focal point, rather it emerges as a point of leverage from which to achieve a more egalitarian redistribution of power, thereby leading to a greater democratization of the entire political process (Bachrach and Botwinick 1992, pp. 2, 12). Participatory democracy seems to go by a variety of names. Some refer to it as deliberative, while others call it discursive. The goal is greater participation. According to Karen Wendling (1997), participatory democracy is probably the most completely egalitarian form of democracy, as it seeks to extend beyond simple universal suffrage and the right to influence political leaders to the col­ lective self-­management of society as though there were no leaders. People, in other words, control all the circumstances that affect their daily lives and their destinies, which includes the economic sphere as well. Participatory democracy addresses itself to institutional structures that will ultimately have bearing on questions of political equality. Robert Goodin (2003) uses the term reflective as the means by which greater participation will be achieved. He argues that demo­ cracy is fundamentally about making social outcomes systematically responsive to the settled preferences of all affected parties. Voting is a classic mechanism, which is an external act, but Goodin would prefer to focus on the internal acts that precede voting. Citizens of a democracy are supposed to act reflectively, which means they should give considerable thought to what they want, why they want it, and the best way in which they can obtain it. Following this reflection, these citizens are supposed to engage in a collective determination of what it is that they are to do. Therefore, in a democracy the people act collectively. But they also act responsively by taking into account the beliefs, values, and evid­ ence presented by others. This would seem to be the essence of Dworkin’s liberal conception of equality. They should also take into account the impact that their collective actions may have on others. As Goodin understands it, demo­ cracy has long been equated with populism, and has essentially progressed in three broad waves during the twentieth century. The first wave, known as democratic elitism, rejected populist theories of democracy as impractical because they imposed unrealistic demands on the time and attention of ordinary citizens.

44   Democratic theory For the democratic elitist, democracy consisted simply in the competitive strug­ gle for people’s votes in periodic elections. The second wave extolled the virtue of participatory democracy whereby participation would extend beyond the nominal act of voting. And the third wave revolved around deliberative democracy. Democracy is first and foremost a matter of making collective decisions. All theories of liberal democracy necessarily have certain things in common. They all rest on Enlightenment premises of individual autonomy. Therefore, a liberal democracy ought to take people’s preferences seriously. Models of democracy differ along two principal dimensions: they either respect people’s preferences directly or indirectly. People’s preferences are respected “directly” if they serve as an immediate input into the policy making process. Or their preferences are respected “indirectly” if their input is somehow mediated through some other agency. A model of democracy that would respect people’s preferences directly but reflectively would in fact be a “pluralist democracy.” As with economics, bargaining over politics is principally about distributions, and much of what occurs in actual social and political bargaining is about the negotiation and rene­ gotiation of beliefs. This bargaining is driven purely by values, effectively repre­ senting people’s divergent goals. A central claim of “input democracy” is that a legitimate political process must encompass more than simply a mechanical process. Rather the political process must be able to evaluate the competing claims and preferences of the various actors on the basis of their merits, which must be a reflective process. Participatory democracy might also be couched in terms of what John Dryzek (1990) calls discursive democracy. This he defines as a set of institution or some institutional design in which members of a community may come forth and make their expectations known with the expectation that there will be conver­ gence between their expectations and those of others. It is a deliberative scheme intended to account for the individual or collective needs and interests of the individual. As such it is a deliberative discourse requiring that individuals parti­ cipate in the process. Strong democracy according to Barber is a distinctively modern form of par­ ticipatory democracy. It rests on the idea of a self-­governing community of citizens who are united less by homogeneous interests than by civic education and who are made capable of common purpose and mutual action by virtue of their civic atti­ tudes and participatory institutions rather than their altruism or their good nature. (1984, p. 117) Strong democracy challenges the politics of elites and the masses that otherwise masquerade as democracy. In a strong democracy, the public is capable of rea­ sonable public deliberation and decision making, and thus rejects deference to so-­called elites who claim to have expertise, which is the hallmark of atomistic

Democratic theory   45 individualism upon which “thin” democracy rests. Strong democracy is self-­ government by communities in which citizens participate in discussions and decisions. Based on democratically arrived goals, strong democracy requires that these communities be able to act on those decisions. A strong democracy would appear to be capable of transcending the limits of representation without having to sacrifice democratic values such as liberty, quality and social justice. Strong democracy creates the type of citizen it needs for strong democracy to function because it is dependent on that citizen. As Barber explains: “The participatory process of self-­legislation that characterizes strong democracy attempts to balance adversary politics by nourishing the mutualistic act of listening” (p. 175). Strong democracy is ultimately about communication and is indeed an act of conversation. As an act of conversation, it is about finding language broad and novel enough to bridge conflicting perceptions of the world. Talk is import­ ant because it enables citizens to overcome their narrow self-­interests, while simultaneously buttressing the autonomy of individual wills that are essential to democracy. But talk also strengthens individual autonomy by securing that indi­ vidual’s place in the political community. By virtue of membership in the polit­ ical community which requires assenting to common decisions, the citizen is then able to reformulate his or her interests and beliefs in such a way that they will be commensurate with those of the collective public. The strong democratic process, then, seeks to strengthen the role of the “citizen.” The strong democrat places the democratic process itself at the center of its definition of citizenship. The strong democrat promotes reciprocal empathy and mutual respect. According to Barber, there are essentially three barriers to democracy, espe­ cially strong democracy. They are mass society and the problem it raises of scale; capitalism and the problem it raises of inequality and privatism; and the absence of an independent ground and the problem it raises of uncertainty. Because strong democracy requires direct communication, it is particularly vulnerable to the corruptions of scale. Scale makes it difficult to engage in col­ lective action. If democracy is defined as popular government for the sake of protecting individual liberty, collective action in matters political or economic, especially if that action is coercive, will be viewed as illegitimate. But if demo­ cracy is defined as popular government in the name of equality and social justice, collective action then becomes an essential part of that legitimacy. The corpora­ tion is, as far as Barber is concerned, incompatible with freedom and equality, whether construed individually or socially, and largely owing to asymmetrical power. It obliterates the distinction between public and private, and leaves no room for either a self-­governing citizen or a voluntary contract. This view is, of course, no different from that taken by the institutional economists during the early twentieth century that the imperfections of the labor market effectively gave employers, especially in the form of corporations, superior bargaining power relative to individual workers. Individual workers are at a significant dis­ advantage relative to corporations (Budd 2004). A strong democracy sees it as legitimate to invent and transform society in the name of a democratically achieved vision. This would clearly have implications for the role of wage policy

46   Democratic theory in democratic society. Consider Barber’s observation about educational vouch­ ers in a strong democracy: The strong democrat must feel considerable ambivalence about voucher schemes. Their great virtue is that they are intolerant of state bureaucracies and that they mobilize parent/student constituencies in a fashion that also serves to mobilize citizenship. Parents engaged in their children’s education become citizens engaged in their neighborhoods: to care for and to act on behalf of one’s own interests is the first step toward civic activity in a lethar­ gic representative system where individuals are accustomed to deferring to politicians, bureaucrats, experts, and managers. (Barber 1984, p. 295) As Barber puts it, vouchers are a form of power, which is the most effective cat­ alyst that citizenship can have. If strong democracy is about autonomous action by mobilized citizens who are firmly in control of their lives, and this enables them to affect the character of their communities, a voucher system that enables the parents to make decisions rather than being subject to the decisions made by bureaucrats who behave paternalistically, then a voucher system is in keeping with democratic theory. Clearly the same could be said about wage policy, for to the extent that a liveable wage effectively empowers workers, particularly those at the bottom of the distribution, it serves as a catalyst for them to become more effective citizens. At a minimum, a higher wage may enable workers to see themselves as living a life with dignity, which, in and of itself, is a necessary prerequisite to being able to actively participate as citizens. All these versions involve varying degrees of state involvement in private and/or otherwise economic life. But to the extent that they seek to involve indi­ viduals more in the collective affairs of their communities, they assume a key ingredient to democracy, whatever its particular form, to be autonomy, as well as a minimal degree of equality. And yet, both characteristics serve the same objectives of maintaining the individual dignity and self-­worth of the individual. At the same time, the evolution in democratic theory from mere procedure with limited participation to greater participation might also be said to parallel the transformation from limited government – the one that protects negative rights – to more active government – the type that assumes that active government policy is necessary to promote citizens’ rights, or foster greater freedom.

Policy and democracy Insofar as democracy reflects the collective aspirations of the community, policy must be seen as the collective expression of those aspirations. To flip it around, however, is to ask what type of policies serve the ends of democracy as it is pre­ dicated on equality and autonomy? Or what types of policies will encourage greater participation. A democracy clearly needs to be responsive to the wishes of the public. And yet, it is questionable just how responsive it can be if eco­

Democratic theory   47 nomic forces have so deprived individuals of opportunity. Any policy that opens up the framework so that individuals have access and can have the opportunity to participate is then in keeping with democratic theory. But I would like to make the further argument that wage policy might be more in keeping, as it is essentially linked to the active participation in the common project of those who will benefit, that common project being work. A wage policy that seeks to bolster wages does in fact require that one work in order to attain the benefits. A wage policy is not the same as a grant of money whereby one doesn’t have to offer anything in exchange. Rather it requires some element of personal respons­ ibility on the part of society’s members. Dworkin (2006) would further argue that as much as a democratic society requires that individuals be regarded as equal, it also requires that they also demonstrate personal responsibility. The requirement of personal responsibility, then, isn’t hard to see, given the empha­ sis on human agency. After all, one cannot be autonomous if one isn’t respons­ ible for one’s actions. Public policy that achieves this objective can then be said to correspond to the requirements of democratic theory. But as I argue in the next few chapters, wage policy, just like democratic theory, has gone through several permutations. Wage policy in its putative form of doing nothing and respecting liberty of contract very much corresponds to Barber’s definition of “thin” democracy predicated on procedure. Conversely, more expansive versions, such as universal minimum basic incomes, which will be discussed more fully in the final chapter, corres­ pond to more participatory notions of democracy. Ironically, however, each version seeks the attainment of the same objectives, mainly equal opportunity, personal autonomy and personal responsibility. But the more expansive versions of wage policy recognize that because of various economic transformations that have occurred, those objectives cannot be attained unless there is a correspond­ ing transformation in the democratic principles that underpin that economic structure. Similarly, evolution in democratic principles require a rethinking of the type of policy that will give them substance.

3 Evolution of wage policy

The United States has long had a wage policy of sorts, albeit in putative form. The earliest form of wage policy was slavery, and not unlike the feudalistic structure it was to be found in continental Europe. In its most extreme and egregious form, slavery was chattel slavery, characteristic of the plantation economy of the South. In its less extreme form, slavery existed in the form of indentures, which were negotiated contracts between employees, usually immigrants who couldn’t afford passage, and employers who agreed to pay their passage in exchange for labor. These indentures were no doubt the precursor to the wage labor system that we have today. What is important is that whatever form wage policy has assumed, it has generally been tailor made to the specific form of economic structure characteristic of a particular time period. Even a contractual arrangement assumed a government function, as it implied a need for some type of enforcement mechanism. At a minimum, the government was responsible for enforcing the contract, and it often did so to the point that workers failing to live up to the terms of the contract could find themselves in jail for breach of contract. These labor agreements also appeared to favor the property rights of employers over those of employees, to the extent that employees had any. The concept of free labor, arising during the industrial period still assumed a role for government in enforcing contract. But the nature of the contract needed to be changed. Slavery was too expensive for industrial production, and it was simply considered to be more efficient to pay workers wages for the actual labor they performed. They, in turn, would be responsible for their own upkeep. Industrial production, however, came with its own set of problems, most notably the business cycle and that wages might fluctuate according to that cycle. Wages for factory workers were often insufficient for basic subsistence. That government would ultimately come to endorse the types of institutions that would boost wages was really an acknowledgment that the economy indeed needed it. In this chapter I trace the evolution of wage policy in the United States beginning with the transformation from slave labor to indentures to wage labor through the development and support of wage bolstering labor market institutions like unions and the minimum wage. The early indentures were clearly a byproduct of the pre-­industrial and mostly agrarian economy. And if unions and the federal minimum wage were the byproducts of industrialization, current

Evolution of wage policy   49 Living Wage ordinances, discussed in Chapter 5, and even renewed interest in the minimum wage at the state level, are the byproducts of the post-­industrial economy. It will become clear that the evolution of wage policy does parallel the various economic transformations from a feudal economy to industrial to post-­ industrial, and that wage policy has indeed been a critical component of economic development, albeit not always stated as such.

Legacy of feudalism Karren Orren (1991) has argued that American labor law was very much influenced by the traditions of feudalism. Labor–management relations and the corresponding structure of government were governed by the same feudalistic traditions that dictated the relationship between masters and servants. A key aspect of this feudal influence was the role of the courts in this relationship, particularly in the enforcement of contract. Prior to the advent of wage labor, which would come to represent individual freedom, labor was essentially unfree, which in seventeenth-­century England was the nearly universal form of consensual manual labor. The feudalistic economy was primarily agrarian and owned by a landed aristocracy. Those who owned land were the lords and those who worked were the serfs. As a social system, this was a highly stratified class based society, whereby the classes were essentially castes. Politically, the state was ruled by the aristocracy, who in turn may have been beholden to a single monarch. The state was also ruled by a clerical order. In this structure, workers don’t have rights. They certainly don’t have the luxury of choosing what it is that they would like to do. They are essentially forced to work the land in exchange for their subsistence. Workers do not receive pay in the form of monetary wages, but in-­kind wages in the form of barter. Although workers don’t have rights that they can in any way claim against their masters, their masters do in fact have obligations to them. They are required to provide for their basic subsistence and security needs. This is essentially a slave labor system, whereby the labor power of the workers is essentially a form of property owned by the masters, i.e. their employers. The concept of a labor contract that emerged much later is actually quite controversial because it is freely entered into. To freely enter into a contract is to assume some measure of rights. One who entered into a labor contract effectively exchanged freedom for payment. Workers who violated their contracts were punishable by imprisonment. Therefore, the legal control exercised by masters over their wage workers meant that workers were sometimes treated as a form of property held in their service. Masters effectively enjoyed the type of control over their workers that property ownership would ordinarily confer on them over their things (Steinfeld 1991). This isn’t to say that workers’ rights were necessarily being neglected, but that through contract the worker freely traded them away. According to Robert Steinfeld (1991), in a social universe composed of individuals who freely buy and sell goods, it is possible to conceptualize the transition – in which one individual “sells” the property in his labor to another – in a

50   Evolution of wage policy number of different ways. By the eighteenth century, contractual unfree labor had come to be viewed as a product of a voluntary bargain between two individuals in the Anglo-­American world. The first such voluntary bargain was indentured servitude. Here individuals voluntarily contract to serve for a term in exchange for compensation. This became the common method by which individuals earned the cost of coming to the New World. Immigrants would sign labor contracts – essentially indentures – committing themselves to serve others for a specified time period. In exchange they often received their transportation expenses and “freedom dues” upon the completion of their service. To a large extent, these indentures, despite the effect that workers during the time period of their contractual obligation would not be free, rested on fundamental liberal assumptions of human agency. Individuals born with certain inalienable rights, thus not subject to the control of anybody, by definition are free to enter into a contractual relationship with employers. This certainly parallels the social contract theory found in Hobbes and Locke. In fact, it is closer to Hobbes because of its assumption of rationality. Individuals reason that the benefits of an unfree labor agreement, just as they reason that the benefits of living under a leviathan, clearly outweigh the costs. Perhaps more important for our purposes is that the unfree labor agreement was a precursor to the free labor agreement because it rested on the same assumption of voluntary contract. The development of free labor, however, parallels capitalist development. Modern employment relations, as they developed during the nineteenth century, were defined in terms of contract. In the earlier world, all workers, whether indentured or not, were subject to penal sanctions for failure to fulfill their obligations. In America, as was also the case in England, masters enjoyed considerable authority over their apprentices and could punish them for neglect or disobedience. The legal contract they enjoyed over their workers was sometimes treated as akin to a type of property they held in their services. In other words, the worker, in language consistent with that of capitalism, was nothing more than a commodity. When he/she sold his/her labor power, he/she was also in effect transferring ownership of himself/herself to his/her employer. Not only did this confer upon the employer total control over the worker, but it required the definition of those relationships as rights to be legally protected by the state through the courts. This was effectively a wage policy, albeit a putative one. Resident servants were akin to wives and children because all were members of the household and all were legal dependents of its head. As such, all were legally entitled to be maintained by the head of household for as long as the relationship continued. By some accounts, these indentures were really a form of slavery, but they weren’t slaves in the sense that they were chattel property characteristic of the southern US plantation economy. Rather they were freely negotiated contracts. To a certain extent, they reflected the theory of possessive individualism, a concept that figured prominently into the notion of labor as property. It flowed from the premise that the natural sovereignty that individuals enjoy over their own persons was an expression of the fact that all individuals owned themselves.

Evolution of wage policy   51 In a literal sense, all individuals are their own masters by virtue of the fact that as their birthright they hold property in their own persons. For those who held these views, the social universe was divided between those who were independent and autonomous and those who were dependent and ruled by the will of others. During the eighteenth century, the labor agreement was understood as an individual’s alienation to another of the property in his/her personal capacity. It was during the seventeenth century that English tradition invoked the “ancient natural liberties” and “rights of the freeborn,” which was to become an important feature of the Anglo-­American political landscape. English political and legal thought made a sharp distinction between slavery and ordinary service. In service, only property in a servant’s labor could be conveyed. In slavery, by contrast, a master could claim nearly absolute property rights in his slave’s life. The tradition of freeborn Englishmen introduces an important source of tension into early modern Anglo-­American attitudes toward labor. And yet, these labor agreements were derived from the legacy of feudalism, of which the underlying assumption was that employers enjoy more rights than workers. Courts enforced contracts on behalf of employers, because the rights of workers were undefined. Though there were clear obligations on the part of employers to their workers, there were no real entitlements that workers could claim. They certainly could not claim an entitlement to a minimum wage, let alone to collectively bargain for an agreeable one. But there was another aspect of the feudalistic legacy that bears some mention. The feudalistic tradition was very paternalistic. Today we often associate the minimum wage, and other forms of wage policy with the welfare state (Waltman 2008). Under paternalism, there is no need for a welfare state because the workers are taken care of by their patrons, who are also their employers. The employers have obligations which extend beyond merely paying wages, which may also be the point. If the welfare state wasn’t needed because under paternalism employers fulfilled their obligations to their workers, a minimum wage likewise was not needed because the employers’ wages would include the maintenance of basic subsistence. Free labor would eventually emerge from these early labor agreements, and develop to specifically meet the needs of an industrial system that required cheap labor. The more traditional feudalistic arrangement would simply be too expensive. The nature of free labor would come to be defined by contract, but it would nonetheless retain its feudalistic vestiges. Free labor would also be a legacy of the American revolution and the influence of liberalism. At the heart of this liberal tradition was human agency, which meant each individual was considered to have the capacity to choose for one’s self a conception of the good. The pursuit of self-­interest in the language of Adam Smith was merely taken to be an extension of that agency. If one was free to choose one’s conception of the good unfettered by government, one could act on that choice in tangible terms by pursuing one’s self-­interest. This, of course, implied limited government. It also assumed that individuals, procedurally at least, were equal. Louis Hartz (1955) in his classic reformulation of Alexis de Tocqueville’s observation maintained that America was essentially developed in the absence of

52   Evolution of wage policy feudalism. Tocqueville observed that America was born free because it didn’t have the feudalistic tradition that characterized Europe. Contrary to the feudalistic order whereby one born into a particular class could only escape that class through death and/or revolution, opportunities existed for upward socio-­ economic mobility. It has essentially become an accepted proposition that American political development, which by extension would have to include labor development, has occurred in the absence of feudalism. But as Orren (1991) suggests, there wasn’t a complete absence of feudalism, rather a belated feudalism which was most evident in labor law following the Civil War. Following the Civil War when the United States entered upon full scale industrialization, politics at its core contained a belated feudalism. There was a remnant of medieval hierarchy of personal relations and a particularized network of law and morality – essentially a system of governance that the word “feudalism” conveys. Neither the American Revolution nor the US Constitution dislodged it, but it remained embedded within American government – a state within a state. The effect was to divide public power, limit the reach of legislation, and set the bounds of collective action well into the current century. Perhaps the important point is that a society born in the absence of feudalism might not have to be mindful of inequality in terms of wealth and income, because there was the potential for upward socio-­economic mobility. A more feudalistic structure, however, with its attendant labor arrangements does serve the needs of an agrarian economy. This type of economy was also served by wage agreements that assumed the form of apprenticeships. The pre-­ commercial/agrarian economy assumed personal independence on the basis of self-­employment. Those who worked for others often were apprentices who in the future could expect to become master craftsmen and/or artisans. Socially and politically, it reflected a political philosophy predicated on individualism, private association, and limited government (Warner 1987). As a function of industrialization, however, wage labor was becoming the reality, and a system had to be adapted that would effectively restrict what the worker was entitled, and this was to be no more than actual wages worked. But this also implied a need for policy to address the consequences of an economic structure that resulted in the suppression of wages for the mass of laborers.

Free labor From the inception of the industrial system – during the first industrial revolution – workers fought desperately to avoid the abyss of wage labor. Wage labor was viewed as a debilitating departure from the traditional modes of financial reward. And yet, workers were unable to avoid their transformation into wage labor. For much of the nineteenth century, wage labor payments to an employer based on hours worked posed a fundamental threat to working-­class conceptions of liberty. The concept of wage labor was particularly problematic because of new conceptions of liberty, freedom, and independence. In the political arena, workers only believed equality to be possible if each member of the polity was

Evolution of wage policy   53 economically independent. In the guise of voluntary contract, workers perceived a compulsion that would make it impossible for them to exercise their citizenship. Those receiving wages could not possibly participate in the civic life as the equals of their employers. The wage system was actually seen as promoting the formation of an aristocracy. On the contrary, liberty, as it was understood at the time and very much owing to the influence of Locke, was defined as the complete ownership of one’s own labor and by extension one’s self. Prior to the Civil War, the free labor ideology in the United States had united northern workers and their employers. It promoted both a hatred of slavery and an equally strong force in mobilizing wage labor. According to this view, slavery was not viewed as a monolith, but a constantly shifting field of exploitation. The definition of slavery metaphor argued that economic deprivation inevitably damaged both the person and the polity, and that wages necessarily produced economic injustice, which was often conceived of as a form of robbery. Lawrence Glickman (1997) maintains that there are two related but fundamentally distinct ways of thinking about slavery and the worth of labor. The first is producerism, which maintains that wage slavery resulted from differences in value between what workers produced and what they earned in wages. This view assumed that the difference was indeed stolen from the workers. The second is consumerism, which is more concerned about the inadequacy of the wage to meet the needs of workers as supporters of families. The wage system was flawed because of its seeming inability to reward the nation’s producers with a comfortable republican life style. It was the producerist rhetoric that was dominant during the first years following the Civil War, but as workers came to accept wage labor, the critique shifted to the consumerist rhetoric towards the end of the nineteenth century. Wage labor was viewed as a degraded status. Workers earning wages viewed themselves as being akin to prostitutes. The preservation of manhood meant avoiding wages. By selling their labor on the market, men who earned wages lost ownership of themselves to somebody else with great power over them. Wage labor also effectively subverted the working-­ class gender system as men now found themselves dependent upon the bosses in the same way that women had always been dependent on men in the patriarchal family. Low wages effectively brought shame. The wage contract was nonetheless viewed as an essential element in the development of an industrial manufacturing based economy. Wage labor, however, was not necessarily considered the same as free labor. Free labor was the ideal to be achieved; wage labor was the reality, and a system that denoted the unfree nature of labor. By the 1820s, the wage contract was becoming more commonplace and it was now establishing the norm by which other social and political relationships would be defined (Montgomery 1993, pp. 12–13). Under the old labor agreements, work was not necessarily viewed as a respectable enterprise. But notions of work were also being transformed. The dispute between the North and South was not only a matter of slavery, but over a way of life predicated on different economic structures. Within this republican frame of mind, slavery and independence were not compatible. The

54   Evolution of wage policy concept of citizenship was literally grounded in a system of property ownership. The republican tradition in the United States stressed the independence of individuals as the basis for citizenship (Foner 1998). As Martin Shefter (1986) explains, the term “wage slavery” was widely used in the years following the Civil War by all segments of the American labor reform movement, and in the vocabulary of the American worker the term “slavery” was contrasted with “manliness.” About 40 percent of the American working class lived in poverty and earned less than $500 a year during the late 1800s, which at the time was the minimum necessary to afford an adequate diet (pp. 203–206). Property owners were both independent and free citizens of the republic; slaves were not. But the economic foundations of the early republic that allowed individuals to be independent were changing. The great economic transformations that Karl Polanyi (1957) wrote about were forcing more and more people into wage labor. And yet, the laws that governed the employer/employee relationship – the so-­called labor contract – were not so quick to change. Under the old feudalistic system, workers, while they had no formal property rights as such, could at least be assured of being provided for materially. Under the new system, there were no such guarantees and labor law was slow to recognize these rights. It thus fell upon institutions of labor to secure them, but unions under the old system were viewed as an encroachment upon the free labor contract (Hattam 1993). The challenge for organized labor was to make wage labor respectable, but it was also to ground the essence of citizenship within a system of wage labor, where property ownership was not in land but in the labor power workers could sell. The idea that work was respectable and a basis for full fledged citizenship certainly had its roots in republican political thought. Classical republicanism assumed that a citizen achieved his greatest moral fulfillment from participating in a self-­governing republic. When citizens were virtuous, which meant that they were willing to sacrifice their private interests for the sake of the general community, they also achieved liberty. Sacrifice also meant a willingness to serve in public office for the sake of working for the common good. But as Gordon Wood explains, there were clearly economic implications to this: This virtue could be found only in a republic of equal, active, and independent citizens. To be completely virtuous citizens, men – never women, because it was assumed they were never independent – had to be free from dependence and from the petty interests of the marketplace. Any loss of independence and virtue was corruption. (1993, p. 104) What this meant, then, was that one could not be an autonomous individual if one was economically dependent on others, which included being paid by masters. Therefore, since liberty and independence were the bases for virtue, one who was not independent would not qualify as a citizen. Although this would preclude those who worked for wages in the employ of others on the grounds

Evolution of wage policy   55 that they lacked independence and were totally absorbed in their narrow occupations, it could also include those engaged in the liberal professions if they too were too dependent on their work for their incomes. They would be no more qualified for positions of virtuous leadership than mechanics and other manual laborers (Wood 1993, pp. 106–107). The overall point was that economic independence would in turn enable one to be politically independent. The ideal worker achieved independence through the ownership of property. By owning and working his own property, he would not be dependent on others. But the notion that work was indeed respectable was also a gospel of the Protestant bourgeoisie that held that work made men useful in a world in which there was also economic scarcity. If individuals were free to work they were also empowered to live lives of independence, and this independence included the potential to acquire their own wealth. The rise of industrialization, however, upset assumptions that hard work would necessarily result in success. An economy now revolving around factories challenged each of the certainties upon which the work ethic rested and also unsettled the easy equation of work and morality that existed in the minds of many. Work in the factories, at the beck and call of owners, no longer appeared to be that which one did of one’s free will. The worker no longer felt as though he owned his own labor, rather he sold it to somebody else for a pittance and while in that somebody else’s employ, he was in fact controlled (Rodgers 1978). The reality seemed to confirm Marx’s conception of capitalist exploitation of labor whereby the factory owner paying for 12 hours of service was in reality getting 24 hours of control over the worker. Because the worker was expected to return to work the next day refreshed for a new day of work, the worker did not have the option of using the other 12 hours in working for somebody else for more pay. Glickman (1997) argues that most workers, especially organized workers, who sold their labor on the market – that is, people who earned wages – lost ownership of themselves to someone else who then had a great amount of power over them. Given how wage workers were viewed within the context of the republican tradition, workers felt that they had lost control. The economic transformations that were taking place also effectively subverted the gender system within the working class in the sense that men in their employment situations assumed a dependent status analogous to women in the home. Men forced to work for wages were no longer able to see themselves as independent citizens, but in effect became children, or even “wage slaves,” in much the same way as women. Because wages were so low men who worked for wages saw themselves as no different from prostitutes. The concept of a living wage, however, would enable them to rise above the shameful image of a prostitute. Social reformers and labor leaders who advocated living wages during the late part of the nineteenth century viewed the living wage as that which would enable workers to achieve full citizenship. One could only be independent to the extent that one could control one’s own labor. Those forced to work for others, to in fact work for wages, lost control of their labor and hence themselves. By this notion, then, wage labor was just another version of slavery.

56   Evolution of wage policy At the heart of republican ideology was the concept of “free labor,” a doctrine which very much provided a model of the good society. Eric Foner (1995) argues that during the antebellum period, especially in northern culture and politics, the dignity of labor had been a constant theme. The dignity of labor was part of American culture from the very beginning, which could be traced to the fact that most Americans came from a Protestant background in which the nobility of labor was an article of faith. In the Republican social outlook, the key figure was the small independent entrepreneur. And yet, this free labor ideology, in language very similar to old Lockean liberalism, held that all value was created by labor and that economic independence was something that all men could and should aspire to. These notions, of course, stemmed from a period in which economic life was organized around independent craftsmen and yeomen prior to the Civil War (Foner 1995, pp. 11–31). Over time, the same republican language that was used to legitimize personal independence, would also be used to justify the organization of unions (Bridges 1986, p.  164). And it was the concept of the Living Wage that ultimately gave the unions their appeal and provided the language for galvanizing mass support. The early union movement, which sought to obtain “living wages” was really about removing that stigma. It was about affording honor to the enterprise of work. And yet, it became a model for political development, as the fight for living wages, and union recognition, would have to be fought on the political stage. The critical point, however, was that it was the changing structure of the economy that provided impetus for political development. One could argue that evolving conceptions of contract, particularly those that made wage labor the norm, did constitute a form of wage policy, albeit in putative form. The wage policy was merely assumed in the form of liberty of contract. From the late nineteenth century through the early 1930s, liberty of contract was indeed the reigning wage policy. In its extreme, as epitomized by the Lochner era, government could not sanction a more formal and positive wage policy on the grounds that it would be violating the workers’ liberty of contract. Even if workers were working in miserable conditions for long hours and low wages, they were nonetheless considered free, through their agency, to enter into the agreement. They weren’t slaves because they were already free to have and sell their labor to somebody else. Perhaps what distinguishes the Free Labor period with its feudalistic constraints from what would emerge later was that wage policy, to the extent that it was an outgrowth of labor law, was made by the courts whereas later it would be taken up by legislatures who were more eager to respond to the masses. It was in essence the difference between common and positive law.

Labor unions With the advent of industrialization and the Fordist economy based on assembly line mass production, workers in the factories found themselves earning wages that were beneath subsistence. Factory wages were barely enough to support

Evolution of wage policy   57 themselves let alone their families. It wasn’t only low wages that were problematic, but that the work they were doing was viewed as having no greater dignity than slave labor. Recognition that a more formal type of wage policy might be necessary was really a reaction to the loss of dignity and independence due to wage labor. To achieve a wage level beyond the basic wage necessary for subsistence would still require collective action. Rather than being a substitute for unionism, it was considered to be a necessary complement to it. From their standpoint, it would be most unfortunate if it were allowed to obscure the value and necessity of voluntary action (Hutchinson 1919, pp. 88–89, 175, 177–178). The problems arising from industrialism highlighted the need for some type of wage policy, if even an informal one, for the purpose of addressing the obvious asymmetrical power relationships. At the same time, those advocating for institutions in the marketplace representing the interests of workers recognized the asymmetrical power relationship between employers and their workers. According to the neoclassical model, there was no difference between labor and other goods and services. Both firms and individual workers in competitive markets were considered to be “wage takers,” and were therefore assumed to have no bargaining power. This meant that in theory, neither one had the ability to exploit the other. Institutional economists, however, especially those writing during the Progressive period categorically rejected this analysis. On the contrary, workers faced a marked inequality of bargaining power and consequently suffered from the exploitive and otherwise unjust wages that were offered them (Kaufman 2005). The standard rationale for collective bargaining coming from the institutionalist perspective, then, rests on two fundamental propositions. The first is that real world labor markets contain significant imperfections that lead to imperfect competition, externalities and public goods. And the second is that in a system of individual bargaining, these imperfections cause wages and working conditions to be depressed below levels that would exist were labor markets more competitive. The economic rationale for labor unions, then, is that collective bargaining offsets these imperfections, and may even result in wages and working conditions in closer approximation of competitive outcomes (Kaufman 1991). Early institutional labor economists emphasized that the labor market imperfectly gave employers superior bargaining power relative to individual employees. Because of the inequality in bargaining power, there really was nothing to prevent the economic coercion of workers. Among the early Progressive thinkers, Robert Hale reformulated the problem of coercion to demonstrate that the sphere of private “voluntary” market relations was indistinguishable from public power exercised in a direct fashion. Capitalists especially, through their state conferred property rights, enjoyed coercive power through their ability to compel exchanges on terms that they would consent to. By virtue of their ability to threaten to withhold their capital or the products of their capital from those who required them, they would be able to compel. The one who did not own property, i.e. the typical low-­wage worker, or the typical industrial worker, whose only option was to bargain with say the one main property owner for a

58   Evolution of wage policy job in order to attain subsistence, was essentially being coerced. If background circumstances were such that individual choices were effectively circumscribed, then there was no question that coercion was ubiquitous and that workers, especially those that did not own property, really did not enjoy the same freedom as those with property, i.e. employers. As far as Hale was concerned, absolute freedom wasn’t really possible, and that all one could really hope for at best was relative freedom (Fried 1998). The logical implication being that labor market institutions aimed at addressing this asymmetry would be needed. And to the extent that they would be created, they would form the foundation of a more formal wage policy. Early institutional economists viewed trade unions as a means by which workers obtained bargaining power in both external labor markets and the internal governance structures of firms. They believed that greater equality in bargaining power would lead to efficiency and equity in the labor market system. These same reformers, however, also sought to promote a form of industrial democracy. The institutionalists viewed labor unions as having both an economic and political function. According to Bruce Kaufman (2000), the economic function consisted of redistributing wealth and protecting and also advancing wages, hours, and conditions of labor. This could be accomplished by replacing the competitive sale of labor, which was individual bargaining, with collective bargaining. Although the neoclassical model viewed this as inefficient, institutionalists did not view the unions as undermining efficiency. This is because institutionalists saw the end-­purpose of economic activity very differently from the neoclassicals. Neoclassicals assumed that the end-­purpose activity was to satisfy consumer wants and gauge the efficiency of the economy by the degree to which it performed these functions. For the institutionalists, the end-­purpose of economic activity was to provide maximum opportunities for human growth and development – what John Commons referred to as “expansion of the human will.” In the neoclassical model labor is simply treated as a factor of production, but in the institutional model the social efficacy of economic policies and institutions is judged by the extent to which they promote the advancement of the human condition. The activity and conditions of work assume an independent value in assessing individual and social welfare. This perspective does not simply view work as a cumbersome process solely for the purpose of earning a living, rather it is activity that affords valuable opportunities for developing self-­ control, expressing personal creativity and the socialization that derives from working with others. Competition in the labor market was actually considered to be anti-­social due to the existence of considerable involuntary unemployment. Unemployment only leads to a downward spiral in wages and working conditions that not only would harm the workforce, but would exacerbate the problem of inadequate demand in the economy. Given that labor markets were imperfect and that property rights were effectively skewed, the early institutionalists regarded free competition as a recipe for inefficiency. Therefore, they believed that unions would stabilize the macro-­economy by preventing deflationary wage cuts in recessions and depres-

Evolution of wage policy   59 sions. Unions would also effectively force employers to take into account both the full social cost of labor and the human essence of labor. Unions were also viewed as part of a governance structure of industry and a vehicle for promoting democracy in the employment relationship. The essence of institutional economics is an analysis of how collective action determines the “rules of the game” by which the economy operates. The firm was viewed as a form of government or governance structure. Industrial democracy, then, consisted of several elements. The first element was to create a method of voice – participation and representation. The second key element would be to substitute the “rule-­by-law” for “rule-­by-men.” The third element was for an impartial judicial procedure to be available to all parties when disputes arose. And the fourth key element would be for there to be a reasonable balance between employers and workers. Through the exercise of union voice and power, the early institutionalists sought to democratize the employment relationship. Under liberty of contract, the employment relationship while being contractual, was unequal in that law and custom gave employers largely unrestricted rights of authority over their workers. The most compelling rationale for unions was to level the playing field. In his Wealth of Nations, Adam Smith (1976) actually acknowledges a potentially useful social role for unions. Smith observed: What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour. It is not, however, difficult to foresee which of the two parties must upon all ordinary occasions, have the advantage in the dispute and force the other into compliance with their terms. Although the master is able to hold out longer, Smith stresses the importance of the workers to the enterprise, which is essentially cooperative. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his masters as his master is to him, but the necessity is not so immediate. (pp. 74–75) Perhaps it is wise to remember that Adam Smith was above all a moral philosopher whose theory of free markets was really in the cause of pursuing a more just society. According to Samuel Fleischacker (2004), one of Smith’s most important contributions might have been a change in attitude towards the poor. He very much opposed the prevalent position of the time that the poor were in any way

60   Evolution of wage policy inferior to the well-­off. Asserting that on the contrary, they possessed the same native abilities as everybody else. He thought it better for the poor person to be independent rather than dependent on their superiors. Whether Smith would have gone so far as to embrace a formal wage policy as a means of decreasing the dependence of the poor on their superiors is an open question, arguably a case can be made in support of one based on Smith’s reasoning. This reasoning was only echoed a century later by Alfred Marshall when he observed that in a commodities market there was a likelihood that advantages in bargaining would be well distributed among the two opposing sides, but that in a labor market that would not be true. The advantage would be held by the buyers of labor, rather than the sellers. The early institutionalists were somewhat ambivalent about competition (Kaufman 2007, p. 47). Robert Prasch (1995) argues that the neoclassical model is really an idealized view of the market which assumes one marketplace, but fails to take into account different markets for different goods. Theories of competition assume a specific type of market, but they don’t allow for the fact that other types of markets may exist. Rather there are two characteristic types of market participants: those who trade in the market to fulfill their needs and those who trade in the market in order to fulfill their wants. Crucial to the success of neoclassical theory is the assumption that everybody who enters into an exchange is fully constituted independently of the market. Hence they are all equal in their bargaining power, with each participant able to in effect determine under what conditions to enter into an exchange. Because of their bargaining power, employers do not have to be conscious of their bargaining power; rather they simply maximize their profits in a manner indicated by standard theory. Therefore, a wants trader has the option of withdrawing from the market if the proposed exchange fails to meet his/her profit-­maximizing criteria. The wants trader is by definition, then, less dependent on the market due to his or her ability to withdraw at any time. This also implies that the wants trader possesses other resources that can be relied upon until such time that the trading conditions are to the wants trader’s advantage. The needs trader, however, does not enjoy the same luxury and may be forced to accept an exchange that is less than ideal, and which in some cases may be considered exploitive because it meets a basic need such as eating. As most low-­wage earners – which would characterize the mass of industrial workers in this period – were essentially needs traders without real bargaining power, they were in reality forced to accept whatever conditions were offered at the lowest wage rates because they didn’t really have the ability to hold out for something better. Consequently, they didn’t enjoy the same freedom as those with greater bargaining power. The neoclassical economist will of course respond that the needs trader is still able to negotiate and hold out for better terms. Even if holding out for better terms means starving, a choice has been made. The higher costs of doing so does not necessarily negate freedom of choice. But the neoclassical argument more fundamentally misses the point: it isn’t the wage demands that workers make that determine whether they are employed; rather it is the aggregate demand for

Evolution of wage policy   61 goods and services (Minsky 1986, pp. 123–124). John Maynard Keynes (1964) explained that it was the fundamental assumption of classical theory that labor could always reduce its real wage by accepting a reduction on its money wages. Workers could always ensure their continued employment by adjusting their wages downward to the point where employers would demand their labor. But there was no available means by which labor collectively could “bring the wage-­ goods equivalent of the general level of money wages into conformity with the marginal disutility of the current volume of employment.” As far as Keynes was concerned, a reduction in money wages would have no lasting tendency to increase employment other than by virtue of its consequences with regards to either the propensity to consume for the entire community or the schedule of marginal efficiency of capital. A reduction in money wages would reduce prices somewhat, and would involve a redistribution of real income from wage-­earners to other factors. And this transfer from wage earners to other factors would in most likelihood diminish the propensity to consume, which in turn would only result in a lower demand for goods and services, thereby resulting in an even greater contraction of productive industry (pp. 14, 262). The point is that flexible wages would not assure full employment if effective demand was deficient (Weintraub 1978–1979). For institutionalists, equality of bargaining power became a normative purpose. Inequality of bargaining, on the other hand, was bound to arise at two different levels in the market exchange process: greatly unequal endowments and/or skewed rules of the game. They advanced a number of reasons for why labor markets were imperfect and thus led to a worker disadvantage in wage bargaining. First, labor markets were quoted price markets, in which wages were administered prices. This meant that contrary to the myth that workers would bargain over wages, they were really placed in the position, because of their unequal position, of “take it or leave it.” Second, the existence of imperfect and asymmetric information in the labor market resulted in unequal bargaining. Third, labor markets were segmented and discriminatory, and fourth labor would not be inventoried, which meant that workers typically only had a small financial reserve fund. In other words, the economically dependent position of workers ultimately meant that workers would take whatever was available for sustenance, thereby forestalling free negotiation. While institutionalists recognized that wage adjustments played an important and necessary role in allocating labor and maintaining a balance between supply and demand, they also believed that wage cuts not only failed to restore equilibrium in labor markets, but that they more often worsened the situation. Wage cuts reduced consumer purchasing power thereby aggravating demand and they also resulted in lower morale and productivity. And if wage cuts could be allowed to proceed, they would lead to a deflationary process of “destructive competition” (Kaufman 2007, pp.  55–56). In a survey of business executives during the 1930s and 1940s, Richard Lester (1946), a later institutional economist, observed that business executives tended to think that costs and profits were contingent on the rate of output, and not the other way around. As far as

62   Evolution of wage policy these executives were concerned, employment levels were not determined by wages rates, but by the rate of output. This would, of course, suggest that no matter how low workers are willing to reduce their wage demands, if there is no demand for their firms’ goods and services, they simply will not be employed. Or as Keynes (1964) explained, if workers were to respond to gradually diminishing employment conditions by offering to work at a gradually diminishing money wage, this would not on the whole have the effect of increasing the demand for their labor services. Rather it would influence output (p. 267). Sometimes competition was viewed positively and other times it was viewed negatively. Competition, after all, was viewed to be fair and balanced when the rules of the game did not unduly favor one side over the other, both sides enjoyed reasonably equal opportunities and access to markets, and neither the buyers nor sellers would have a lopsided advantage in resources. Collective bargaining was thus conceived of as a method of market workplace rule making and regulation. But unions were to have a second face as well: to use rule making and regulation to introduce joint decision making and due process into firms’ governance structure. Early institutional economists recognized that unions had both negative and positive effects on economic efficiency and social welfare. Therefore, they evaluated unions on the basis of cost–benefit analysis. They especially emphasized the valuable role that unions played in giving workers voice and representation in the larger political process of the nation. They no doubt viewed unions as akin to labor market monopolies or cartels, but they were willing to set aside their judgments because economic theory just did not capture the numerous “functions” that actually impeded the competitive process. Rather they defended the exercise of union monopoly power on the grounds that it provided workers a defensive and countervailing form of power. It would balance the employer’s superiority of power in the market and protect workers from exploitation and unreasonable conditions. Moreover, they also concluded that unions reduced wage dispersion among organized production workers in the plant. In short, they were making an argument for the role of institutions, whether they were unions or statutory minimum wages, to bolster wages and ultimately achieve macroeconomic gain. Commons, in particular, considered the industrial system to be a form of despotism whereby the strong ruled the weak through the threat of physical harm as well as the ability to seize people’s property without either notice or compensation. The typical wage worker possessed no property rights in his only source of income – his job – which meant that his livelihood could be confiscated at whim. Institutionalists considered power as the ability to influence, and if one party to the employment relationship had a preponderance of power, it was more than likely that it would be used in an arbitrary and onerous fashion. To them, the process of collective bargaining directly paralleled the legislative function of the state. Consequently, they developed a reform strategy with three major goals. The first goal was to stabilize product and labor markets so as to smooth the disruptive fluctuations in production and employment. This also entailed preventing the excess supply conditions from dragging down labor standards, providing

Evolution of wage policy   63 workers with secure, full-­time jobs and eliminating unemployment. The second goal was to achieve equality of bargaining power between workers and employers. The aim was to effectively redistribute property rights, balance endowments, and use countervailing forces of market power to make competition in the labor market fair and balanced. And the third goal was to achieve industrial democracy or “constitutional government in industry.” Here the aim was to carry into the industrial sphere the basic democratic practices enjoyed by workers in the political sphere. These goals were envisaged as coming to fruition through four methods. First, trade unionism and collective bargaining. Second, legal enactment in the form of protective labor law and social insurance programs. Third, progressive personnel/human resource management. And fourth, macroeconomic stabilization and full employment through monetary, fiscal, and income-­ redistribution policies. There was also a fifth method, which consisted of a more general program of institutional and political reform intended to integrate labor as a class into American society and to make it an equal partner in the economic enterprise. As much as institutional economists were making a strong theoretical case for labor market institutions, and by extension wage policy, the feudalistic constraints imposed by the courts made such reform a challenging proposition. The courts generally considered unions to be monopolies in restraint of trade. In this vein, they only infringed upon the property rights of managers, and thus they were also violating the liberty of contract of workers. It wasn’t until a major economic crisis hit that it would force government to take more active steps aimed at shoring up wage rates. Ultimately, when the National Labor Relations Act (NLRA) was passed during the Great Depression, the preamble did attribute the depression to labor’s unequal bargaining power (Kaufman 2007). And yet, insofar as these reforms were ultimately about giving workers voice and equalizing their bargaining position through the creation and then legitimation of institutions that would also boost their wages, they represented the foundations of formal wage policy.

Minimum wages The logic behind collective bargaining would no doubt apply to a wage floor intended to extend a measure of coverage to those not covered by collective-­ bargaining agreements. Many of the early arguments for the minimum wage revolved around assumptions made by institutional economists and other Progressives that workers faced a marked inequality of bargaining power and consequently suffered from the exploitive and otherwise unjust wages that were offered them (Kaufman 2005). A minimum wage would serve as a tool to correct for the lack of collective bargaining power. By raising the wages of those at the bottom, the minimum wage would effectively accomplish for non-­ unionized workers what labor unions through collective bargaining were able to accomplish for their members: it would give them a sense of voice by establishing a set of standards through the force of law that could also be enforced by the state (Tarling and Wilkinson 1997, p. 103). James Galbraith (1998), for

64   Evolution of wage policy instance, maintains that labor market institutions, particularly the minimum wage offer low-­wage workers a measure of monopoly power that they otherwise lack. For the minimum wage worker who isn’t a union member, the minimum wage affords that worker the type of monopoly power only enjoyed by the union member. Given the unequal relationships between those who work and those who hire workers, institutional structures, such as wage floors and unions, are necessary to make for a more level playing field. In the absence of all workers being unionized, the minimum wage offers a modicum of monopoly power to workers, especially in low-­wage and low-­skilled labor markets to in effect counterbalance the monopoly power of employers. “Minimum wage laws can move people en masse from the crowded first floor toward the second or third in our wage building” (p. 61). These institutions are essential because the so-­called “natural” wage structure fails to achieve an equitable wage distribution. Early economic arguments for the minimum wage revolved around achieving greater efficiency because it would allow workers to better maintain themselves. Among the foremost proponents of this view was English economist Sidney Webb (1912) who argued that a legal minimum wage would have the positive effect of increasing productivity. A wage floor would be beneficial to employees and employers alike, for better paid people would be able to work harder because they would have greater energy due, in large measure, to their ability to better sustain themselves. Moreover, the greater morale among employees deriving from higher wage rates would lead to greater loyalty to their employers. A legal minimum wage, then, would positively increase the productivity of the nation’s industry by ensuring that those who are left unemployed would be the least productive members of the workforce. Not only would employers be forced to look for the best workers so as to increase their overall productivity, employees would be forced to develop their skills so that they could be counted among the better class of workers. Ironically, the logic of this efficiency was perhaps best summed up by George Stigler (1946) who argued that an effective minimum wage does one of two things: it either results in the layoff of those workers whose value is less than the minimum or it results in an increase in productivity among low-­efficiency workers. Rarely does the contemporary neoclassical economist couch the efficiency wage in terms of the Webb effect; but in terms of shirking. That is, in a competitive market workers will take steps to avoid shirking their duties when employers pay them higher wages. When paid a higher wage, workers have an incentive to hold onto their jobs because the costs associated with job loss are now higher. Because workers will seek to avoid shirking, their employers too will benefit from the savings on monitoring costs. These savings actually offset higher wage costs and at the same time offer a positive inducement to work. Consequently, workers work harder and become more productive (Shapiro and Stiglitz 1984). Early neoclassical economist John Bates Clark (1913) made a similar argument when he argued that the absence of a minimum wage essentially triggered

Evolution of wage policy   65 a process whereby employers would pick from the ranks of the most necessitous men and women. As he put it: Mere need and helplessness give citizens a certain valid claim on the state, even though it has done nothing to cause their troubles. Privation that is traceable to social defects makes a more cogent claim. This, in fact, is the basis of the demand for minimum wage laws, since the ill-­paid workers are regarded as victims of social arrangements. (p. 294) Echoing this line of thought businessman Edward Filene (1923) maintained that higher wages would result in higher quality workers. Whereas contemporary neoclassical arguments hold that paying low-­skilled workers more than their worth is inefficient, and that it is further inefficient to invest in their training because they may leave and take their newly acquired skills and training to work for another, the earlier arguments for the minimum wage simply maintained the inefficiency of not paying a higher wage. Employers simply would not be able to get effective organization out of those who weren’t intelligent, and they couldn’t be intelligent if they did not have enough to live on properly. Progressive reformers also maintained that firms paying less than that which was necessary to support their labor in dignity were essentially parasites on the community because the difference ultimately came from someplace (Lehrer 1987). According to Marilyn Power (1999), the parasitic-­industry argument proved to be a powerful tool for those seeking to establish a minimum wage specifically for women. By adopting this analysis, reformers were able to offer two separate explanations for the existence of unfairly low wages. The first explanation had to do with the comparative disadvantage that unorganized individual workers had with their employers when it came to bargaining. The second explanation was that employers paying low wages were simply taking advantage of their workers’ vulnerable position, and this made them parasites on society because they were effectively receiving a subsidy from the community. Parasitic employers who paid less than the true social costs of labor could undersell their competition. Moreover, they would not be motivated to lower their costs through innovation or organization or production techniques. Reformers argued that people who work deserve a “living wage” for their efforts, and the criterion for this living wage would be a minimal level of subsistence (Persons 1919; Hutchinson 1919; Prasch 1998). Emile Hutchinson (1919) in particular noted that a minimum wage that allowed women to maintain themselves in dignity was really about the maintenance of a “moral lifestyle.” The wages that women were able to command were important because “It decides the girl’s companionships, her amusements, her ability to gratify without danger her natural and reasonable tastes, her very capacity for resistance to temptation. Its physical effects open the way to moral dangers” (p. 50). A woman paid wages sufficient to maintain herself would not be forced to resort to prostitution, which in many places at the time was still legal.

66   Evolution of wage policy According to Deborah Figart, Ellen Mutari and Marilyn Power (2002), these were regarded as “essentialist arguments” because they made reference to women’s essentially different nature from men. But reformers drew on other arguments as well. They made the “pragmatic argument” that women were the lowest-­paid workers and consequently they were in desperate circumstances. Because women weren’t unionized, a legislated minimum would thus be an appropriate response. Moreover, a minimum wage, reformers argued, would be in the public interest on the grounds that the public would benefit from the next generation being healthy and brought up well. Women, as the mothers of the next generation, were viewed as a social asset, and for children to be brought up by women who were either weak, sick or immoral would in fact be contrary to the public interest. Therefore, it would be a matter of the public interest to maintain the social practices of the day that defined women as mothers, and to the extent that a minimum wage might serve to maintain this social convention, it too was to be deemed in the public interest. The Supreme Court had said as much when it upheld a maximum hours law for women in the 1908 case of Muller v. Oregon. Society had a compelling public interest in protecting a woman’s maternal function, and thus her “liberty of contract” could be infringed upon. Biological differences essentially required protective legislation. And the various arguments by reformers, whether essentialist or public interest were essentially building on this underlying theme. Women, in short, needed to be paid a higher wage because they were in a vulnerable position (pp. 74–79). In this vein reformers were simply offering another variant of the efficiency argument. Still, the voluntarism upon which liberty of contract rested was considered a powerful argument during the time. Nobody was abandoning liberty of contract in favor of wage-­setting institutions; only that some did not enjoy the same liberty of contract as others, and therefore needed greater protection. Ironically, the US Supreme Court would use the excuse of the Nineteenth Amendment – that gave women the right to vote – to deny women that protection and in turn assert that they too enjoyed liberty of contract. In Adkins v. Children’s Hospital (1923) only 15 years later the Supreme Court held that a minimum wage statute applying only to women in the District of Columbia was an unconstitutional violation of a women’s liberty of contract. Because women could now vote, they no longer needed special protective legislation (Levin-­Waldman 2001, ch. 3). The biological differences that the Court cited in Muller for why protective legislation was essential were somehow eliminated via constitutional amendment. And yet, it is worth noting that past legacies would nonetheless serve to constrain the scope of future wage policy, making it all but impossible to establish the same type of wage-­setting institutions found in the social market economies of Europe. The first minimum wage law in the United States was not adopted until 1912 in Massachusetts. A year later, eight states followed suit. Although the FLSA of 1938 would apply to men and women alike and fixed wages through legislative statute, the early laws only applied to women and were fixed either through wage boards or commissions. The primary components of the first law, for instance,

Evolution of wage policy   67 included a commission to administer the program and tripartite wage boards to make recommendations with regards to wage rates. Recommendations were based on the principle of maintaining an adequate cost of living, with general consideration given to the financial health of those industries and occupations involved. Enforcement was to be through “public opinion” as opposed to legal sanction. Although it did establish the principle of minimum wage legislation in the United States, the Massachusetts law was relatively weak (Nordlund 1997). Wage boards considered the subsistence needs of women, particularly in the sweated industries, but they also took into account the health of the industries to which these laws would apply. In determining wage rates, these wage boards would typically weigh an employer’s ability to pay higher wages against the needs of women for subsistence wages. In terms of political language – that language which would be acceptable to employers and lawyers who might have to argue these matters later in court – it would not suffice to compare the health of employees with that of the industries for which they worked. Rather it would have to be clear that there would indeed be reciprocal benefits to the employers. And yet, wage boards became the basis of wage policy in Great Britain. The 1909 Trade Boards Act in Britain, for example, was initially intended to wipe out “sweating.” In sweating, manufacturers supplied materials to individuals who might work at home and small workshops, and then collected the finished goods. Workers weren’t paid wages per se, but were paid by the piece produced. It was hoped that the Trade Boards would constitute a first step towards either a universal minimum wage that would soon replace the wage boards or at least that the trade board system would be expanded into most of the economy (Waltman 2008, pp. 42–49). In France, labor market institutions have been in stark contrast to the United States. France has been characterized by high minimum wages and strong employment protective legislation. Wage rates in France tend to be set in a more centralized fashion. In the aftermath of World War II, the first national legal minimum hourly wage was introduced – the Minimum Interbranch Guaranteed Wage (SMIG), which was also indexed to inflation. Conceived as a “fair wage” it was thought that it would balance the relationship between wage earner and employer in the face of disequilibria that would tend to favor employers. This was later transformed in 1970 into the SMIC – the interprofessional, indexed-­ linked growth minimum wage – and was automatically indexed to both inflation and particularly to real growth (Caroli and Gautie 2008). Although France has been characterized by higher rates of unemployment, it also had much reduced incidence of low-­wage work. Unlike the United States, low-­wage work in France is not identical to poverty. Rather the minimum wage has played a key role in compressing the distribution of wages at the bottom. One of the key explanations for the small number of low-­wage workers in France is the existence of the minimum wage. Another consequence of the high minimum wage has been a deficit in the number of low-­skilled, potentially labor-­intensive activities (Caroli et al. 2008).

68   Evolution of wage policy Denmark also presents an interesting contrast, as it tends to be characterized by what is referred to as the “Danish model,” which is comprised of agreements between employers and trade unions. These agreements are much more important as a regulatory mechanism than legislation and government interventions. One of the features of the Danish labor market is that the wage distribution in Denmark is much more compressed than in the United States. This means that there isn’t quite the same gap between the top and the bottom. Denmark has a thoroughly organized labor market, and labor market issues have historically been settled in centralized negotiations between employers and employee representatives without government interference. As a consequence of the Danish model, Denmark does not have a minimum wage law as do other countries. Employers, however, did respond to union pressure at general wage bargaining in 1977 and agreed on minimum tariffs concerning all employees and members of the Danish Employees’ Federation. For the trade unions, the introduction of a minimum tariff was seen as a victorious step in the ongoing struggle to raise the wages of low-­wage workers, concentrated among women and low-­skilled men. The new wage policy was called the “solidarity wage policy.” And yet, despite unionism as the primary form of wage policy in Denmark, Danish workers still aren’t as well protected as they are in the rest of Europe. In some cases, they are as unprotected as they are in the United States (Westergaard-­Nielson 2008). The Netherlands actually parallels the British model of wage councils. The debate over low pay and employment date back to the aftermath of World War II. For a majority of workers under the 1950 Worker Council Act, workers were entitled to representation in joint work councils in the firm, initially chaired by employees. Prior to 1980, low pay was an integral part of general wage formation. After the war until the early 1960s, all outcomes of collective wage negotiation had to be officially approved by government-­appointed officials. Social partners – a variety of different actors in business, labor, and government – in 1964 agreed between them on an economy-­wide minimum wage. Consequently, low-­pay, which was identified as the minimum wage, came to be treated separately from wages in general following 1964. And yet, the evolution of both wages and social insurance changed dramatically during and after the deep recession and second oil crisis of 1980, thus beginning a period of prolonged wage restraint and welfare reform. From the 1980s on, negotiated real wage growth was moderated (Salverda et al. 2008). Sweden too, influenced by the Rehn-­Meidner model, has long had what might be described as an active labor policy. In the aftermath of World War I, a strong emphasis was placed on work, and cash advances and support were discouraged. Unemployed workers were expected to either obtain a job on the open labor market through employment agencies or accept a poorly paid public works job. A continuing theme of labor market policy was that the labor market should come to work better. Labor market policy was a key issue of the Labor movement’s committee program for the post-­war period, published shortly before the end of World War II. Although the three main components of active labor policy

Evolution of wage policy   69 were full employment; a fair income distribution and higher standard of living; and higher efficiency and greater democracy in the economy, the later component of “solidaristic wage policy” is ultimately what became the most important from the vantage point of wage policy (Wadensjo 2001). On one level, solidaristic wage policy implies equal pay for equal work regardless of the profitability of the companies, but on another the aim was to establish fair wage differentials rather than general wage equalization. As much as wage differences between earners was to be expected, it was also believed that those differences should reflect objective differences in the working environment, responsibility, experience and education; not short-­run profits or labor conditions. For Rehn and Meidner, solidaristic wage policy would encourage economic growth, mainly through structural change and alleviating inflationary wage–wage races. As Lennart Erixson explains: By solidaristic wage policy, a pull mechanism is replaced by a push mechanism, or better, a rationing mechanism, in labour markets. Labor mobility is maintained by the threatened unemployment in unprofitable sectors but also by greater number of vacancies in profitable sectors. (p. 19) To many social scientists, the “Swedish Model” has been synonymous with the Rehn-­Meidner model. In practice, however, the Swedish model might have been much more rigid and less flexible in adapting to changes in the world economy and Swedish society than often thought. There were actually four main points to Rehn-­Meidner. First, there would be tight fiscal policy to fight inflation. Total demand should be restrained to avoid overheating and rapid cost increases. Second, a selective labor market policy would fight unemployment in the event that retrenchment caused problems in the labor market. Third, an active labor market policy would be used to both pull and push workers to new job opportunities. Labor market policy was to be one of transition back to work rather than one of support for people while unemployed. And fourth, a solidaristic wage policy would aim to achieve equal pay for equal work. The aim was to achieve a more just wage structure, and also to reduce wage competition. The goal wasn’t just egalitarian, but to apply pressure on firms so that it would become more difficult for one firm to undersell another simply by paying lower wages. Rather as an aspect of economic planning, weak firms would be pushed out of business while high-­productivity firms would prosper. During the 1930s the Swedish model was considered to be the “MiddleWay.” To Swedes it represented a much more elaborate set of institutions and policies developed during the 1950s and 1960s. But the functioning of the Swedish model deteriorated during the 1970s and 1980s. And yet, this was also against the background of the long-­term changes in labor markets and social structures that were taking place in most industrial countries during this period. Still focusing on solidaristic wage policy, the Rehn–Meidner model sought to search for a wage that would be seen as fair and not cause a wage–wage spiral, which came to characterize Sweden during

70   Evolution of wage policy the 1970s and 1980s. In practice Swedish policy did not follow the Rehn– Meidner prescriptions with regards to stabilization policies (Eklund 2001).

Twin pillars of labor policy Clearly the European experience with wage policy could be described as more comprehensive. Wage policy was both more limited and incremental in the United States. The two main pillars of labor policy in the United States were established during the Great Depression. As the key problem in the Great Depression was depressed wages the focus of policy centered on boosting wages. It also focused on ending labor management strife, which it was assumed was related to managers’ desire to suppress wages. The principal components of this focus would be the Wagner Labor Relations Act and Federal Labor Standards Act (FLSA). Whereas the former would legitimize unions and assert the public interest of collective bargaining, the latter would establish a federal wage floor. These two key pieces of legislation, however, were preceded by the National Industrial Relations Act (NIRA) and the National Recovery Act (NRA). Indeed, the FLSA and the NLRA were to be complements of one another. The expectation was that workers would continue to negotiate their own labor agreements, whether individually or collectively, but they needed government to establish a more level playing field. The first federal minimum wage was actually contained in both the NIRA and NRA, which contained codes that established minimum wages on an industry-­by-industry basis. The NIRA, passed in early 1933, was designed to maintain price and market stability by adopting industry codes that would safeguard against unfair competition. The codes contained provisions on wages, hours, working conditions, union membership and collective bargaining. Section 3(a) of the act specifically authorized the president to approve codes of “fair competition” after making certain prescribed findings (Kirkendall 1974, pp.  41–42). Section 7 dealt with issues of collective bargaining, maximum hours and minimum wages. With this section it was established that as a matter of fair competition that (a) employees were to have the right to organize and bargain collectively with representatives of their choosing; (b) they were not to be coerced into joining a company union; and (c) their employers were to comply with maximum hours and minimum wages as they were approved and prescribed by the president (NIRA 1933). Once the president approved a code, it would have the force of law. Although maximum hours and minimum wages were to be prescribed, they were not uniform but would vary from industry to industry. The underlying purpose behind the NIRA was to prohibit those practices regarded as unfair by industry because they might have the effect of destroying the price structure without justification. The codes were also intended to prohibit the unfair practice of exploiting workers by cutting their wages and increasing their hours of labor. It didn’t take long, however, for this measure to be challenged in the courts. In Schecter Poultry Corp. v. United States (1934), the law was challenged on the grounds that the codes (a) violated the separation of powers because Congress

Evolution of wage policy   71 delegated its legislative authority to the President; (b) the codes weren’t in regulation of interstate commerce but intrastate commerce; and (c) the wage and hours provisions in Section 3 violated the Constitution’s Fifth Amendment’s due process clause. In the case of the code that applied to the poultry industry, the “Code of Fair Competition for the Live Poultry Industry of the Metropolitan Area in and about the City of New York,” approved by executive order, established maximum hours of 40 hours a week and a minimum wage of 50 cents an hour. Among the arguments made by the plaintiff, the A.L.A. Schecter Poultry Company, was that the minimum wage wasn’t restricted to women and children, as were minimum wage provisions of the past. Specifically, the NIRA threw overboard “old fashioned” limitations and represented a sharp departure from the health and welfare standard that had been used in the past (p. 502). In short, they were butting up against the traditional conception of liberty of contract. Speaking for the Court, Chief Justice Charles Evans Hughes made it clear that the code-­making authority constituted an unconstitutional delegation of legislative power, and for this reason alone the NIRA could not stand. As far as the Court was concerned, the code-­making authority constituted an unconstitutional delegation of legislative authority (p. 542). But the Court was not prepared to assess the issues of minimum wages and maximum hours in terms of the Fifth Amendment’s due process clause. Rather from its point of view, the wages and hours of those working in the poultry plants had no direct relationship to interstate commerce. And it was on this point that the Court appeared to raise the specter of a slippery slope. If the government can determine wages and hours, the precedent then exists for it to insert itself into other operational matters such as number of employees, rents, advertising and general management. From the Court’s standpoint, there was nothing in the Constitution that would sanction such a centralized system, no matter what economic advantages might exist (p. 549). The Schecter case was one of several that resulted in earlier New Deal measures being ruled unconstitutional. But the Court’s apparent embrace of conservatism did not mean that the Roosevelt administration was ready to give up. On the contrary, measures like wages and hours were viewed as part of a larger political agenda aimed at bringing about recovery, boosting consumption, and developing underdeveloped sectors of the country. By the time the FLSA came about the opposition was perhaps less vocal than in the past, for employers were perhaps muted by the perception on the part of the Roosevelt administration that they were the ones responsible for the Depression (Nordlund 1997). But there were also employers who came to support it, and even made it clear that they had voluntarily adopted NIRA. codes before they had even been legally mandated to because it would inevitably result in a more efficient organization of both the managerial and production processes. The New Deal also brought to an end the Lochner era, which had epitomized the putative wage policy of liberty of contract. The Lochner era took its name from the 1905 case of Lochner v. New York (1904) where the Court struck down a state statute establishing a maximum of ten hours a day and 60 hours a week

72   Evolution of wage policy for bakers. Although there was ample precedent for regulation on the grounds that the state’s police power might be necessary to protect the public welfare or prevent harm to others, the Court did not see anything in what a baker did that their health would be at risk. Certainly there was no risk to justify abridging their liberty of contract. The nail in Lochner’s coffin would come in the 1937 case of West Coast Hotel v. Parrish decision, which opened the doors wide to legislative experimentation. But the Great Depression was also exposing the total irrelevance of the liberty of contract. After all, even if the workers were free to take the lowest possible wages to ensure employment, it didn’t mean anything if consumers weren’t demanding goods and services. And they were in a weaker position to do so on the basis of deflated wages. Although the Wagner act did no more than codify a series of federal regulations protecting the rights of workers to organize and bargain collectively, it was, for the time, a revolutionary piece of legislation. Opponents viewed it as a revolutionary break from America’s constitutional tradition, for it appeared to enlarge the powers of the national state and intrude on purely private economic transactions. They also saw it as a conscious effort on the part of the state to strengthen trade unionism because it implied a government endorsement of unionizing. But for Senator Joseph Wagner of New York, the bill’s sponsor, trade unionism was essential to ensuring an equitable distribution of the rewards of the economy. And through unionism, income could be redistributed to workers, thereby maintaining their purchasing power and ensuring that this type of depression not occur again (Dubofsky 1994). What the new law implied was that in the development of a capitalist system, generally biased in favor of employers and other property owners, there was a need for labor market institutions that could give workers effective voice and in so doing maintain stability. For Wagner, it was this inequality in bargaining power between capital and labor that was at root the cause of the Great Depression. Therefore, recovery required measures to equalize that bargaining power (Kaufman 1999, p. 25). As to be expected, the constitutionality of the Wagner Act was called into question relatively early, but the significance of this precedent for the minimum wage really cannot be overstated. By protecting the rights of workers to organize, and establishing a National Labor Relations Board (NLRB) to rule on unfair labor practices, the state was in effect legitimizing the tools of collective bargaining as a means by which overall economic stability could be maintained. But insofar as workers were recognized to have a need to band together in order to ensure a respectable wage rate, the state was also acknowledging there to be nothing “natural” about the wages they had received in the past. There were structural reasons for why wages were low and they had more to do with the monopoly power of those firms paying them. If unionism was now a respectable means by which wages could be artificially inflated for a narrow segment of the labor force, why not statutory regulation for a broader segment of the population? Wage policy, however, wasn’t only a matter of ensuring stability; it was also about economic development, and the minimum wage specifically was seen as

Evolution of wage policy   73 an indispensable tool in this development. The Roosevelt administration figured that higher wages in the South, where they were always lower than in the North, would force southern industry to modernize. For New Deal policy makers the South’s backward economy was the Nation’s number one problem, which was also causing the rest of the nation to suffer economic imbalance. The average annual wage in industry in 1937 was $865 in the South, compared to $1,219 in the rest of the nation. And compared to the rest of the nation, most industrial workers were relatively unskilled. Even the wages of skilled workers lagged behind the rest. According to 1937 figures, the pay for most skilled workers in manufacturing was about 12 cents an hour less in the South than anywhere else in the country. Moreover, their low wages were no great help to southern industry either. Low wages, after all, meant severely reduced purchasing power, and it was purchasing power that industry was ultimately dependent upon. Because wages were so low, there was no real tax base to support much of an infrastructure. Low wages resulting in low tax revenues only made poverty self-­ perpetuating. Southern states simply were unable to provide the type of education that modern industry required (National Emergency Council 1938, p. 39). From the perspective of New Deal policymakers only advanced manufacturing could provide the high wages, purchasing power and tax base to get the South out of its misery. Roosevelt also believed, in accordance with the views of the early twentieth-­century progressive reformers, that high wages would increase the efficiency of southern workers. But as much as southern politicians may have shared the administration’s desire for recovery, they didn’t necessarily share Roosevelt’s goals of wage floors, cheap electrical power and expanded services. Employers in the South demanded not only regional wage differentials in debates over the earlier codes in the NIRA, but racial differences as well. But it wasn’t just that Roosevelt wanted to put an end to the starvation and excessively long hours, he wanted to bring what he took to be a backwards southern economy into the modern era. The South was viewed as a region ripe for economic development. And part of the liberal coalition that elected him was comprised of southern liberals who looked to federal intervention for both economic and political salvation. Those who understood the importance of the minimum wage for economic development also understood that by bringing the South into the modern era, they were also ushering in an era of greater democracy in the South. While those in the North may have viewed the minimum wage as a basis for improving efficiency, those in the South didn’t quite see the need to incur whatever costs would attend those efforts. On the contrary, in echoes of feudalism southern employers argued that they had a moral obligation to employ these “inefficient laborers,” and the minimum wage would only make it more difficult for them to do so. Southern liberals not only wanted to rehabilitate the region, but they wanted to uplift the region’s poorest people. In seeking to expand the activities of the national government, they sought to remove control of federal programs from local elites and concentrate that power in the hands of federal

74   Evolution of wage policy officials like themselves. Economic development, then, was considered to be an essential ingredient in greater democratization that would occur through the demise of these elites. From their perspective, the national government could become a major force in the South and ultimately overthrow the region’s traditional political and economic arrangements. They forged close ties with national labor unions, especially the Congress of Industrial Unions (CIO), with the belief that unionization would break the power of repressive, inefficient southern businesses and guarantee the region’s downtrodden a healthy standard of living. The first minimum wage went into effect in October of 1938 at a rate of 25 cents an hour. The original act provided that the statutory minimum would be raised to 30 cents an hour one year later. At the same time, it established a procedure for raising the minimum wage by stages to a level of 40 cents an hour within seven years, thereby obviating the need for legislative action for some time to come. In an attempt to skirt the problem initially faced in Schecter, Congress was emphatic that the measure was about interstate commerce and the maintenance of fair competition across state boundary lines. Issues of fairness, equity and justice, which may have inspired Progressive reformers, were beside the point. This is not to say these were not objectives; only that the federal government could legitimize its authority through the Commerce clause. At the same time, the larger macroeconomic argument of labor market stability that had finally found legitimacy in West Coast Hotel v. Parrish was by no means left out. On the contrary, Congress was clear that the issue of labor market stability and interstate commerce were inextricably linked when it stated that the presence of substandard wages “leads to labor disputes burdening and obstructing commerce . . . and interferes with the orderly and fair marketing of goods in commerce” (FLSA 1938, p.  1060). Moreover, this new and formal wage policy would in no way impinge on liberty of contract because it was simply assumed that the FLSA was only creating a wage floor. The basic notion of liberty of contract was preserved above that floor. In other words, in an industrial production economy, economic stability would only be maintained if workers were guaranteed a minimum income. Because the free market itself could not be relied upon to ensure that this would be the case, a more robust wage policy was clearly needed. The FLSA never really created the types of Labor Boards that would come to characterize minimum wage programs in Europe; rather it simply established a framework for recommendations that would presumably be acted on by Congress at a later date. In this vein, the foundations were similar to the foundations of the wage boards in Britain. The hope was that a more comprehensive wage policy would emerge. The FLSA specifically established a wage and hours division in the Department of Labor which in turn would appoint an industry committee for each industry engaged in either commerce or goods production. Committees, comprised of representatives from among employers, employees and the general public, were to make recommendations for the highest possible minimum wage rate within an industry which would not adversely affect employment. At the same time, these recommendations were

Evolution of wage policy   75 supposed to take into account the respective industry’s economic and competitive conditions. The FLSA could be said to fall within the American tradition of incremental public policy making, insofar as it established a firm foundation for wage policy in the United States. Still, the reach was quite limited, and one wonders, given its limited scope, just what the federal government was attempting to accomplish. The minimum wage would achieve some measure of fairness by eliminating regional disparities. States with lower wage rates would effectively lose some of their comparative competitive advantage by having to pay a higher wage rate. That some states enjoyed this competitive advantage was viewed to be unfair. Most of the opposition, however, was effectively muted by limiting the scope to areas and people that would not immediately affect them politically. And yet, to the extent that certain southern industries may have been forced to modernize, others would no doubt argue that despite its adverse consequences, there was some success. To a certain extent, the issue would always be a North–South issue, which in later years would also come to manifest itself as a contest between right-­to-work states – which included all the southern states – and high union density states, which also included all of the industrial states of the North. The objective was to establish a minimum set of standards that would ensure that producers in one region of the country would not have unfair competitive advantage over producers in another because they were either paying substandard wages or working their employees excessively long hours. But for the most part, the only workers covered by the law were those engaged in goods production and interstate commerce. Excluded from coverage were those engaged in local retail sales, intrastate commerce, transportation, and agriculture. Of course, executive, administrative and professional workers were excluded, as it was assumed that (a) their wages were considerably more than the minimum and (b) the nature of their work was such that a time clock could not be imposed. What is important to note is that many of those whom we today associate with the lower, if not the lowest end, of the wage scale were simply not covered by the provisions of the FLSA. And those for whom the law did apply, they were more likely to be members of a trade union, in which case their wages would be higher than the statutory minimum anyway. Between 1949 and 1981, the minimum wage rose from $0.40 an hour to $3.35 an hour. It was specifically during the 1960s that coverage was greatly expanded to encompass an additional 4.5 million workers. The 1966 amendments in particular expanded coverage to include hotel, restaurant and recreational workers; hospital workers, agricultural workers, and all transportation workers. Coverage would only continue to be expanded until the late 1970s, and the expansion could be said to reflect a consolidation of sorts for the wage policy foundations already put in place. In short, the running theme behind both the Wagner Act and the FLSA was that workers needed to have some measure of voice if they were to achieve wages that would in fact be livable. Moreover, in an industrial production economy, workers had to be guaranteed reasonable wages not only

76   Evolution of wage policy because they needed to support their families, but because they would have macroeconomic benefits for the economy. Contemporary critics often tend to fault these programs for fostering a sense of entitlement, but their initial purpose was to generate greater opportunity, particularly for those who may have been disadvantaged (Davies 1996). There could be no doubt that higher wages would certainly help to alleviate the poverty of many. That they were being proposed by the same administration that was attempting to fight poverty was certainly not lost on anybody, particularly labor leaders. For the AFL-­CIO amendments to the FLSA presented an opportunity through wage policy to both reduce poverty and to increase employment. Poverty would be reduced through the increase in the minimum wage. Employment would be increased by discouraging overtime work and by reducing the statutory work week itself. But these amendments were also intended to complement the Johnson administration’s War on Poverty and Great Society Programs. AFL-­CIO President George Meany, for instance, saw the new minimum wage amendments as “anti-­poverty” legislation that would improve the lot of the “working poor” (AFL-­CIO News March 1961). These amendments effectively extended coverage to an estimated 9.1 million workers, of whom more than half were estimated to be earning less. Although the increases were expected to increase the national wage bill by $800 million, it was believed that could be absorbed because the graduated increases were roughly equal to the productivity gains of prior years (CQ Almanac 1966, p.  825). But, whereas labor viewed greater opportunity through the lenses of higher wages, business, as to be expected, viewed it through the lenses of greater education and training. The National Association of Manufacturers was clear that what was important was for low skilled workers to get education and training so that they would be able to produce services of a greater value. As far as wage setting was concerned, the government had no business to get itself involved. Those who opposed wage policy were clinging to the long-­lost ideal of liberty of contract. That there was an expansion of the minimum wage had much to do with the general state of the economy and the political climate of the time. Coverage could be expanded because it was a period of economic growth. But the belief in government and the efficacy of government solutions was also an assumption of the times. Environmental circumstances, however, were to change quite drastically during the 1970s. The oil shocks of 1973 pushed the economy into a period of stagflation. Meanwhile, the real wages of the middle class were beginning to decline. Criticism was beginning to mount against the War on Poverty and Great Society programs of the previous decade. Although the two were separate issues, the confluence between the two in public discourse only led to negative implications for the minimum wage in particular. Because Great Society programs were perceived to be a failure, any program that could in any way be viewed as a measure for alleviating poverty must by definition also be a failure. Moreover, the further identification of the War on Poverty with African Americans only worked to reinforce the political isolation of poor African Americans. Their isolation only served to strengthen political claims that their problems were not

Evolution of wage policy   77 economic, but social. In as much as this was believed to be true, it then followed that economic programs aimed at offering them opportunity could in no way correct the social pathologies plaguing their communities. Their problem, after all, was behavioral, not economic (Weir 1992). Of course, these views were buttressed by a new social science which relied on the use of traditional social science methodologies, but for new ideological ends (Schram 1995). By extension, the minimum wage could not possibly help them, whereas it might have helped others before them. Rather it could only exacerbate other problems. In terms of public policy, the primary concern was with inflation. This meant that any program that could potentially contribute to greater inflation was likely to receive greater scrutiny. Additionally, it was also a period in which cracks in labor’s power were beginning to reveal themselves. Towards the end of the 1970s, however, it was becoming clear that previous amendments actually had limited effect. Inflation wiped out many of the gains stemming from the 1974 amendments. This led to calls for a scheme of indexation (AFL-­CIO News March 1976), which never attained the needed support of Congress. Rather what emerged were the 1977 FLSA amendments which called for the minimum wage to be increased in stages over a three-­year period. Although the end of this staged process would see a minimum wage in excess of $3.00, it was less than what labor wanted. The compromise reached was to raise the minimum wage through four phase-­ins in lieu of indexation. But these amendments also established the Minimum Wage Study Commission which to some extent would serve as a catalyst for changing the nature of the debate. Empirical analysis would now be turned towards other foci and, boosted with the new MWSC, come to legitimate a program of analysis aimed at demonstrating the misplacement of the program itself. The same type of statistics that had been relied upon in the past to support the minimum wage would now be used to undermine it. Despite the minimum wage’s changing form during the 1970s, which would ultimately lead to its deterioration in the 1980s, there was another variant of wage policy that emerged during this period. While the minimum wage was expanding during the 1960s, opponents of the minimum wage argued that low-­ wage workers were being rewarded without any commensurate return in value. Ironically, Milton Friedman had advocated for a negative income tax as a way of assisting the poor. Those too poor to pay taxes would receive a check from the IRS. In 1969, the Nixon administration introduced the Family Assistance Plan (FAP). Under this proposal, all families would receive a minimum yearly allowance, and they would receive it regardless of whether they worked or not. At the same time, traditional public assistance programs would be eliminated. In Friedmanite terms, this was most in keeping with libertarian principles of maximizing personal freedom. To preserve the work incentive a negative income tax would be imposed, whereby the FAP would be reduced by a certain percentage as earned income increased. While liberals wanted the allowance to be generous, along the lines of 50 percent in order to ensure an income floor, conservatives were concerned that too high a rate would actually stifle incentive. A FAP grant

78   Evolution of wage policy set at $4,000, for instance, would result in a household receiving money until they earned $8,000. But if the negative tax rate was set at 25 percent, a household would receive a grant until their income reached $16,000. Moreover, all families of four would be eligible for FAP money if their incomes were below $16,000. Either conservatives would rebel over rising costs or liberals would rebel because to save money the FAP would have to be lower with a higher negative tax (Moynihan 1973; Aaron 1973; Glazer 1988). The FAP that was introduced called for an allowance of $1,600, but failed to gain passage because of the nature of the politics mentioned above. But out of the defeat was born a new approach, which was remarkably similar to the FAP: the Earned Income Tax Credit (EITC). The EITC was introduced in 1975 as a means of offsetting the Social Security payroll tax for low-­income earners. Part of the Tax Reduction Act of 1975, the EITC was intended to improve work incentive. And it is on this point that the EITC would differ from the FAP. Workers would only be eligible for an EITC if they worked, and for those whose earnings were too low to pay taxes, the EITC would function as a negative tax. The original bill also emphasized the need to assist low-­income wage earners severely affected by rising food and energy costs. To qualify for an EITC, a worker would have to be employed and have children. A minimum allowance was based on one child while the maximum was based on two. At a certain threshold, the EITC would phase out. The EITC was also viewed as a means of reducing whatever inequities arose in coverage from other public assistance programs due to disparities between the states. Over the years, however, the EITC was expanded to keep up with inflation. In 1990 Congress passed the first major expansion with the Omnibus Reconciliation Act (OBRA 90), which substantially increased the size of the credit and added provisions for larger families. These provisions granted larger credits to households with more than one child, households with a child under one year of age, and those households paying their own health insurance costs to cover a qualifying child. The credit was then expanded further in OBRA 93. Whereas the initial credit was worth 10 percent of the first $4,000 in income, it was worth 40 percent of the first $8,425 of income in 1994. By 1996, the credit for a household with two children was $3,370 and $2,040 for a household with one. Therefore, a low-­wage worker earning the statutory minimum wage, which in 1996 was $4.70 an hour, was receiving a wage subsidy equal to 40 percent in value. A household with two children earning $8,425 to $11,000, would receive maximum credit of $3,370, but when household income began to exceed $11,000 their credits would be reduced at a rate of 21.06 percent until their earned income reached $27,000 and the credit was equal to zero. By 2007, however, working families with children whose annual incomes fell below $35,000 to $48,000 (depending on marital status and number of children) were eligible for the EITC. Moreover, working poor whose incomes fell below $13,000 if single or $18,000 if married were also eligible for a very small credit. The average EITC for a family with two children was $2,448 and $243 for a family without children (Center for Budget and Policy Priorities 2009). Although

Evolution of wage policy   79 the EITC could be viewed as a form of wage policy because it was intended to effectively enable low-­wage workers with children to earn a livable wage by subsidizing low wages, it was in reality a tax cut on federal income taxes for many in the lower end of the middle class. It enabled households to reduce the taxes that they otherwise would have paid. But because the EITC was contingent on household income rather than the individual, it was not really the same as a negative income tax or some other type of minimum wage floor. Moreover, it was the household income that would determine the size of the credit. Although the credit was contingent on filing tax returns, arrangements could be made with employers of those qualifying for the credit to be paid higher income over the course of the year and the reimbursements to go directly to the employer. And yet, the EITC had a very low participation rate, in large measure because few people knew about it.

Conclusion On one level, the evolution of the minimum wage in the United States with its attendant expansion in coverage did much to consolidate the formation of wage policy in the United States. Add to this the foundations of labor policy, coming from the Wagner Act, the foundations of a coherent wage policy were strong. But on another level, the nature of the evolution in the United States also made it a foregone conclusion that those foundations would quickly come under siege. The first glimpses of this were present in 1949, and following the first studies produced by the MWSC, which estimated that a 10 percent increase in the minimum wage would reduce teenage employment by 1 percent. Meanwhile, estimates for adults were considerably less or even negligible. Moreover, adults under the wage floor were judged to be better off. Even when the official Minimum Wage Study Commission concluded its report, both sides of the debate were able to take away from it something that would buttress their position. There were instances where the report was favorable to the minimum wage, and other instances where it touted the conventional textbook predictions of disemployment effects. Because the positions and tone were considered by some to be supportive of the minimum wage program, one Commission member charged that the final report was not only biased towards labor unions, but that it was essentially “an undistinguished piece of work” (Eccles and Freeman 1982, p. 227). The effect was to relegate the minimum wage to a debate between those arguing the poverty reducing benefits and those arguing the disemployment effects. And to a certain extent, the emphasis of minimum wage critics on the EITC only highlights this because the EITC is specifically a program for the working poor. Lost, however, was that wage policy is a middle class issue, and that contrary to popular mythology it would be critical to the maintenance of a viable middle class. The point being that just as wage policy was recognized to be essential to leveling the playing field and providing the working middle class the purchasing power necessary for a burgeoning middle class, it would continue

80   Evolution of wage policy to be essential if the middle class were to be sustained. But as will become evident in the next couple of chapters, the decline in labor market institutions – unions and the minimum wage – essentially the decline of wage policy has only hurt the middle class. Perhaps another wrinkle in this was that the overall nature of the debate on economic stabilization was shifting away from labor market institutions with fiscal policy characteristic of the 1940s into the 1960s, to monetary policy.

4 Post-­New Deal era and the demise of wage policy

Arguably, the demise of wage policy in the United States began shortly after World War II with the passage of the Taft–Hartley Act, which was viewed as no less than an assault on unions. To the extent that New Deal policies served to establish new and strengthen existing labor market institutions, wage policy in the post-­New Deal era can be characterized as anti-­labor market institutions. The objective was to weaken those very same institutions in order to suppress wages. As was true of the fight over the FLSA during the New Deal era, the fight over wage policy during the post-­New Deal era was driven by regional differences. Regions where wage rates were always historically lower saw the strengthening of unions and the establishment of minimum wages as an attempt to impose a higher wage structure on them. With a lower wage structure, they enjoyed some comparative locational advantage as firms looking for places to locate would seek to do so in lower cost labor markets. The assault on these institutions wasn’t an assault on wage policy per se; rather wage policy essentially declined as a function of the coalescence of several forces. The first was that between the 1950s and 1980s union membership fell sharply. During the 1980s, the Reagan administration seized upon these foundations and only accelerated the decline of unionism by mounting an all out assault on unions. With Reagan’s firing of the PATCO air traffic controllers in 1981, the precedent was set to fire striking workers. Although the Wagner Act required collective bargaining, it never prohibited the hiring of replacement workers while permanent workers were on strike. But until the 1980s, it was simply taboo to do so. While the striking worker technically could not be fired, the hiring of replacement workers and the cessation of negotiations was effectively tantamount to a firing. The second force, which was very much influenced by the first, was that presidential administrations opposed to labor unions were also opposed to the minimum wage. As unions were declining in membership, particularly during the 1980s, the minimum wage was also stagnating with its value falling considerably below the poverty line. Moreover, without unions to serve as a constituency in support of wage policy, it was even less likely that the minimum wage would be raised. Meanwhile, these two forces coincided with the neoclassical synthesis on the minimum wage that stressed the inefficiency of the minimum wage, as well as other institutions that artificially raised wages.

82   Post-New Deal era and the demise of wage policy The import of the synthesis cannot be stressed enough, as it was during this period that it became dominant, largely because the political environment was conducive. The coalescence of these forces only made it a foregone conclusion that wage policy would fall. On one level, the demise of wage policy was a function of the demise of workers’ voice. But on another level, the demise of wage policy only contributed to the demise of that voice. Beginning with a look at Taft-­Hartley, I discuss in greater depth how the neoclassical synthesis provided a foundation for the political and policy assault on wage policy. Although the synthesis merely attempted to explain behavior on the basis of incentives in a competitive marketplace seeking to achieve efficiency, the assumptions of the synthesis easily lent themselves to use and exploitation by those with a vested interest in suppressing wages and maintaining a low-­wage structure (Levin-­Waldman 2000c).

The Taft–Hartley Act In an attempt to qualify the original Wagner Act, conservatives in Congress introduced legislation that would effectively weaken the NLRB by splitting it administratively, and subjecting its rulings to greater judicial review. But it wasn’t just a question of ideology, as the impetus for the proposals, that would in some quarters come to be known as the “union-­control bill,” or even “slave-­ labor bill.” The impetus appears to have been a massive strike wave following World War II. Passed in 1947 over the initial veto of President Harry Truman, and originally known as the Labor–Management Relations Act, it was sponsored by Senator William Taft from Ohio and Representative Fred Hartley from New Jersey. The Act sought to establish control of labor disputes on a new basis by enlarging the NLRB and providing that both the union and employer would be required to serve notice on the other prior to terminating a collective-­bargaining agreement. Under the law, the government would be empowered to obtain an 80-day injunction against any strike deemed to be a threat to national health and safety. Protection would no longer be extended to wildcat strikes, and the closed shop – that had long been the staple of unionizing activity – was outlawed. The Act was clear in the beginning that industrial strife could be avoided if everybody under the law recognized that neither party – management or labor – had any right to engage in acts or practices which would jeopardize the public health, safety, or interest of the Nation (Labor Management Relations Act 1947). Although most collective-­bargaining provisions from Wagner were maintained, more hurdles for unions were created. Now a union seeking to use the NLRB would have to file financial reports as well as affidavits with the Department of Labor that union officers weren’t Communists. This was a particularly significant development given that the historic role of the courts of enforcing wage– labor contracts in favor of employers, and the historic bias that unions were really nothing more than monopolies in restraint of free trade. Under the Wagner Act there were only unfair labor practices of employers, but under the new law, the list of unfair practices of unions was considerably longer. One such unfair

Post-New Deal era and the demise of wage policy   83 practice would be for a bargaining representative in a given unit to refuse to bargain with employers. Moreover, suits of danger against unions could be brought in federal court for a variety of reasons, including breach of contract (Witte 1947). The right to bring suit was effectively the right to seek and obtain anti-­strike injunctions. Of course, it begs the question of whether a strike would be considered a breach of contract, thereby warranting federal action. Unions were also prohibited from contributing to political campaigns. Union security at the state level was effectively eliminated in that states were now allowed to pass right-­to-work laws. Under these laws, states could now prohibit the closed shop, thereby making unionization more difficult, if not altogether impossible. Under these laws, no one could be required to belong to a union as a condition of employment, and no collective-­bargaining agreement could impose such a requirement. The law made it clear that it considered it an unfair labor practice to induce an employer to discriminate against any worker to either encourage or discourage union membership. So while it was unlawful to discriminate against those workers belonging to unions, it was now illegal to force workers, as was the case with the closed shop, to join unions as a condition of employment (Witte 1947). This provision alone made it more likely that employers would seek ways not to hire union members. Moreover, workers would be less likely to attempt to organize out of fear that fewer job opportunities would now exist.

The neoclassical foundation Although it is commonplace to date the neoclassical assault on wage policy to the Reagan years under the influence of Milton Friedman, the real shot over the bow was fired in the late 1940s in a debate between Richard Lester, an institutionalist at Princeton and the marginalists (Prasch 2007). Lester argued that “marginalism” – neoclassicism broadly defined – essentially began with inaccurate assessments of the modern manufacturing firm’s cost structure. Neoclassicals essentially neglected the fact that these firms usually experienced a decrease in average costs as their outputs increased. Moreover, they only compounded this error when they continued to insist on a flawed conception of the labor market’s structure and dynamics. Included in this conception was an assumption of a high degree of factor mobility and equality of bargaining. Lester’s shot across the bow became known as the “Marginal Cost Controversy.” While Lester had data based on employer surveys to back up his claims, neoclassicals, led by George Stigler and Fritz Machlup, essentially dismissed it as being irrelevant. They argued that a firm’s costs were essentially subjective, and that an understanding of a firm’s subjective aspects meant that one had to be skeptical of Lester’s data. To Machlup (1946) in particular, if a firm’s costs were subjective, it would thus be difficult to determine their shape and slope on the basis of empirical research. The neoclassical theory was dynamic rather than static, and Machlup did not believe that a firm’s subjective factors could be accounted for on the basis of employer surveys. Until Milton Friedman, at least,

84   Post-New Deal era and the demise of wage policy most academic scholarship agreed with Lester and rejected Stigler’s (1946) position that a minimum wage would lead to lower levels of employment. Friedman, however, rejected all sides of the controversy and argued that the neoclassical model ought to be maintained on the basis that it was useful for constructing testable hypotheses. As a consequence of Friedman’s version of “positive economics,” that was ultimately to become deeply entrenched in the academy, the method of surveys and research into the validity of neoclassical assumptions was effectively put on hold (Prasch 2007). Not only did Friedman’s model stress his view of positive economics, but it also made an argument against the minimum wage based on personal freedom that was very much linked to earlier arguments of liberty of contract found in the early part of the twentieth century. Government’s role is merely to do what the marketplace cannot: maintain, arbitrate and enforce the rules of the game. When government intervenes, it limits freedom. The excuse over the last few decades for governmental intervention has been what Friedman calls “full employment” and “economic growth.” Contrary to enhancing employment, government interference only results in greater unemployment, thereby justifying even more interference, which in turn only limits further individual freedom. The greatest achievement of capitalism lies not in the accumulation of property and wealth, but in the opportunities it has afforded individuals to develop and improve themselves (Friedman 2002). If a minimum wage has the opposite effect of what was intended, it would effectively hinder individuals’ ability to improve themselves, infringing on their personal freedom and autonomy (Budd 2004). Although the foundations for wage policy were being cemented, at the same time the seeds were being sown for the eventual deterioration of wage policy. Though liberty of contract had been discredited, the commitment of some to it was by no means diminished. Wage policy, in whatever form it assumes, is problematic because it flies in the face of the neoclassical economics ethos of efficiency. Efficiency is assumed to be advanced through competitive markets where market clearing wages are achieved when the demand for labor is exactly equal to the supply of labor. In a perfectly competitive market unemployment doesn’t exist because of the flexibility of wages. A wage floor, such as a mandated minimum wage or any other type of institution that artificially inflates wages, is inefficient because of the wage rigidity it introduces into the labor market. Therefore, a wage that is higher than the equilibrium wage, will result in lower employment as fewer workers will be hired than are willing to work. A policy that artificially raises wages to help some at the expense of others is simply inefficient, because an economy forced to lay workers off as a function of artificially inflated wages isn’t utilizing its full labor capacity. This means that the market is not making use of all available labor, and the resultant idleness of the labor in turn means that the marketplace is unable to produce to its full capacity. In a competitive market, each worker receives the value of his or her marginal revenue product – the amount of increase in the output that results from an increase in say a unit of labor. If adding an additional worker results in a rise in total revenues, the firm’s output

Post-New Deal era and the demise of wage policy   85 will rise as a result. Firms typically use the marginal revenue product of labor as a criterion for determining how many more workers to hire because they are able to calculate how much more output can be expected based on how many units they add. An effective minimum wage, then, does one of two things: it either results in the layoff of those workers whose value is less than the minimum or it results in an increase in productivity among low-­efficiency workers (Stigler 1946; Ehrenberg and Smith 1997). The same effects are similarly assumed to occur as a function of unions. The critical point being that anything that artificially inflates wages, i.e. active wage policy in any form, only adds to wage rigidity. A wage policy, especially in the form of a floor, ends up hurting low-­wage workers – precisely those whom it was intended to help. As the cost of labor is increased (due to a mandated minimum wage that is higher than the market-­ clearing wage), firms are willing to hire fewer workers and employment drops. Only if the demand for goods and services on the part of consumers is increased can it be expected that there will be an increased demand for labor that will effectively bid up wages. A wage floor, then, benefits some – those who will be paid more money – at a cost to others – those who will either lose their jobs and/ or not be able to find other jobs because employers do not believe their value to be worth the new minimum wage. Even if there is some outward appearance of benefit to be derived from an increase in the wage floor, there will invariably be a cost to be borne whether in the form of job loss, lost opportunity for jobs, lost benefits or increased output per man hour – the demand for higher productivity. In so doing, it violates Pareto optimality, which is also a central tenet of welfare economics (Wagner 1996). In evaluating policy choices it is often commonplace to ask whether a policy change is “Pareto efficient.” By this yardstick, a policy that provides assistance to some can only be beneficial if it does not have a deleterious effect on the welfare of others. When economists speak about welfare effects they mean that an action designed to benefit one group cannot make either everybody else, or even another group, worse off. For policy to be Pareto-­optimal it essentially has to be win–win. In other words, a policy that is zero-­sum isn’t Pareto-­optimal. A policy is not Pareto-­optimal if it raises the wages of some at a loss to others. But what if overall welfare is enhanced because wage inequality has declined, in large measure because the wages of those at the bottom into the lower-­middle class are no longer stagnant? In welfare economics, social welfare, in short, is achieved through efficiency, which is defined as the effective use of scarce resources. Nobody, it is assumed, can be made better off without making somebody else worse off. “Otherwise, if someone’s welfare can be improved without harming someone else, the current situation is wasteful (inefficient) and scarce resources are not being utilized as effectively as they could be” (Budd 2004, p. 15). Welfare is only affirmed to be optimized when all gains from trade are exhausted through voluntary exchange. The problem here is that it gives effect to the structure of existing markets and the existing distribution of income. And yet, these are matters of selective perception (Medema 1989). Welfare can only

86   Post-New Deal era and the demise of wage policy be optimized if exchanges are voluntary, which may not necessarily be the case for low-­wage workers earning the minimum. Low-­wage workers, as we noted in the last chapter, often find themselves with little choice but to accept whatever low-­paying jobs are available. They are needs traders. Exchanges aren’t nearly as voluntary for the needs trader as they are for the wants trader. The neoclassical ethos simply assumes a good and efficient outcome to arise from individuals freely making choices and pursuing their interests, very much in consonance with the earlier notions of liberty of contract. This emphasis on free choice and efficiency, however, may also mask the particular vision of society contained in the neoclassical ethos’s normative conception of the economy. In this vision, workers can always determine whether they will be employed by virtue of their willingness to be flexible when it comes to their wage demands. Deborah Figart et al. (2002) refer to this as the wage as price – what one in an exchange relationship is going to pay for one’s labor services. But it fails to take into account that there are other ways of conceiving the wage: mainly wages as living – the notion that the purpose of wages is to provide an adequate level of support for workers – and wages as social practice, which emphasize the socially and historically specific process of wage setting. That worker flexibility may be efficient for the overall marketplace does not mean that it serves the needs of individual workers. A minimum wage is assumed to be inefficient because it leads to an underutilization of labor in the aggregate, but the neoclassical vision as it expresses itself through competitive markets, fails to address the consequences of a world where wages could be allowed to drop to a level whereby demand would be equal to supply, such as rising wage and income inequality and the inability of workers to purchase goods and services. In the real world, a minimum wage is likely to affect different people differently (Brown et al. 1982; Levin-­Waldman 2001). This might imply yet a different conception of inefficiency. After all, efficiency could just as easily be defined as the ability of individuals to demand goods and services, precisely because they are paid sufficient wages. The principal focus of much of the empirical literature has been on the youth labor market. Since the Minimum Wage Study Commission (MWSC) (1981) report came out it has been the prevailing wisdom that the minimum wage takes its greatest toll on the youth labor market, that a binding wage floor reduces employment for younger and less-­skilled workers. The Commission staff estimated that a 10 percent increase in the minimum wage would reduce teenage employment by about 1 percent. Other estimates have placed the disemployment effect even higher (MWSC 1981, pp. 35–38). Since then a consensus has emerged among mainstream economists that a 10 percent increase in the minimum wage will result in a 1–3 percent reduction in teenage employment (Kosters 1996; Kosters and Welch 1972; Welch 1974, 1978; Meyer and Wise 1983). At the same time, effects are judged to be proportionately smaller among adults in the 20–24-year-­old age range (Neumark and Wascher 1992), and that adults on balance appear to be better off under a wage floor. Although the MWSC too noted the smaller effects among adults, they have not been the focus

Post-New Deal era and the demise of wage policy   87 of much of the research. And, as I will show in Chapter 6, it also obscures the potential benefits to the middle class. Herein lies the problem, for there have not been many studies estimating just how many people might be attracted to the labor force. The neoclassical model has always assumed the costs to be on the demand side, that employers will demand less labor. However, they have neglected the potential benefits on the supply side. Ironically, however, the MWSC report implies supply side effects. By distinguishing between reduced employment and higher unemployment, the Commission effectively acknowledged that a higher wage would effectively attract people into the labor market. Because workers actively looking for work constitute the formal definition of unemployment, the official unemployment rate would increase due to an expanded market of job seekers. Most studies suggesting lower employment usually mean that fewer workers will be hired as a result of higher wages and that in some cases there will be an increase in unemployment due to a potential layoff of existing minimum wage workers. But to formally acknowledge that unemployment will rise because more workers may look for jobs at higher wage rates is to acknowledge that there are supply side effects. The principal argument for not focusing on the potential benefits to the poor, however, is that most minimum wage workers are not adults. Much of the data on who earns the minimum wage shows that only a small fraction of the labor force earns it and that most of them are teenagers. Earners of the minimum wage are for the most part teenagers or contributing members of a household budget (Brown 1996; Burkhauser and Finegan 1989). The MWSC estimated that 68 percent of minimum wage earners were in families headed by married couples. Of these, 1.5 million were the only earners in their families, thereby making up 14 percent of low-­wage workers. 54 percent of all minimum wage workers were in families with two or more earners. Still, the Commission made it clear that minimum wage earners were not the primary earners in families with more than one earner (MWSC 1981, p. 13). But as I will also show in Chapter 6, this is not completely true and is subject to just how the minimum wage population is constructed (Levin-­Waldman 2002, 2005a, 2005b). Those who fall into the category of the dependent poor are not currently employed in those jobs, even though those are the jobs they would most likely qualify for (Burtless 1995). Still, the evidence on the effects has been inconclusive, and is easily manipulated by either side of the debate to its respective advantage. Nevertheless, the MWSC report only served to buttress the conclusion that raising the minimum wage would not greatly help the poor. On the contrary, raising the minimum wage is more likely to hurt the poor because at a higher wage, employers are more likely to hire more skilled labor as a substitute for unskilled labor. Because low-­skilled individuals are heavily over represented among the ranks of welfare recipients, minimum wage increases will effectively result in employers discriminating against recipients (Finegold 1998). These studies, however, might well miss the point. Even if most minimum wage earners are not the primary earners in their households, it does not follow that the income of those earners isn’t necessary to the sustenance of the family unit.

88   Post-New Deal era and the demise of wage policy Moreover, it misses the wage’s potential for redistribution. Gramlich (1976), for instance, has pointed towards evidence that minimum wage increases primarily benefit adult females and that whatever disemployment effects may result among low-­wage adults are not strong enough to make them worse off on balance. Most studies on the effects of the minimum wage, however, appear to speak more to the values of the researcher than they do to the actual data itself. Sanford Schram (1995) has suggested that, at least in the domain of welfare and poverty research, those with particular ideological biases have been quite successful in dressing up their ideology in the language of objective social science. Even though the objective is ideological, it has the imprimatur of legitimacy because of the supposedly scientific methodology employed. And as Tom Palley (1998) points out, economics has long had an anti-­labor bias. Because the economics profession produces what society takes for economic knowledge, it has assumed the role of determining society’s vision of how the economy works. Moreover, it has adopted an intellectual view that is implicitly anti-­labor and pro business. Economic theory is often considered anti-­labor because of the assumption that competitive market theory makes about unemployment being a consequence of high and rigid wages (pp. 19–21). Also because the economics profession generally has an anti-­labor bias built into its models, there is little reason to believe that the issue of the minimum wage should necessarily be viewed differently. What is critical to our discussion here is that the neoclassical model has nicely coincided with the political and economic interests of those opposed to the minimum wage specifically and wage policy more generally. Arguably, a focus on the model effectively obscures the true agenda of those interests, namely the suppression of wages and the maintenance of a low-­wage structure that will allow employers to maintain a strict class division and keep the workers in their place. Because the model, along with these studies, has given the larger efficiency argument and the fear of disemployment effects an imprimatur of legitimacy, what has often been neglected is that the data does not always support the theoretical construct. A major problem with the orthodoxy is that it is predicated on problematic data. Much of the data are time-­series data which merely look at changing employment rates at various points in time, usually around when a minimum wage increase has occurred. Then through statistical testing, attempts are made to establish a correlation between an increase in the minimum wage and a change in employment. Statistical tests at best show correlations, and even strong ones, but they do not establish causal relationships. In the end, it cannot be established with authority that a particular minimum wage increase resulted in a disemployment effect – that it was specifically that increase that caused the disemployment effect, as opposed to other circumstances, i.e. an economic downturn, the loss of markets, and so on. It does not tell us anything about the behavior of firms per se; rather it only provides a basis upon which that behavior can be inferred. Janet Currie and Bruce Fallick (1996), for instance, have attempted to get around the inherent weaknesses of time-­series data by using individual-­level data

Post-New Deal era and the demise of wage policy   89 from the National Longitudinal Survey of Youth (NLSY) to examine disemployment effects of the minimum wage on individual year-­to-year changes. They sought to identify a group of workers that would most likely be directly affected by the minimum wage and then compared their employment to the employment of a group of workers who were least likely to be affected. Affected workers were found to be 3 percent less likely to be employed a year later. At the same time, no evidence was found that minimum wage increases affected the wages of workers who remained employed a year later. Still, they were not able to establish that it was the increase in the minimum wage that was a direct cause of their not being employed a year later as opposed to other factors. In the end, all that can be made are inferences, and to the extent that they provide the basis for inference, it serves to support the theoretical construct characteristic of the neoclassical synthesis. And yet, based on changes in employment patterns following, say, a minimum wage increase, a further inference is made about the behavior of firms, which only reinforces the reigning orthodoxy. Moreover, considerable research in recent years has demonstrated the employment consequences predicted by the orthodoxy have not occurred. Using the same social science methodology in which the orthodoxy is steeped, researchers have provided empirical findings which do not bear out the orthodoxy. Not only has the minimum wage been shown to have little or no real disemployment effect, but in some cases employment actually rose, particularly in the fast food industry (Card and Krueger 1995, 1998; Levin-­Waldman 2000a, 2000b). The neoclassical model also holds the minimum wage to be inefficient on the grounds that it is mis-­targeted. Most minimum wage earners are assumed not to be primary earners in their households, but secondary earners by and large (Brown 1996; Burkhauser and Finegan 1989). Because these incomes are considered to be less consequential to the maintenance of their households, the potential benefits given the costs are considered to be even smaller. This too contributes to the sense that they are inefficient – they are unnecessary. And yet, this misses the fact that so-­called secondary earners may in fact be necessary to the maintenance of the household. By describing them as “secondary earners,” the effect is to cast the minimum wage population – what some would describe as a “target population” – as other, with the purpose being to delegitimize them. The use of the term “secondary” effectively represents a negative social construction of the target population, and one very much based on a particular societal ethos (Schneider and Ingram 1993). Because they are unimportant, the minimum wage, or any type of wage policy for that matter, couldn’t possibly be used as a positive policy tool. They are cast as being unworthy of wage increases on the grounds that such increases are not necessary to the maintenance of their families. This construction is very similar to the centuries old distinction between the “worthy” and “unworthy” poor. Those who were poor through no fault of their own – widows, the disabled, the elderly, and orphans – were considered to be worthy and were to be treated with compassion and charity. The unworthy were those who were simply lazy and lacked “moral character,” and

90   Post-New Deal era and the demise of wage policy thus were to be treated harshly (Katz 1989). The more poor people who can be characterized as unworthy, the less responsibility society has to care for their well-­being. To a large extent, the appeal of the neoclassical ethic regarding the minimum wage may have as much to do with how the minimum wage population is constructed. Similarly if low-­wage workers can be conceived of as unworthy of higher wages because of their attributes and perceived failings, society again then bears no responsibility for their low wages and is thus under no obligation to ensure that their wages rise above a certain level. The neoclassical synthesis, in short, assumes a minimum wage to be inefficient, in part, because it isn’t necessary. If the minimum wage was primarily benefitting teenagers and not benefitting those working to support a family, what was the logic of the minimum wage at all? It was simply irrelevant. At the same time, it was irrelevant because it did not bear on the poverty rate. First, those who argued against increases in the minimum wage suggested that only teenagers would derive benefit from increases, with the implication that in a policy calculus in which one of the variables is poverty this group simply wasn’t important. Or at least they weren’t important enough that countless numbers of businesses should incur rising labor costs. Now the same group that wasn’t considered important before was becoming the reason for why the minimum wage should not be increased. Raising the minimum wage now would hurt teenagers because they wouldn’t be able to find employment. Obscured here, however, was the more normative theory that social welfare might be maximized more from an efficiency standpoint when teenagers’ parents are employed at a wage sufficient enough to support themselves and their families. Those opposed to increases because it may reduce profits can appeal to the language of the orthodoxy and mask their self-­interests in the language of the larger public interest. That is, increases in the minimum wage would be detrimental to the economic well-­being of the larger community because it will have employment consequences. Social science, however, is supposed to have the value of freeing policymakers from the constraints of ideology, as it relies on a separation of facts from values. But does it really do this? On the contrary, the focus on the orthodoxy only obscures the fact that the minimum wage is a highly political issue which affects different interests in different ways. More importantly, it is supposed to remove ambiguity and enable decisions to be made on the basis of rationality. Arguably, there is nothing in the neoclassical synthesis that would, in and of itself, precipitate the demise of wage policy. There clearly is no room for formal wage policy in the neoclassical model. On the contrary, it is more comfortable with the putative wage policy of laissez-­faire and liberty of contract. And yet, the neoclassical synthesis has consistently been exploited by those opposed to wage policy. It provides a convenient rationale for not supporting it, mainly that it has employment consequences. As competitive labor market theory assumes a full employment economy, the minimum wage orthodoxy is not only a product of those assumptions, but it nicely serves the interests of those who believe that all government interference – whether in the form of regulation, public programs

Post-New Deal era and the demise of wage policy   91 and other interventions – greatly undermines free market ideology and ultimately free choice.

The political/policy assault The intellectual climate, coupled with the reigning political economy of the minimum wage, served as a conducive backdrop for political forces, especially those representing the interests of business, to mount an assault on wage policy as it evolved from the Progressive period through the New Deal. During the 1980s several things actually happened. The number of minimum wage workers declined, poverty increased and the value of the wage dropped considerably. Between 1979 and 1994 the number earning the minimum wage dropped by 7.1 percent, but the most important drop was in the value of the minimum wage, which fell below 40 percent of the poverty line. The minimum wage, which hovered around the poverty line through 1979, began to decline sharply afterwards. By 1989, it was only at 70.5 percent of the poverty line, and even following some increases during the 1990s, the minimum wage never reached above 80 percent of the poverty line. Many were quick to point to the drop in the minimum wage as a contributing factor to the increase in poverty. A full-­time worker heading a family of three and earning the minimum wage that was above the poverty line in 1979 was now below the poverty line in 1992. And if it was a family of four they were even further below the poverty line (Spriggs and Klein 1994). More than rising poverty was the increase in poverty among women – the feminization in poverty – which also appeared to be affected by the state of the minimum wage (Martin and Giannaros 1990). On the contrary, had the real minimum wage remained constant at its maximum 1968 value ($4.90 in 1987 dollars), it was estimated that poverty would have been reduced by 7.8 percent from its 1987 level of 34.3 percent Alternatively, had the 1987 real minimum wage maintained the 1959–1987 average value, the poverty rate would have declined by 3.9 percent in 1987. Figart and June Lapidus (1995) estimated that an increase in the minimum wage during the 1990s from $4.35 to $4.70 would have resulted in an increase in women’s average wages from $7.79 to $10.00, although the effects would have been larger for those earning less than the previous average. All of this occurred at a time when the neoclassical model had assumed the mantle of infallible orthodoxy. The intellectual foundations for the demise in wage policy no doubt contributed, albeit unwittingly, to the main political assault that would take place beginning with the presidency of Ronald Reagan and what came to be known as the Reagan revolution. It was during this period that the nature of wage policy in the form of the minimum wage and unionism did begin to change. The Reagan presidency ushered in a whole new outlook on the economy. For neoclassical academics like Milton Friedman, the White House finally had an occupant who viewed government as the problem, rather than the solution to the nation’s economic and social problems. Summing up the goals of economic policy, George Stigler (1986) argued that “The supreme goal of the

92   Post-New Deal era and the demise of wage policy Western World is the development of the individual: the creation for the individual of a maximum area of personal freedom, and with this a corresponding area of personal responsibility” (p. 93). As noble as policies intended to provide a safety net or reduce income inequalities might be (which would also include the minimum wage) they were fundamentally at odds with the tenets of freedom. Consequently, the older institutionalist arguments emphasizing the role of government, to the extent they had been listened to at all during the 1970s, had lost their voice. But there was something else going on here. By the mid-­1970s, the Keynesian economic policies – out of which more formal wage policy emerged – had largely been discredited due to oil shocks and the resultant stagflation. From the neoclassical point of view, the economic problems confronted in the 1970s were the product of too much government intervention. After all, the neoclassical model maintained unemployment to be nonexistent in a competitive market because workers could always lower their wage rates to the point that their labor services were demanded. Unemployment was due to the rigidity of wages – that labor was unable to lower its prices because of regulations which interfered with the pure competition of the market. It was not, as Keynesians might have suggested, due to a lack of demand for goods and services. On the contrary, the neoclassical model assumed that lower prices due to flexible wages would lead to increased demand. The Reagan administration made no secret of its views that too much interference in the economy was the principal reason the economy had been in a recession during the 1970s. Moreover, inflation was by and large a product of workers demanding too much from their employers, without returning sufficient productivity, which meant that labor unions were as much part of the problem. Although the number of workers associated with unions never exceeded 30 percent during the 1950s, it dipped below 19 percent during the 1980s (Goldfield 1987). While Taft-­Hartley may have begun a process of undermining unions, a major blow to union efforts came with the Reagan administration’s handling of the PATCO air traffic controllers strike. The conflict over PATCO really began in the Carter Administration. Years of unresolved problems and grievances had escalated into an FAA management campaign of harassment against the Air Traffic Controllers and the formation of the Management Strike Force during the summer of 1980 (Moody 1988, pp.  140–141). When PATCO went on strike in 1981, President Reagan responded by firing all striking workers. In so doing, a clear message was sent to labor unions across the country that any form of union militancy would not be tolerated (Dubofsky 1994). Now the earlier taboo on firing striking workers was finally broken (Reich 1997). On one level, the firings were symbolic because federal employees were prohibited from striking. But on another, as symbolic as it was, it effectively “galvanized anti-­union managerial factions in a whole variety of industries and occupations where union organization had previously been unassailable. Moreover, it set the stage for a prolonged period of union give backs and concession bargaining” (Piore 1995, p.  10). The climate created by

Post-New Deal era and the demise of wage policy   93 the Reagan administration has generally been characterized as hostile to workers, and especially so to organized labor. As Keeran and Tarpinian (1989–1990) suggest, more important than Reagan’s decertification of PATCO and the firing of its striking members was his anti-­union appointments to the NLRB. Those companies operating during a strike in the 1980s now found a strong ally in the law (pp. 464–466). Similarly, NLRB and Supreme Court decisions were increasingly becoming hostile to union goals as there was a tendency toward a more restrictive interpretation of the National Labor Relations Act (NLRA). Several assumptions underpinned a substantial portion of existing legal doctrine: (a) The continuity of production must be maintained and limited only when statutory language clearly protects employee interference; (b) Employees will act irresponsibly unless they are controlled; (c) Employees possess limited status in the work place, and therefore, they owe a considerable measure of respect and deference to their employers; and (d) The enterprise is under management’s control, with great stress being placed upon the employer’s property rights in controlling the workplace. And as much as the NLRA may suggest participatory goals for workers, they can never become full-­fledged partners, as that might interfere with management’s exclusive rights (Alterson 1989–1990). This point became patently clear in First National Maintenance Corporation v. National Labor Relations Board (1980). In First National Maintenance (1980) the issue was whether an employer was required to negotiate over its decision to close part of its business. Was decision bargaining considered to be a legitimate province of the “wages, hours, and other terms and conditions of employment” standard? The Court held that within the context of the NLRA, parties were free to bargain over any subject, but that in establishing this legislation, Congress sought to limit the duty to bargain to matters of “wages, hours, and other terms and conditions of employment.” The Court further asserted that Congress never expected that elected representatives of the union would become equal partners in the operations of the business. In other words, the subjects which must be bargained over were limited. Management, after all, had to be free from the constraints of the bargaining process to the extent essential for running a profitable business. It also had to have some degree of certainty beforehand as to when it may proceed to reach decisions without fear of later judgments that its conduct was an unfair labor practice (pp. 678–679). And yet, the same logic could just as well have applied to the question of wage policy itself. A business in need of flexibility to make its own managerial decisions without being subject to the approval of a union, might also be in need of the same flexibility to set its own wage rates again without being subject to the approval of the union. Moreover, any claim that a union might make about its existence being required because of asymmetrical power, was not in and of itself a sufficient basis for interference with the efficient operations of the company. The foundation of wage policy that had been established under the Wagner Act by creating a mandate for collective-­bargaining on the premise that the

94   Post-New Deal era and the demise of wage policy balance of power between employers and employees was asymmetrical, was effectively being eroded with First National Maintenance. Although the Court never claimed the need for unencumbered decision making to be absolute, it seemed to be saying that unless it could be shown that management through its legitimate rights to make decisions created such insurmountable burdens for the workers that the public interest would be infringed upon, there was to be a presumption in favor of management’s right to decide how best to run its business. The Court made it clear that a firm’s decisions over investments were not subject to discussions with anybody. At issue, then, was whether there would be any discernable public benefit to be derived from labor’s involvement in the decision-­making process. On the contrary, labor involvement in the decision-­ making process might actually be detrimental, not to labor specifically but the larger community because it violates Pareto optimality. Given the logic, especially within the context of the neoclassical assumption of inefficiency, it isn’t difficult to see how wage policy might similarly be viewed as detrimental to the public interest. In focusing on disemployment effects, even if only on a small portion of the labor force, the neoclassical synthesis provided a nice cover for those who sought to strip workers of any rights based on the requirement of employers to have complete control and authority because this narrow view of efficiency is taken to be in the public interest. Some have suggested that both the assault on labor unions and the minimum wage were a matter of deliberate government policy aimed at creating a low-­ wage economy (Piore 1995; Gordon 1996; Prasch 1996). At the same time, much of the assault to wages and labor unions, as the source of wages out of control, also assumed the form of planned disinvestment among companies, especially multinationals who would close their plants in the United States where wage rates were relatively high and would reopen them in developing countries where wage rates were considerably lower. During this period when the rate of plant closure was increasing, it was believed that some were closing not so much because they were unprofitable, but that they weren’t profitable enough (Bluestone and Harrison 1982; Bowles et al. 1983; Rothstein 1986; Reich 1983; and Levin-­Waldman 1992). One school of thought even suggests that management during the 1970s and 1980s embarked on a systematic plan to undercut labor by closing plants and relocating facilities to more favorable business climates. By closing down one plant and punishing its workers, workers in other plants would be forced into more serviceable behavior (Bowles et al. 1983). Not only was there an assault on labor, but the thrust of the new ideology was on dismantling the entire welfare state. In the area of social policy, the administration moved to limit eligibility for public assistance and reduce benefit levels. While assistance programs were being reduced, job training programs, like the Comprehensive Training Employment Program (CETA), were being completely eliminated. On the regulatory front, the administration only accelerated the pace of deregulation begun in the Carter administration. Students of welfare policy were quick to label administration policy as a war on the poor with the intended goal being the creation of a reserve army of labor. At the very least, it appeared

Post-New Deal era and the demise of wage policy   95 as though the interests of capital and the propertied classes were receiving a new Bill of Rights at the expense of workers and the poor (Piven and Cloward 1982; Katz 1989; Bowles et al. 1983; Dolbeare 1986; Fraser and Gerstle 1989). To some extent, the political tide of the 1980s represented a return to the constitutional logic of the Lochner era. During the Lochner era the courts required convincing proof that a state action would not in any way violate one’s rights, or if it was to it had to be clear that the public interest would in fact be served. The focus on empiricism during the 1980s seemed to suggest the same, but with a different twist. In the absence of any real proof that (a) the minimum wage did not cause unemployment and (b) a larger proportion of the labor market was to benefit others than teenagers, there was no legitimate basis to consider the minimum wage at all. Meanwhile, as wages were stagnant and unions were in decline, there was a larger debate on welfare reform and the elimination of entitlements. Conservatives increasingly argued that public assistance created disincentives to work and effectively relieved the poor of their personal responsibility. Welfare, along with other labor market protections, was a source of moral hazard. A variety of thinkers argued that public assistance should be eliminated so that poor people who may have previously shunned work would now be forced to seek any type of work (Murray 1984). Lawrence Mead (1992) in particular argued that poor people did not work for what he termed “mysterious reasons.” In the name of equality, poor people had a civic responsibility to participate in the common project of society, and that common project was work. They were not entitled to receive welfare and as such the entitlement status conferred through the receipt of welfare had to be ended. In exchange for their benefits, Mead (1986) was advocating work, and work through coercion if need be. Only when they fulfilled their obligations to the community could they rightfully claim their equal rights of citizenship. Ironically, conservatives did support it in the form of the EITC because it was viewed as rewarding work. And yet, as liberal groups sought to make increasingly more low-­wage workers aware of their eligibility for the credit, conservatives in Congress sought to limit the reach of the EITC by claiming that many EITC filers were ineligible and otherwise guilty of fraud. The newly elected Republican Congress under the speakership of Newt Gingrich even began to hold hearings into EITC fraud and abuse. The same argument was essentially being made against wage policy. Just like welfare created moral hazard, so too did wage policy. By creating a wage floor, workers were absolved of having to accept any job that would pay anything, especially less than what they may have been accustomed to. Neoclassical economists, most notably Martin Feldstein who was chair of Reagan’s Council of Economic Advisors and James Poterba, sought to frame the problem of moral hazard arising from labor market protections in terms of the reservation wage. A reservation wage was a wage below which a worker would not accept a job. As they saw it, the principal imperfection in modern labor markets was the downward rigidity of existing nominal wages. Consequently, the decline in marginal value of the product of an employee’s labor would likely cause temporary layoff,

96   Post-New Deal era and the demise of wage policy as opposed to downward wage adjustment. Employees who lost jobs were likely to find that the wages at their next jobs were lower than the wages at their previous ones. Through a comparison of reservation wages with wages of last jobs, Feldstein and Poterba (1984) attempted to show the distortions caused by Unemployment Insurance (UI) on the assumption that the probability of finding an acceptable job was likely to decline as the reservation wage exceeds the previous wage. In most cases the reservation wage would at least be equal to the previous wage. From a sample of unemployed individuals, the cumulative percentage of reservation wage rates was less than or equal to 62 percent of their previous wages. The remaining 38 percent of the sample had a reservation wage equal to or greater than their previous earnings. As they saw it, were it not for the current system of UI, individuals’ reservation wages would of course be lower. Although UI reduces the cost of unemployment to the individual, it can nonetheless raise the unemployment rate in several quite different ways. For the individual who is unemployed and looking for a job, the lower cost of unemployment implies a higher reservation wage, and therefore a longer period of unemployment. Although Feldstein and Poterba were applying the reservation wage to the program of UI, the logic of their arguments similarly applied to the minimum wage, and other forms of wage policy. Moreover, it was further maintained that if workers were unable to command higher wages, it was their own fault. They had an obligation to acquire the necessary education and training that would enable them to command higher wages. Just as the government did not owe the poor public assistance as compensation for their behavioral deficiencies, it did not owe them a guarantee of a living wage for their skills deficiencies. Some even went so far as to suggest that the assault on welfare and wage policy was nothing less than an assault on the middle class. The elimination of social protections, it was argued, would force the middle class, out of fear of losing their jobs, to be more pliant (Gans 1996). The assault on wage policy and the assault on welfare were part and parcel of the same thing. Nobody was entitled to anything, especially workers. Just as workers were in a precarious position during the Progressive era because of asymmetrical power, with the demise of wage policy they were being returned to that precarious position. At the same time, the general tendency for more free markets, as exemplified by the demise of wage policy, was not restricted to the United States. Much of the same was happening in many of the European countries that had always been more generous in its welfare state provision. And yet, the point remains: the demise of wage policy was greater in the United States than elsewhere because of our particular version of welfare capitalism – the liberal market-­based one.

Measuring the demise One consequence of the demise of wage policy has been the lack of voice for workers. That policies are pursued that are increasingly more pro-­business, or that pro-­labor policies aren’t actively pursued, is a function of the disappearance

Post-New Deal era and the demise of wage policy   97 of a key constituency in support of such policies (Levin-­Waldman 2001). Another consequence of the demise of wage policy, and not mutually exclusive of the first has been both stagnant wages for the middle class (which will be discussed in greater depth in Chapter 6) and rising income inequality. But it is also because of this declining unionism that voice has also declined. And as a consequence of the absence of collective bargaining and other forms of centralized wage setting, wage inequality has increased. The declining voice of workers has been evident in the declining influence of organized labor or American unionism. J. David Greenstone (1969) presciently predicted that the decline in industrial employment coupled with the emergence of more liberal Republican candidates would someday reduce labor’s partisan activity on behalf of the Democrats. Kevin Phillips (1970) too predicted that the Republican party would emerge as the majority party following the 1968 election, and that this new majority would ultimately supplant the New Deal coalition that had reigned supreme since the 1930s. Richard Nixon’s election to the presidency was considered to be especially significant because it represented a regional party shift, or the beginning stages of a shift, particularly in the American heartland and the South. But the emerging Republican majority was also taking place in top growth states like California, Arizona, Texas, and Florida, as well as suburban communities. To a large extent, these trends are similar to those predicted by Greenstone. In a previous work, I (2001) argued that the decline of unionism may well have been a contributing factor to the emerging Republican majority. Unions traditionally got their rank-­and-file members out to vote, and union members were traditionally aligned with the Democratic party. As unions declined, those former members who might otherwise have continued to be registered Democrats simply dealigned themselves and became independents. The number of registered Republicans on the basis of data from the National Election Studies (NES) between 1952 and 1992 never really increased; rather the number of registered Democrats decreased. Consequently, the decline of unionism, and voice traditionally associated with it, did play a role in the emergence of Phillips’ Republican majority. And because of their traditional anti-­labor and pro-­business bias coupled with the absence of a countervailing constituency, it was only a foregone conclusion that policies less receptive to wage policy would be pursued (Levin-­Waldman 2001, pp. 141–146). The neoclassical preoccupation with the monopoly face of unionism, however, has perhaps obscured the critical political functions performed by unions, especially in the area of electoral politics. Beginning with the coalition they helped forge to bring the Democrats to power during the 1930s, unions have been very successful in giving ordinary workers – those who otherwise would not have had – a voice. Consequently, the decline in unionism resulting in the diminution of voice meant that in the absence of a constituency to lobby on behalf of workers, the interests of businesses were more likely to be heard. But this is not the same as saying that workers necessarily became more conservative on economic issues. The decline of union influence could be said to have two important effects. First it reduces the voice of its members in the firms they are employed in, and

98   Post-New Deal era and the demise of wage policy second it may reduce their voice in the political arena. To the extent that unions offer workers a form of monopoly power that enables them to bargain on a more equal footing with management, the deterioration of that institution will only reduce that monopoly power, with one consequence being an increase in income inequality (Galbraith 1998). Theoretically, this would apply pressure on whatever remaining institutions exist to give workers this semblance of either voice or monopoly power. To the extent that the minimum wage might constitute one of these remaining institutions, the deterioration of unions means that the one constituency with the most invested may no longer be there to lobby on its behalf. All in all, however, the decline in union membership can perhaps be attributed to the changing economic base of the country. This is a product of capital mobility that has perhaps found its most visible and tangible expression in plant closure whereby many of the jobs, once held by unionized workers, have been lost to other regions of the world. With fewer opportunities for unionized workers, and subsequently fewer efforts to unionize workers for fear that their employers will also opt to disinvest, the labor organization appears to have fallen victim to what Everett Carll Ladd (1995) has referred to as the post-­industrial transformation and its attendant political repercussions. During the 1930s, organized labor was a key constituent in a coalition that led to what many have referred to as the great New Deal realignment of 1936, whereby the Democratic party, representing many issues of great concern to working Americans, became the majority party. But that coalition, according to Ladd, has been collapsing – a collapse that began following World War II. And Ladd attributes this collapse to the general economic transformation from manufacturing to post-­industrial service. That this coalition has been breaking down might be a contributing factor to the growing influence of Republicans at the national level, ultimately resulting in policies beneficial to business interests.

Role of wage setting institutions Growing inequality has only undermined the fabric of democratic society, as it has hindered individuals’ personal autonomy, thereby weakening their ability to participate. This, of course, begs the question: To the extent that wage policy may have had the effect of encouraging more participation and perhaps democratizing the workforce, would it be reasonable to infer that the assault on wage policy, aside from the devastating effects it may have had on democratic society, was a deliberate attempt by some to turn back the clock on that democratization? Is this an example of the elites attempting to reassert themselves? Recent studies have documented the declining fortunes of the middle class and stagnant wages in aggregate terms for more than three decades now (Smeeding et al. 1990; Phillips 1990; Hungerford 1993; Newman 1993; Wolff; 1994; Danziger and Gottschalk 1995). But on either end of this middle income group, those at the top of the income distribution have seen their incomes increase while those at the bottom of the distribution have seen their incomes decrease in real terms.

Post-New Deal era and the demise of wage policy   99 Jonas Pontusson (2005) notes that rising inequality has become a permanent phenomenon in OECD countries. Between 1947 and 1973, the incomes of families in the bottom fifth of the income distribution in the United States grew more rapidly than the income of families in any of the other countries. Meanwhile, the incomes of families in the top fifth of the distribution grew more slowly than the incomes of families in other quintiles. After 1973, however, that changed. Low-­ income families in the United States experienced a steady decline in real income from the late 1970s through the middle of the 1990s. And it was only because of economic growth that accelerated during the course of the 1990s, that the decline in their incomes came to an end. By most comprehensive measures, incomes of the top 5 percent of the income distribution rose steadily over the 1990s from under seven times that of the middle 20 percent of America in 1989 to almost eight times in 1999. Between 1989–1999, the average family’s income increased by 3.9 percent. Meanwhile, the income of those families in the top 5 percent increased by 11.6 percent. More unequal than income, however, has been wealth. In the United States in 1998, for example, the top 1 percent received 14 percent of all income, but enjoyed 38.5 percent of all net worth and 47.2 percent of all net financial assets. The top 10 percent received about 40 percent of all income, but held about 83 percent of all financial assets. During the mid-­1990s, the United States had the highest poverty rate of 16 developed countries, while it also continued to have the highest per capita income in the world (Hodgson 2004, pp.  91–94). In the aggregate, the amount of money in American households rose from $2.9 trillion in the mid-­1970s to 4.8 trillion in the mid-­1990s. And while average household income rose from $39,415 to $47,123 in constant dollars, the average incomes of the top 5 percent rose from $126,131 to $201,684. Although incomes of those in the middle fifth ranged from $27,760 to $44,000 with an average income of $35,486, this middle fifth only had 15.1 percent of the total. The median pay for a full-­time worker in the United States was $25,480, with 51.9 million men earning more at a median of $28,964 and 39 million women earning less at a median of $21,736 (Hacker 1998, pp. 10–16). Larry Bartels (2008) suggests that most Americans have only a vague sense of the contours of the nation’s income distribution. In 2005, for instance, the typical American family had a total gross income of $56,200 while the richest 5 percent of American families had incomes of more than $184,500. Low-­income families in the United States have experienced the steady decline in real income from the late 1970s through the first half of the 1990s. This decline came to an end as employment growth accelerated during the course of the 1990s (Pontusson 2005). US census data from the Current Population Survey (CPS) for 1976–2008 shows a considerable increase in income inequality. This can be seen in Table 4.1 on the basis of comparisons of the bottom quintile to top quintile of the distribution, and of 10:50:90 percentile ratios. The primary reason for relying on both techniques is that because the US Census bureau top codes the income variable (at $1,000,000 in recent years), the effect is to understate the extent to which there is income inequality. Various researchers have

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

6,000 6,318 6,840 7,533 8,453 8,825 9,256 9,412 9,670 10,500 11,159 11,911 12,677 13,001 14,206 14,629 14,800 15,000 15,302 15,907 16,500 17,039 17,686 18,620 19,358 20,789 21,677

10th ($)

15,700 16,866 18,154 20,002 22,075 23,790 25,622 26,573 28,000 30,182 32,010 33,500 35,592 36,892 39,300 40,200 41,120 42,300 43,700 45,556 46,553 48,919 50,470 53,060 55,241 57,890 60,200

50th ($)

Table 4.1  Household income inequality

30,149 32,667 35,580 39,320 43,797 47,373 51,500 55,000 58,200 62,872 66,755 70,801 74,600 77,703 83,200 85,505 87,522 90,350 84,881 99,530 101,820 106,648 112,863 117,889 123,984 127,216 132,375

90th ($) 5,591 5,854 6,224 6,997 7,838 8,091 8,390 8,606 8,884 9,801 10,395 10,944 11,929 12,281 13,343 13,771 13,820 14,083 14,347 15,044 15,718 16,204 16,560 17,521 18,254 19,545 20,343

Bottom quintile ($) 33,500 36,383 39,324 43,325 47,629 51,013 56,617 61,025 64,299 70,727 75,686 79,016 83,582 86,152 93,112 94,660 96,582 99,571 104,007 108,487 124,588 131,396 140,841 146,310 146,445 158,062 165,493

Top quintile ($) 2.6 2.7 2.7 2.7 2.6 2.7 2.8 2.8 2.9 2.9 2.9 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.9 2.9 2.8 2.9 2.9 2.9 2.9 2.8 2.8

50:10 ratio 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

90:50 ratio 5.0 5.2 5.2 5.2 5.2 5.4 5.6 5.8 6.0 6.0 6.0 5.9 5.9 6.0 5.9 5.8 5.9 6.0 6.2 6.3 6.2 6.3 6.4 6.3 6.4 6.1 6.1

90:10 ratio 6.0 6.2 6.3 6.2 6.1 6.3 6.7 7.1 7.2 7.2 7.2 7.2 7.0 7.0 7.0 6.9 7.0 7.1 7.2 7.2 7.9 8.1 8.5 8.4 8.0 8.1 8.2

Top-tobottom ratio

21,401 22,000 22,298 23,000 24,596 25,000

60,600 62,470 64,100 66,020 69,606 72,288

133,756 139,561 141,650 149,601 156,362 160,000

20,167 20,602 20,883 21,836 23,020 23,854

165,054 170,622 174,558 184,990 195,830 194,373

2.8 2.8 2.9 2.9 2.8 2.9

2.2 2.2 2.2 2.3 2.3 2.2

6.3 6.3 6.4 6.5 6.4 6.4

8.2 8.3 8.4 8.5 8.5 8.1

Source: Miriam King, Steven Ruggles, Trent Alexander, Donna Leicach, and Matthew Sobek. 2004. Integrated Public Use Microdata Series, Current Population Survey: Version 2.0 (Machine-readable database). Minneapolis, MN: Minnesota Population Center (producer and distributor). Online, available at: http//cps.ipums. org/cps.

2003 2004 2005 2006 2007 2008

102   Post-New Deal era and the demise of wage policy tried to get around this problem by using 10:50:90 percentile levels to analyze the distribution rather than quintile distribution. This avoids the top-­coding problem largely because it excludes those over the 90th percentile level. And yet, most of the skew comes from that top 1 percent that has now been eliminated. Even though these techniques will avoid understatement of income inequality, the fact remains that a comparison of the 10:90 percentiles of the income distribution still eliminates the top 10 percent where a disproportionate share of family income happens to be. The effect is to make the distribution appear to be more equal than it really is. Therefore I present the wage distribution using both quintile comparisons and 10:50:90 percentile level analyses. Each shows that income inequality in the United States grew substantially over the last three decades. On the basis of the 90:10 measure which also reflects a top-­to-bottom measure on the basis of median income, inequality in household income rose by 28 percent between 1976 and 2008. Meanwhile, on the basis of the top-­to-bottom ratio using mean income, household income inequality rose by 35 percent. The top-­to-bottom ratio using median income was no different from the 90:10 measure. That is, the median income of the top and bottom quintiles were exactly the same as the 90th and 10th percentiles respectively. The rise in household income inequality wasn’t nearly as great for the 50:10 or the 90:50 percentile ratios. Income inequality among the 50:10 percentile ratio rose by 11.5 percent compared to 15.8 percent for the 90:50 percentile ratio. One way to understand this would be to infer that the reason for lower rises in income inequality here is because of stagnant wages particularly among the middle class, which might well be attributable to the demise in wage policy, and which will be discussed in greater length in Chapter 6. Another way to understand this is that there was a greater relative increase in income among the top 10 percent of the distribution than among the bottom 10 percent. Peter Gottschalk (1997) suggests that income inequality increases when the growth of income is greater among those at the top than among those at the bottom, even though bottom incomes have improved in absolute terms. While mean wages grew rapidly during the 1950s and 1960s, the dispersion around the growing mean changed very little. But as mean wages grew slowly during the 1970s through the 1990s inequality rapidly increased. So long as those at the bottom of the income distribution gained along with everyone else from secular growth in the mean, it was a foregone conclusion that poverty rates would be kept down. Indeed, income growth of those at the top was greater than the growth of those at the bottom. Between 1976–2008, the percentage increase in income among the 10th percentile was 316.7 percent compared to 360.4 percent among the 50th percentile and 431 percent among the 90th percentile. Among the bottom quintile, average incomes increased by 326.7 percent compared to 480.2 percent among the top quintile. Not only are these trends consistent with the literature already reviewed in this chapter, but they are consistent with the more conventional observation that during this period the rich got richer while the poor got poorer.

Post-New Deal era and the demise of wage policy   103 Several studies using data from the Luxembourg Income Study (LIS), have found that both inequality and poverty are greater in the United States than in other OECD countries. The United States was found to have had the highest inequality in disposable income, followed by the Netherlands and Australia. Sweden and Norway, by contrast, had the most equally distributed income (Buhmann et al. 1988). Similarly, when comparing the United States to the United Kingdom, Canada, and Sweden on the basis of disposable income as a measure of economic well-­being, both the United States and United Kingdom were found to have experienced between 1974–1994 rapid secular increases in inequality and in relative poverty. Inequality increased less in Canada and Sweden, where poverty levels were also lower. And while the United States had the highest relative poverty rates, Sweden had the lowest. Younger households (under age 30) in the United States were not found to be doing as well as older ones (over 65), but both young and old were found to have higher poverty rates than other nations. Those with the highest incomes and the lowest poverty rates in every nation were middle-­aged (40–54) families. Moreover, the relative position of younger households in the United States only worsened considerably since 1979, thereby producing a much steeper age–income profile through working ages. And the evolution of the age–income profile in the United Kingdom has been similar to the United States (Coder et al. 1989; Smeeding and Sullivan 1998). Labor economists typically explain the growth of wage inequality in the United States, at least, in terms of a mismatch between relative demand and supply of skilled labor. Some even maintain that the relative supply of unskilled labor has only increased as a function of immigration. The theory of perfectly competitive markets blames rising inequality on structural changes in the economy that have resulted from a mismatch between good paying jobs and the skills available to workers. The main culprit is technological change biased towards those with higher levels of education and skills (Juhn et al. 1993). According to this school of thought, the labor market is divided into a primary market where high premiums are placed on skilled workers, and a secondary market where unskilled workers are trapped in the lowest-­wage service sector of the economy. The growth in wage inequality between the primary and secondary labor markets has been caused by increasing skills differentials between the two (Katz and Murphy 1992; Katz and Krueger 1992). While there is a tendency among economists to associate the escalation of inequality over the past 30 years with important structural changes in the US economy, including demographic shifts, globalization, and technological change, a contributing factor has been the politics of the nation which has been the true source of policy change. Adrian Wood (1994), for instance, attributes the high level of unemployment in Europe to a mismatch – a decline in the relative demand for unskilled labor in conjunction with the rigidity of relative wages. Where relative wages are rigid, a rise in the relative demand for unskilled labor tends to cause shortages of skilled workers and surpluses of unskilled workers. And yet, while there is higher unemployment, there is also lower inequality. Rather the greater flexibility of

104   Post-New Deal era and the demise of wage policy wages in the United States, which could also be indicative of a lack of serious wage policy, is symptomatic of less concern about income inequality than in Europe. Real income growth, after all, has been much stronger under Democratic presidents than under Republican presidents (Bartels 2008). Another strand of research on the rise of wage inequality in the United States emphasizes the role of political and institutional developments, specifically the decline of unions and the failure of the Federal Government to maintain the real value of the minimum wage. The minimum wage, however, is limited from a comparative perspective because many countries don’t have a statutory minimum wage, which is true for a majority of social market economies, characterized by high rates of unionization and highly institutionalized forms of collective bargaining. Rather wage agreements negotiated by unions and employer associations typically apply to all workers in a given sector irrespective of whether they are members of the unions. Consequently, the floor of the wage hierarchy is effectively determined by collective bargaining rather than government legislation. The more institutionalist school is captured by the SME concept which holds inequality to be a function of ideology fused with specific policies (Pontusson 2005). Or it speaks to perhaps a particular version of welfare capitalism. Institutionalists hold rising wage inequality to be due to a shift in public policy and a corresponding decline in labor market institutions like unions and the minimum wage in the United States and wage councils in Britain (Piore 1995; Gordon, 1996; DiNardo and Lemieux, 1997; Fortin and Lemieux 1997; Lee 1997; Machin 1997; Galbraith 1998; Palley 1998; Lemieux 1998; Howell 1999; Wallerstein 1999; Craypo and Cormier 2000). Examining trends in overall wage inequality in the United States labor market on the basis of data from the Current Population Survey (CPS), David Card and John DiNardo (2002) attributed overall wage inequality during the early 1980s to trends in the minimum wage and declining unionization. And in data on worker literacy in OECD countries, David Howell and Friedrich Huebler (2001) found that while there was a positive association between skills differentials and changes in wage inequality, there was also a strong association between labor market institutions and changes in wage inequality. Also during the late 1970s, in conjunction with the increasing influence of the neoclassical synthesis, the United States began experiencing a sharp ideological shift towards a preference for competitive market outcomes and solutions, and this ideological shift did have direct effects on bargaining in the workplace (Moody 1988). This shift was also reflected in increasing Republican majorities. Or as Bartels (2008) suggests a common explanation for the electoral success of Republican candidates over the past four decades is that the White working class increasingly became conservative. But mass public opinion bears little resemblance to the truly ideological landscape that political elites have taken for granted. White working class voters might appear to be more conservative and to vote Republican only because Republicans have succeeded in shifting the focus of political debate from economic issues. Under Republican presidents, the

Post-New Deal era and the demise of wage policy   105 average growth of every income level has been about two percentage points higher in presidential election years than in non-­election years. Still, as much as inequality has been an enduring legacy for the last quarter century, it has not been as great in Europe. A key reason for this is that inegalitarian market forces have been constrained by labor market institutions and a welfare state that has to a greater extent compensated low-­income families. There hasn’t been quite the same level of wage policy decline in Europe as there has been in the United States, in large part, because of the presence of centralized wage setting institutions. Michael Wallerstein (2008) has been clear that more centralized wage institutions do make a difference. Centralized bargaining is often associated with greater equality of wages in different occupations. Collective bargaining always entails a centralization of wage setting relative to purely competitive labor markets. Wages can be centralized in two basic ways: direct negotiations between peak associations of unions and employers and government intervention. Where industry-­level bargaining predominates, countries are more likely to centralize than when plant-­level bargaining predominates. Even in the absence of centralized bargaining, industry-­level unions may coordinate their demands and employers’ associations may coordinate their response (Wallerstein and Western 2008). Freeman and Medoff (1984) most famously found that a 10 percent increase in organizing in manufacturing generates a 1.5 percent increase in the union wage. The wages of non-­union workers, however, did not appear to be influenced by the percentage of workers organized. From the mid-­1990s, there was a continued decline in union density accompanied by a falling union wage premium because the declining demand for union labor fell due to a couple of pressures: increasing competitiveness throughout the US economy and union companies facing non-­union competition (Blanchflower and Bryson 2008). According to David Card, Thomas Lemieux and Craig Riddell (2008), the dominant view at least until the 1970s was that unions tended to increase wage inequality. Increasingly it is becoming clear that declining unionism contributed to a steep increase in wage inequality in both the United States and the United Kingdom during the 1980s. The fraction of workers covered by collective-­ bargaining agreements in the United States, the United Kingdom and even Canada has been relatively modest. Collective bargaining in these countries has also tended to be conducted at the industry or sectoral level. Within narrowly defined skill groups, wage inequality has always been lower for union workers than non-­union workers. Milton Friedman had posited two channels for the disequalizing effects of unions. One was the “between-­sector” effect, which is the gap between otherwise similar workers in union and non-­union sectors. And the other is the hypothesized positive correlation between wage gains and the level of wages in the absence of unions. Freeman attributed the compression of wages in the union sector to explicit union policies that sought to standardize wages within and across firms and establishments. On the basis of longitudinal data, Freeman found there to be low-­wage inequality in the union sector. He found that the

106   Post-New Deal era and the demise of wage policy d­ ispersion tended to fall when workers left non-­union jobs for union jobs, and that it rose when they moved in the opposite direction. Card et al. (2008) found that the trends in Canada were similar to the United States for 1984–2001. Male unionization rates declined 14 percentage points, whereas male unionization rates only declined by 9 percentage points in the United States over the same time period. Union wage compression effects help to explain a reasonable fraction of secular growth in male wage inequality and of cross-­country differences in male wage inequality. But unlike the United States and the United Kingdom, overall inequality in Canada remained very stable. And yet, overall wage inequality would have declined had union wage impacts remained at their 1984 levels. In other words, had there not been a decline in unions, inequality would have been less. They suggest that there may have been several developments to offset the pressure towards increased inequality associated with the decline in union strength, at least in Canada. The real minimum wage in Canada rose from the mid-­1980s to the late 1900s while in the United States it was approximately constant over the same period.

Sources of inequality All this would appear to point to the conclusion that relative to other countries where wage policy is more prevalent, the decline in wage policy in the United States is a key factor in explaining why inequality is greater in the United States than elsewhere. Part of the difference is the difference in overall welfare state tradition. In Europe, particularly in the SMEs, wage policy has been formalized and is a product of planning. Pontusson (2005) distinguishes between an economic orthodoxy which he calls the “market-­liberal view” and the “social market model”: under the “market-­liberal view” governments may create a more equal distribution of both income and consumption through taxation, transfer payments and the provision of services. And yet, when they do they also distort market forces and undermine efficiency. The market-­liberal view also implies that countries in which wages are more equally distributed will also have lower living standards. In most OECD countries, the average annual growth rates from 1980–2000 were lower than the corresponding figures from the previous two decades. The social market view, by contrast, holds that economy-­wide collective bargaining agreements, i.e. wage policies, characteristic of northern and Central Europe facilitate the exercise of wage restraint and may also enable those countries to achieve a better trade-­off between inflation and unemployment. It is often claimed that liberal market institutions produce better employment outcomes than do social market institutions. Over the 1990–2002 period, the average growth rate of service employment in the LMEs outpaced that of continental SMEs. As a group, LMEs are characterized by higher than average employment growth rates, but, not by lower than average unemployment rates, nor by higher than average employment rates. A commonly held view among both European and American economists is that the poor performance among Europe’s social market economies is due to the lack of labor market flexibility.

Post-New Deal era and the demise of wage policy   107 Some combination of institutionalized collective bargaining, minimum wage legislation and other forms of social welfare provision such as more generous unemployment compensation has effectively retarded economic growth. But the SMEs are characterized by egalitarian wages. And while egalitarian wages have inhibited employment growth in SMEs, it is not clear that they are the main obstacle to employment growth. And yet, in both liberal and social market economies, union influence – one form that wage policy takes – in the process of wage formation tends to be associated with some degree of wage equalization. One example of the more formalized wage policies has been the corporatist policies found in many European countries. Corporatism entails a cooperative relationship between government, business, and labor. The objective was to reach an agreement on wage levels so as to maintain economic stability. It is essentially about regulating conflict between interest groups in society. As much as the community’s growth is assumed to be based on greater cooperation, it also assumes instability to arise from the conflict between these interests (Schott 1984; Panitch 1977). Arguably the logic is similar to that underpinning the initial Wagner Act, but the Wagner Act merely assumed that conflict could be attained through the collective bargaining between the two principal interests: labor and management. Corporatism, however, assumes that government too has a key role to play in preventing conflict, and that centralized wage setting through this type of cooperation will indeed prevent strife.

Conclusion In this chapter I have attempted to chart the demise of wage policy in the United States, especially during the post-­New Deal period. The political assault on wage policy was clearly assisted by the prominence of the neoclassical economics position that wage policies, aside from creating moral hazard and infringing upon personal liberty, were at the core simply inefficient. The assault which assumed the form of attacks on unionism, allowing the minimum wage to decline in value, and the general attack on welfare and entitlement, has had profound consequences and implications for democracy. First and foremost, the protections that workers enjoyed as a counterbalance to the asymmetrical balance of power between workers and their employers was eroded. Second, because workers lost their voice, a critical constituency that could lobby for the types of policies beneficial to workers and the middle class was absent, thereby making it a foregone conclusion that policies more favorable to businesses would be pursued. Because there were no longer effective policies in place to bolster wages, income inequality grew considerably, especially during the 1980s when the assault on unions was at its peak and the minimum wage had gone a long time without being raised.

5 New living wage movement

In this chapter, I argue that the living wage movement both in the United States and abroad has been motivated by the transformations in the global economy. In the United States, the living wage movement specifically, and the statewide minimum wage initiatives it has inspired, have been a response to the collapse of the federal minimum wage, or what might be termed as the failure of wage policy. In this vein, it fits into Pontusson’s (2005) liberal market economies framework whereas in other countries it reflects more the social market economies framework. It also fits into Esping-­Andersen’s (1990) liberal welfare state regime of limited measures. The collapse of wage policy, especially during the 1990s, ended up being a major factor in the emergence of grass-­roots organizations intended to create a minimum wage at the local level. Beginning in 1994 the City of Baltimore passed the nation’s first Living Wage ordinance. Under this ordinance, all companies that had contracts with the city to perform public services were required to pay a minimum hourly wage of $6.10 an hour at a time when the federal minimum wage was still $4.35 an hour. More than a 130 municipalities have since passed ordinances. Although the living wage movement has taken on characteristics of a social movement with the goal of achieving greater justice and fairness in the labor market, it has also been driven by deep structural changes in the labor market, and changes which highlight the need for serious wage policy. Attempts to resurrect wage policy haven’t ended with just the living wage movement, rather they have extended into measures taken by various states to raise their current minimum wages. And in some cases states that never had a minimum wage adopted one. More encompassing statewide efforts have been inspired by the success of these living wage campaigns (Wicks-­Lim 2006). Meanwhile, at the national level, the most recent minimum wage increases first legislated in the first 100 hours of the new Congress in 2007 – with increases taking effect in three stages through the summer of 2009 – represented an attempt to restore some elements of formal wage policy. But the action of Congress was preceded by the midterm 2006 election, where not only did the Democrats retake control of the House of Representatives, but several states through statewide referenda passed new minimum wage laws. Perhaps what was most striking about this was that several

New living wage movement   109 states with right-­to-work laws passed their first minimum wages. Could we then say that these statewide efforts were a culmination of the smaller local grass-­ roots efforts to pass Living Wage ordinances? The quest for a living wage, however, was not only to be found in the United States, rather living wage movements of varying kinds were developing in other countries, largely in response to a greater tendency to move way from social market economies to more liberal market economies. The living wage, however, does not have the same meaning abroad as it does in the United States. In the United States, the living wage is very narrow, as it generally is a local ordinance requiring private contractors who do business with their local governments to pay a specified minimum wage. Campaigns in other countries are actually reminiscent of the historical living wage in the United States, mainly a quest for a national minimum standard. In Canada, for instance, struggles to achieve a living wage have primarily focused on the need to increase the minimum wage, particularly for members of the Homeworkers Association (Eaton and Dagg 2004). In Britain, campaigns for living wages have been about low-­wage workers. According to Damian Grinshaw (2004), the British campaign for living wages, or low-­ pay campaigns as they are called, essentially contain three dimensions: (a) the improvement of the National Minimum Wage; (b) the elimination of a two-­tiered work force; and (c) the prevention of over-­reliance on in-­work benefits. Or some would say to represent a shift away from older policies of making work pay predicated on in-­work assistance to a new ethical view that workers are entitled to a guaranteed minimum income and should be paid wages on some notion of need (Grover 2005). Because other countries’ foci have been on national policy, their achievements have been considerably broader than in the United States where the immediate benefits only accrue to those working for firms with local contracts. In Britain, these low pay campaigns provide new insights for understanding the forces shaping wage structures among low-­paid workers. By highlighting the issue of poorly paid workers, they have been successful in pressuring and convincing employing organizations to improve levels of pay. In Britain where there is no official equivalent of the US poverty threshold, the aim of the living wage is nonetheless similar to that of the United States: to increase the wages of poorly paid workers. Living wages, then, are seen as part of a wider concern in the labor movement with tackling poverty (Grover 2005). Indeed, they have been the force behind the attainment of Britain’s National Minimum Wage (NMW) introduced by Britain’s New Labor Party in 1999. Between 1979 and 1997, under a Conservative government, the United Kingdom experienced rising levels of income disparities and poverty, and also a growing percentage of low-­paid workers. By 2005, an estimated 22.1 percent of workers in the United Kingdom were categorized as “low pay.” Low pay in the United Kingdom has also been associated with female employment, part-­time work, and low-­skilled occupations. And compared to continental Europe, the United Kingdom never had a highly regulated labor market. A rapid increase in earnings inequality and a sharp increase in the number of households during the

110   New living wage movement 1980s and early 1990s led to a substantial increase in household poverty (Mason et al. 2008). Historically, trade unions provided significant protection for many workers at the low-­end of the labor market. Union membership peaked at 53 percent in 1979, but that peak was followed by a sustained decline, precipitated initially by the severe recession at the end of the 1970s through the beginning of the 1980s. Union density now stands at 29 percent. In 1989 when density was 53 percent, about 78 percent of the workforce was covered by collective agreements. Now with 29 percent density, only 36 percent of the workforce is covered by collective agreements. In the vast majority of firms, there is no negotiation or consultation regarding pay and working conditions, including unionized workplaces. In contrast to other Western European countries, there never was a single all encompassing system of industrial relations in the United Kingdom. Under the Thatcher government new laws were introduced which not only reduced the scope of unions to act, but essentially created an environment whereby employers were able to withdraw recognition of trade unions. Until 1999, the United Kingdom didn’t have a national minimum wage, but there were other forms of low-­wage protection – through a broad system of wage councils (Mason et al. 2008). In Australia, the concept of a living wage is actually an integral element in a national system of wage determination. At the center of Australia’s unique wage setting institutions are quasi judicial tribunals that were established around the turn of the century to manage and resolve industrial disputes. The idea of a living wage was a founding concept in the Australian industrial arbitration system. The Australian Council of Trade Unions launched their living wage campaign in 1996 as a claim before the Australian Industrial Relations Commission to vary awards. With the living wage campaign, the ACTU was attempting to mount a counter-­offensive against the newly elected government that was committed to breaking union power and deregulating the labor market. The living wage has, in short, been about preventing the collapse of hourly wage rates in an economy plagued by chronic unemployment and underemployment (Buchanan et al. 2004). And in New Zealand, the living wage has been about achieving fair labor standards. In New Zealand’s labor market, wage determination occurred principally through centralized bargaining systems until the mid-­1980s. “Fair wages” were initially defined with reference to prevailing wage rates, but over time they became conflated with appropriate living standards. For nearly a century, the Industrial Conciliation and Arbitration Act of 1894 had established a basic framework for industrial relations. As part of a 1925 statement of the Arbitration Council, the living wage was considered to be a minimum rate earned by a man that would be sufficient to maintain himself, his wife, and two dependent children. Until 1984, the labor market had been governed by the full-­income concept – a social wage – that included all non-­wage benefits paid by employers, as well as contributions from government revenue to wage earners or the entire population. But between 1984 and 1990, the Labour party, which was always closely linked to the trade union movement, began a process of dismantling market reg-

New living wage movement   111 ulations. In 1991, the National Government enacted the Employment Contracts Act (ECA), which didn’t even mention trade unions; rather they were subsumed under bargaining agents, thereby weakening their ability to recruit and represent workers. Given this climate, the living wage in New Zealand, as is the case in Britain, has been about improving the national minimum wage, which always fluctuated widely in its ratio to average wages (Heyman 2004). The key difference between the United States and other countries, is that the living wage is part of a broader wage policy to either maintain national gains that workers achieved in the past that are perhaps perceived to be under threat, or to obtain a better national wage policy. It is, in short, about national minimum income standards that are meant to encompass all workers. In the United States it is much narrower, and reflects the limited purpose of wage policy – to simply boost wages. In the spirit of incrementalism that characterizes the policy making process in the United States, the living wage has merely attempted to offer assistance to a narrow subset of workers just for a start. That is, with a local foundation in place, the precedent exists to expand further at a later time. There are voices in the United States that view the living wage as a vehicle through which to reinvigorate the declining labor movement (Turner and Cornfield 2007). Arguably, living wage campaigns outside the United States have been successful in achieving the ideals found in the rhetoric of justice and fairness employed by many American campaigns to galvanize low-­wage workers. The US living wage movement, in particular, is of interest for two reasons: first, campaigns for Living Wage ordinances have sprung up in response to municipalities contracting out municipal services to private contractors. This outsourcing has primarily been an effort to save money at the local level by having services once performed by relatively highly paid unionized municipal employees to private contractors paying their non-­unionized employees considerably less. In this vein, the outsourcing has only represented an assault on wage policy in that it has been an assault on municipal unions. Both of these are reflective of the collapse of wage policy. Living wage campaigns, then, are in essence a response to that assault. Second, these campaigns have also been in response to the failure of minimum wages at both the federal and state levels to keep pace with inflation, which has in essence been the erosion of wage policy. In a larger sense, the contemporary living wage movement, at least in the United States and elsewhere, has been how economic transformations have driven evolving forms of wage policy and also evolving forms of democracy. The rhetorical justification for the living wage has long been the failure of the federal minimum wage to keep up with inflation, coupled with rising inequality. Most treatments of the living wage have focused on the fairness issue. But the living wage has been an inevitable response to much more. On one level, as I demonstrate on the basis of census data from the Integrated Public Use Micro-­series data (IPUMS), the living wage was a byproduct of historical forces that made it more likely that some cities would pass ordinances over others. That is, the living wage had more to do with labor market forces. On another level, they have been a response to the failure of economic development

112   New living wage movement policy, particularly at the local level, in response to these transformations, to attract and create the type of jobs that would pay livable wages. And in the absence of serious wage policy, it was only inevitable that grass-­roots organizations – maybe even a social movement – would emerge that would seek to redress the basic grievance – that at root these jobs simply do not pay sufficiently. Although the data in this chapter only looks at economic transformations in the United States, the analysis is nonetheless illustrative of the impact of changing economies. Therefore, it should have lessons for other countries even though policy objectives will differ. What should become clear towards the end of the chapter is that labor market transformation resulting in the disappearance of high-­paying skilled jobs ultimately need to be met with a wage policy that will ensure the continuation of a middle class. Moreover, this may well be consistent with much of the literature that has stressed the cruciality of economic development to the maintenance of democracy. Wage policy is actually part and parcel of economic development. That there has been a proliferation of living wage campaigns, particularly in the United States, it is very much a response to the nature of economic development as it has been taking place, and is wrapped up in the politics of redevelopment.

The changing economic base The transformation of the economic base from industrial based manufacturing to a service and information based economy has resulted in most jobs being created either at the high end of the income distribution requiring considerable training and skill or at the bottom end for those lacking in education and skill. It is true that during the 1930s when the federal minimum wage was enacted that many of the manufacturing jobs were low skill and low wage, just as many of the service jobs are today. But federal policy in the form of the minimum wage and the Wagner Labor Relations Act, which established protection for collective bargaining, were intended to raise the wages of low-­wage manufacturing jobs for the express purpose of creating consumer demand by expanding the purchasing power of workers. Along with the decline of manufacturing has been a corresponding decline in union membership and union power in the marketplace. Therefore, the changing base of the economy coupled with the declining value of the minimum wage, along with labor union decline, have left many among the ranks of the working urban poor unable to support themselves and their families in a dignified manner. In this regard, central arguments behind the living wage are very similar to those behind the minimum wage. The living wage in most US cities only covers those workers employed by firms that have contracts with those municipalities that passed the ordinances, or in some cases workers employed by firms that have received financial assistance. As such, coverage only extends to a limited number of workers and only at the local level. Living wages have been passed specifically in response to two things. First, they are a response to the failure of both federal and state minimum wage laws to keep pace with inflation and enable the lowest paid workers to live above

New living wage movement   113 the poverty line. And second they are a response to the trend over the last decade to outsource public services to those contractors who, unfettered by municipal civil service rules and unions, are often able to pay considerably less than would be the case were they a public agency paying the same workers to perform the same services. Unlike the minimum wage which only increases when Congress acts to pass it, most Living Wage ordinances make provisions for indexation. Many ordinances establish a basic wage level and then index them to either the Consumer Price Index (CPI) or increases in state median wages. Living Wage ordinances often contain a two tiered wage: one that is paid if the employer provides health insurance and an even higher one if no health insurance is provided. Ordinances also often include provisions for paid vacation and monitoring and enforcement procedures (ACORN 2001b). The language of this new movement, in large measure, has only mirrored the language of the Progressive period that called for living wage. Because the federal government has failed to maintain the minimum wage, localities and states have taken it upon themselves to mount grass-­roots efforts to achieve more livable wages. But to a certain extent, the movement for living wages has only been more pointed. Just like unionism and the federal minimum wage before were responses to industrialism, the living wage has been a response to post-­ industrialism. It has also been a backlash against economic development policies that have created either high wages at the top or lower wages at the bottom (Levin-­Waldman 2005b). A common argument is that living wages are often responses to grass-­roots campaigns seeking to attain justice and fairness for low-­wage workers (Pollin and Luce 1998). A central argument for the living wage, flowing from the collapse of wage policy, has been because the economy in general, and local economies in particular, have failed to generate jobs that pay wages sufficient to support families, some type of wage policy, whether it be a minimum wage or a living wage, must be mandated to compensate for this structural failure. Whereas the federal minimum wage was born in an era when the economy was undergoing the pains of industrialization and the strife that accompanied it, the modern living wage, however, was born in the post-­industrial economy, whereby the base of the economy shifted from industrial-­based manufacturing to a service and information based economy. As a result of the shift, most jobs were created either at the high end of the income distribution that also required considerable training and skill, or at the bottom end where most workers were lacking in both education and skill. The flight of capital from the nation’s cities that in many respects was emblematic of this post-­industrial transformation forced many local governments to pursue the types of economic development and redevelopment policies that would generate growth. To attract investment, municipalities often felt compelled to create “favorable business” climates, which often meant reducing government expenses and offering tax breaks (Greene 2002). In many cases, the contracting out of municipal services to private contractors was to cut costs in

114   New living wage movement just those efforts to create such a favorable business climate. In this vein, these types of policies reflect the urban growth machine model first formulated by Harvey Molotch (1976) and later refined by Paul Peterson (1981). In Molotch’s formulation, cities are essentially growth machines, whereby the principal function is to generate economic growth and to in turn pursue those policies that will facilitate growth. To achieve these ends, public officials form coalitions with business leaders for the purposes of generating growth-­oriented policies. At the same time, in order to appear representative of the larger population, as well as to deflect attention from these coalitions, they focus on symbolic political issues. In Peterson’s refinement, a public official when confronted by the need to generate growth, would never pursue the types of policies that might create unfavorable business climates. In the Peterson model there are three types of politics: allocational, redistributive, and redevelopment. By allocation, Peterson means the types of policies that will result in large segments, if not all segments, of the community receiving something and the costs being passed on to all. When a government pursues redistributive policies, it takes from one group and gives to another. Hence raising taxes in order to pay for some new type of program is seen as being redistributive. Redevelopment refers to the types of policies intended to attract investors into the city in order to generate growth and achieve fiscal stability. The end result is what Clarence Stone (1989) might refer to as an urban regime predicated on growth. Regime specifically refers to the types of coalitions and/or partnerships formed between public and private actors for achieving a public objective, which in this case is defined as an economy that will create jobs and opportunities. Reducing costs through the outsourcing of municipal services is considered to be part and parcel of creating a favorable business climate. As Greene (2002) suggests, privatization works to the benefit of the regime pursuing growth policies by making the city a more attractive place to invest. Elder and Cobb (1983) refer to this as sending a signal in order to convey a message, which in this case is that the city in question is a good place to do business. Not only is it a good place to do business because it may be offering financial assistance to lure business, but it is a good place for doing business because the reduction to the municipal budget effectively signals to businesses that they will not have to worry about the local government pursuing redistributive policy at the expense of development. By the same logic, an assault on wage policy, or at least the deliberate indifference to the need for one, is also viewed as creating a favorable business climate. The irony, however, is that public officials pursuing growth policies don’t see themselves as necessarily beholden to business interests; rather they see themselves as stewards of the public interest, and that by pursuing these types of policies, they are furthering the larger urban interest. When the result has been low-­paying service jobs, the response has often been the emergence of anti-­growth community coalitions arguing that these policies are essentially unjust and unfair (Merrifield 2002). And to a large extent, the emergence of living wage campaigns can be viewed as a political backlash against these types of policies (Levin-­Waldman 2004, 2005b).

New living wage movement   115 The belief that the living wage is about achieving a more fair and just society is ultimately about achieving economic justice. There are those who view the living wage movement as but a new form of social movement. Bruce Nissen (2000) suggests that because the policy objectives of living wage campaigns have been relatively limited, they might be considered within the context of long-­term social movements, whose ultimate objectives are to achieve a more just and equitable society. Groups protest when they believe that their concerns are not adequately being addressed by the governing regime. Social movements often emerge in response to the distribution in public goods, as exemplified in public policy, not being available to all, even though the larger community may have played a role in their production (Kirschelt 1993). An example of that might be the type of economic development that may only benefit a few, but all are effectively being forced to pay for in the form of tax abatements and outsourced city services intended to achieve a favorable business climate. David Reynolds (1999) notes that living wage campaigns across the country have brought together broad coalitions to fight for economic justice. At the same time, these campaigns’ leaders have been given opportunities to develop new strategies for organizing because they have been able to build coalitions with the communities they live in and other progressive organizations, and to also connect them with a progressive political agenda. Most definitions of social movements do share some reference to “social change,” and contemporary conceptions of social movements may reflect the failure of the economy to provide materially for all its citizens (Walton 1998). In this vein, living wage campaigns may fit the model in that they are often the response to the failure of a particular local economy to provide sufficient economic opportunity for low-­wage/low-­ skilled workers (Levin-­Waldman 2005b). Arguments of justice and fairness do capitalize on the failure of the federal minimum wage to keep pace with inflation, along with the inherent injustice of cutting municipal costs off the backs of municipal workers. But they also capitalize on one of the byproducts of the post-­industrial transformation that has created a dual economy – growing income inequality. The outsourcing of jobs and the stagnation of the minimum wage have been amidst a climate of rising income inequality, and indeed many cities that passed ordinances tended to have greater inequality than those that did not. Erica Shoenberger (2000) suggests that in this vein, the living wage isn’t a policy that simply provides charity to the working poor, or even redistributes income, but “a way of readjusting the costs and benefits of a particular strategy to make them more equitable” (p. 433). It is through the living wage that the burdens of the specific strategy of outsourcing municipal services are effectively reallocated. Or to put it another way, if a strategy of economic development predicated on the low-­road is going to be pursued, there in turn needs to be some type of corresponding wage policy that enables low-­wage employees to earn livable wages that enable them to support themselves and their families with dignity. To talk about achieving greater equity is to talk about the same power imbalances, the asymmetrical relationships that necessitated the creation of labor

116   New living wage movement market institutions in the first place. Cities that passed ordinances, of course, did so for a variety of reasons, not least of which is each city’s respective governing regime. Using CPS data in another study, I (2008) found that cities with certain labor market features were in fact more likely to pass ordinances than cities without those features. Cities that passed such ordinances had larger gaps in educational attainment among their workers, which could be a source of growing income inequality. That higher income inequality is an important characteristic only underscores one of the issues that campaigns have been responding to. Cities that passed ordinances also tended to be in high union density states, which may also underscore the importance of constituent bases of support.

Urban path dependency Another way to understand the fledgling living wage movement, or at least what it responds to, is within the context of path dependency theory. The rhetoric of justice and fairness no doubt serves to mobilize people into these campaigns and infuse them with a sense of purpose. Underneath the rhetorical surface, however, the root source of the movement is the absence of wage policy. But the collapse of wage policy accompanied significant change in labor markets over time which may have made it a foregone conclusion that such campaigns would emerge either because there was a genuine need for a wage policy given the structure of a particular labor market or other circumstances, i.e. political, would be conducive to their development. Paul Pierson (2000) argues that it has become increasingly common for social scientists to describe political processes as “path dependent.” The problem, however, is that there isn’t always clear definition as to what it means. In a broader version of path dependence, it refers to the “causal relevance of preceding stages in a temporal sequence” (p. 212). He suggests that this understanding in which preceding steps in a particular direction effectively reduce further movement in the same direction is captured by the idea of increasing returns. Economic growth generates the positive feedback that defines increasing returns processes. Path dependence processes, however, are most powerful at the macro­level involving organizations and institutions. Path dependence in short can be defined as the observation that our future is determined in large part by the legacy of the past, at both policy and institutional levels. A policy step in one direction is likely to encourage the next policy step in the same direction. In terms of policymakers themselves, they are likely socialized into norms, values and ways of working that constitute an institution. Values are often unquestioned and often times actively promoted and elevated to a sacred status within the organization (Gains et al. 2005). Adrian Kay (2005) suggests that path dependency is an empirical category – an organizing concept – that can be used to label a certain type of temporal process. It is a particularly appealing concept for understanding public policy because it in essence maintains that policymakers don’t really have much room to make free choices. As Douglas North (1990) explains, history matters: “The path of institutional

New living wage movement   117 change that determines the long-­run evolution of economies is shaped by constraints derived from the past and the (frequently unanticipated) consequences of the innumerable incremental choices of entrepreneurs which continually modify those constraints” (p. 365). The path dependent literature seems to suggest that major policy outcomes and/or developments cannot be explained in terms of short-­term processes. Rather trajectories are punctuated by what James Mahoney refers (2001) to as critical junctures. These critical junctures are defined by two essential components: (a) they represent a choice that was made between two or more alternatives, and (b) they are characterized by a contingency in which an unforeseen event has an impact. A critical juncture, however, increases the probability that policymakers will follow a particular path. What is important about path dependence is that at these critical junctures policy actors create institutions to deal with the unforeseen event, and these institutions in turn shape the policy behavior of subsequent actors. If we could say that an economic transformation constitutes a critical juncture, we might also say that the types of urban growth regimes evoked by the Molotch–Peterson growth machine model are akin to the types of institutions designed to address them. Once locked into a path, there is no good reason to believe that it will be easy to break out of that path (Altman 2000). Rather there is a determinate relationship between past and present actions. What path-­dependency models do is they enable us to demonstrate how economic processes are “locked-­in” as a consequence of their past histories (Dopfur 1991). This might already imply that the policy choices that local officials made which may have led up to living wage campaigns may have similarly been “locked-­in” as a consequence of those cities’ past histories. Path dependency implies that current options and possibilities are limited by institutional legacies (Torfing 1999). This might be relevant to the living wage to the extent that economic transformation yielding a dual labor market could be said to constitute an institutional legacy. Or at the very least they have constituted critical junctures. To suggest that living wage campaigns may fit into the broader category of urban path dependency theory is to raise the following questions: what is it about the nature of urban politics that leads to these types of political movements? Laura Reese’s (2006) discussion of tax abatements is perhaps a good example of policy behavior that is strongly path dependent because past abatement practices are very likely to affect future abatements. Demographic core variables appear to affect local economic development policy. Larger cities have been found to be more active in economic development, and older cities appear more aggressive in their strategies. When it comes to local economic decisions, research on path dependency suggests that once an incentive to invest is offered it will continue to be offered and that over time such incentives will only escalate and maybe even broaden. In other words, once the pattern of response has been established it only gets duplicated in the future. Path dependency theory’s application to the evolution of living wages assumes the form of “historical institutionalism,” which may account for why

118   New living wage movement certain countries and/or systems develop a certain way while others developed in different ways. As Kathleen Thelen (1999) observes, historical institutionalism often begins with empirical puzzles that emerge from observed events or comparisons. Historical institutionalism, for example, has been concerned with the following types of questions: “Why did the policies of the advanced industrial countries differ so much in response to the oil shocks of 1973? Why have some industrial relations systems proved more stable than others in the face of globalization pressures?” (pp. 373–374). Historical institutionalism conceives of public policymaking and political policymaking as a distinct process characterized by extended time periods of considerable stability – “path dependency” – which are interrupted by “formative moments.” But there is an inherent tendency in historical institutionalist theory to assign history a more logical trajectory – “retrospective rationality” – than would otherwise be the case. Historical institutionalism has difficulty properly conceptualizing and accounting for political conflict, and thus is unable to explain political and policy change. It tends to be consistent with the theory of incrementalism in that its central argument that policies persist unless there is a serious force exerted for change which is consistent with numerous observations both popular and academic (Peters, Pierce and King 2005). How, then, might this apply to living wages? Public officials are specifically afraid to advocate the types of policies that will cost votes (Wolfinger 1971). Conversely, they would be afraid of pursuing a policy path different from what has been pursued in the past for the same reasons. Consequently, they fall into established and predictable patterns of behavior. Much of the contemporary living wage movement is a response by those low-­wage workers who have been forced to bear the brunt of these decisions. Therefore, the living wage path may look as follows: The reason why cities have felt compelled to pursue these types of policies lies in the economic transformations that have occurred in them. These transformations, in other words, may have created a path in that they resulted in some having specific labor market characteristics that would make them more conducive to the passage of Living Wage ordinances. We might, then, postulate the following hypothesis: cities that have passed ordinances were more likely to have suffered greater economic decline and transformation than those that did not. More specifically, these cities may have experienced a greater decline in the types of blue collar manufacturing jobs that paid better wages to otherwise low-­skilled workers. Meanwhile, these same cities saw greater growth in higher paying jobs requiring greater skill and education at the top end of the distribution. Cities that passed ordinances, then, most likely exhibited certain labor market demographic characteristics that cities that did not pass ordinances did not, and the changes in those cities over time were more acute. Cities that passed ordinances, in short, may have been in greater need of wage policy, as they may have had a larger population suffering from the absence of wage policy.

New living wage movement   119

Comparative city analysis Data for this analysis is drawn from the IPUMS for 1950–1990. I specifically look at the IPUMS files for 1950, 1980 and 1990 because they are the files that specifically have a city variable that allows for examining a specific city’s demographics. From these files, I cull a list of cities that are common to all three data files. Those cities are then separated into two groups: those that passed ordinances, LW cities; and those that did not, non-­LW cities. The result is a sample of 53 cities of which 25 passed ordinances. The purpose of this analysis is to look at changes in demographics over a period of time in those cities that passed ordinances prior to their adoption. As 1994 was the year that the first Living Wage ordinance was passed in Baltimore, 1990 represents the ending year for change. A look at 1980–1990 would have yielded more cities in the sample, but the object was to take a more historical view of these changes. The list of cities being used for this analysis in Table 5.1 reflect those that were common to all three files, also indicating whether they are in high union density states or low union density states. The union density measure reflects the union density of the state as a whole in which the city happens to be located. Although this won’t necessarily represent an accurate measure of union density in the city itself, especially as union density could just as much be in the city’s surrounding suburban communities as it could be in the cities themselves, it may nonetheless be suggestive. We may be more likely to find more workers in unions in those states where union density tends to be higher. Although union membership would be a better measure, only a small percentage of workers are actually members of unions, and more to the point, the IPUMS does not have a union variable. Cities in states with higher union densities may well have greater sensitivity to union issues because they tend to be more influenced by union culture. As an example, Republican members of Congress have historically tended to vote for minimum wage increases when coming from high union density states despite their party’s ideological antagonism to both the minimum wages and calls for increases (Levin-­ Waldman 2001). Table 5.2 clearly reveals differences between LW (living wage) cities and non-­LW (non-­living wage) cities. In terms of education, LW cities in 1950 had higher percentages of workers with no more than an eleventh-­grade education than did non-­LW cities, and this trend continued through 1980 and 1990. In fact the percentage difference between the two actually is greater in both 1980 and 1990 than in 1950. To the extent that education might serve as a proxy for skills and/or training, it would appear that living wage cities generally have had higher percentages of workers with lower skills and/or training. Throughout this period, living wage cities have lower percentages of workers who have completed a twelfth-­grade education, although by 1990 that does change. But in terms of advanced education as measured by 1–3 years of college or a college degree and/ or more, living wage cities consistently have fewer workers in these categories than non-­living wage cities.

120   New living wage movement Table 5.1  Listing of cities Living wage*

Non-living wage

Albany, NY (HU)** Baltimore, MD (LU) Boston, MA (HU) Buffalo, NY (HU) Cleveland, OH (HU) Des Moines, IA (LU) Detroit, MI (HU) Hartford, CT (HU) Los Angeles, CA (HU) Louisville, KY (LU) Miami, FL (LU) Milwaukee, WI (HU) Minneapolis, MN (HU) New Orleans, LA (LU) New York, NY (HU) Orlando, FL (LU) Philadelphia, PA (HU) Rochester, NY (HU) Sacramento, CA (HU) Saint Louis, MO (LU) San Antonio, TX (LU) San Francisco, CA (HU) San Jose, CA (HU) Syracuse, NY (HU) Washington, DC (HU)

Akron, OH (HU) Atlanta, GA (LU) Austin, TX (LU) Baton Rouge, LA (LU) Bridgeport, CT (HU) Chattanooga, TN (LU) Dallas, TX (LU) Erie, PA (HU) Flint, MI (HU) Fort Wayne, IN (HU) Fort Worth, TX (LU) Fresno, CA (HU) Grand Rapids, MI (HU) Houston, TX (LU) Memphis, TN (LU) Mobile, AL (LU) Newark, NJ (HU) Oklahoma City, OK (LU) Peoria, IL (HU) San Diego, CA (HU) South Bend, IN (HU) Spokane, WA (HU) Stockton, CA (HU) Tampa, FL (LU) Tulsa, OK (LU) Waterbury, CT (HU) Winston-Salem, NC (LU) Worcester, MA (HU)

Notes *Cities listed as living wage cities are those that passed ordinances before the end of 2007. It does not reflect any ordinances that may have been passed by any of the non-living wage cities since. ** High Union density is defined as above 15 percent and is based on the union density of each city’s state. State union density is drawn from Table 8 in Barry T. Hirsch and David A. Macpherson. 1996. Union Membership and Earnings Data Book: Compilations from the Current Population Survey. Washington: The Bureau of National Affairs, Inc., pp. 22–23.

In terms of industry, living wage cities consistently had more workers in manufacturing and services than non-­living wage cities. They also had more workers in transportation, communication and other utilities through 1980. By 1990, living wage cities and non-­living wage cities were equal in terms of the percentage of workers in transportation, communication and other utilities. Living wage cities, however, had fewer workers in Personal Services again through 1980. By 1990, living wage and non-­living wage cities were again equal. With regards to occupation, living wage cities consistently had fewer workers working as either craftsmen or laborers, but did consistently have more workers working as operatives.

New living wage movement   121 Living wage cities appear to have smaller populations in the 18–34 age cohort, and more in the 35–54 and 55 and over cohorts. This difference appears to be consistent throughout, which perhaps speaks to a slightly older working population to be found in LW cities as opposed to non-­LW cities. LW cities also appear throughout to have larger populations of naturalized citizens, which would suggest larger immigrant populations. Also consistent from 1950 through 1990 is that LW cities appear to have larger percentages of workers who are unemployed than in non-­LW cities. The descriptive statistics in Table 5.2 already suggest that cities that passed ordinances have certain characteristics which non-­living wage cities do not. These differences may or may not predispose a city towards passage of Living Wage ordinances, which is something that will be tested in the next section. But the question is whether changes in these key characteristics may have affected the likelihood that cities possessing certain labor demographic features would pass ordinances. Changes in labor market characteristics can be seen in Table 5.3. As Table 5.3 makes clear, there are quite a few significant changes over the 40-year period. The change in racial composition is quite substantial. While the decline in White workers in LW cities over non-­LW cities was 48.3 percent greater than in non-­LW cities, the increase in Black workers was 147.2 percent greater in LW cities than in non-­LW cities. Meanwhile, all cities had a tremendous growth in the percentage of workers who were not citizens, although that growth was 12.1 percent greater in non-­LW cities than in LW cities. Still, the growth in non-­citizen workers was 6.8 percent greater in LW cities than in all the cities together. Another important change was in the age distribution, with a slight growth in the 18–34 age cohort in LW cities. Although the decline in the 35–54 age cohort was greater in LW cities than in non-­LW cities, the increase in the 55 and over age cohort was greater in non-­LW cities than in LW cities. This would suggest that LW cities had an increase in the age cohort that would generally be expected to earn less. In terms of education, there was a larger decrease in workers with no more than an eleventh-­grade education in non-­living wage cities than living wage cities. This difference alone might suggest that they are less likely to have a low-­ skilled workforce and more likely to have more skilled workers than living wage cities. Although the drop in the number of those with no more than an eleventh-­ grade education is slightly higher in non-­living wage cities than living wage cities, the increase in educational levels generally, except for four or more years of college, is higher in living wage cities. In terms of industry, the drop in manufacturing in living wage cities was greater in living wage cities than in non-­living wage cities. Whereas the percentage decrease in manufacturing was 0.5 percent less in living wage cities than all cities, it was 7.7 percent less in non-­living wage cities than in all cities. The decrease in manufacturing in living wage cities was 7.1 percent greater than in non-­living wage cities. This, in and of itself, implies a greater loss in higher paying jobs for lower skilled workers in those cities that ultimately passed ordinances than those that did not. While the greatest declines in manufacturing

56.1 3.3 40.6

40.0 39.7 20.3

60.6 25.0 8.0 6.5

Employment status Employed Unemployed Not in labor force

Age 18–34 35–54 55+

Education Eleventh grade or less Twelfth grade 1–3 years college 4+ years of college

56.0 26.4 10.9 6.7

43.3 38.3 18.4

57.6 2.3 40.0

97.3 1.8 0 0.3 0.4

4.6 1.6

13.9 3.5

96.3 1.7 1.3 0.1 0.6

0.1

82.9 16.8

0.1

86.6 12.9

Hispanic Not Hispanic Mexican Puerto Rican Cuban Other not reported

Citizen Born abroad of American parents Naturalized citizen Not a citizen Not citizens/

Race White Black

Diff

7.9> 5.6< 36.3< 3.1>

8.3< 3.7> 10.3>

2.7< 43.5> 1.5>

200.0< 50.0>

1.0< 5.9
118.3>

0

4.5> 30.0
0.8< 5.0< 1.6>

1.3< 0.5> 1.5>

1.1< 6.5> 0.7>

0.3< 0 30.0> 100.0
12.9>

0

1.5> 6.2
3.5< 17.3< 9.2
15.4>

11.3< 32.4> 15.0>

14.8< 28.3 428.6> 333.3> 200.0>

179.4> 129.5>

0

6.7< 12.3>

Non-LW Diff

35.6 31.6 17.5 15.3

42.6 27.8 29.6

57.6 4.6 37.7

88.2 5.2 2.9 1.0 2.8

7.8 8.5

0.4

70.4 25.6

All

3.1> 0.6< 4.2< 0.6


3.0< 0 4.0>

10.3< 13.0< 27.6> 30.0> 28.6>

21.8> 18.8>

0

0.7< 0.4
6.8> 20.2< 4.0


4.6< 6.0> 6.4>

7.8< 22.4< 254.5> 250.0> 152.8>

122.7> 98.7>

0

10.7< 5.8>

Non-LW Diff

24.8 30.6 24.6 19.9

39. 32.0 28.2

59.3 5.3 35.4

83.0 8.3 3.1 1.0 4.6

8.1 13.3

0.7

61.2 24.1

All

3.2> 2.0> 5.6< 0

1.8< 0 2.1>

1.4< 0 2.0
7.9< 25.8> 40.0> 30.0>

20.9> 18.8>

0

2.3< 0.8
56.0>

1.2< 100.0< 6.6


6.7


7.4>

14.0> 4.0> 8.1< 69.2


100.0
0 1.6
0 1.3< 0 4.0
0 0

6.3>

1.4>

2.9< 8.3>

0

1.0> 2.0> 0.6< 6.1>

100.0< 0 1.3
50.0< 14.6
23.7< 22.6< 0.4> 0

1.6> 0 9.4


6.9>

4.9< 61.5>

8.8>

1.6> 14.6< 9.3> 19.7>

600.0< 52.5< 6.9>

50.0
0 4.9
5.1< 6.2< 2.1< 0

1.7> 0 1.2


150.0< 15.0< 1.0
12.5>

1.0> 0 3.6


7.8>

0 50.0>

2.5>

0 15.0< 15.0< 9.7>

800.0< 15.7< 5.8>

75.0
4.9< 3.3< 3.6< 12.5>

1.5> 0 0

1.5


0 12.5>

1.2>

1.7< 5.0< 3.8< 4.9>

0.3< 200.0 5.3 3.9< 14.7 0.7
14.5< 5.6> 3.3> 10.2>

2.2< 7.8> 4.2< 3.3< 8.2