Sorry Robert Reich, Companies Are Not Charities

Story Stream
recent articles

Recently, I have been having a bit of a back-and-forth with former Labor Secretary Robert Reich about labor markets (his, mine, his). While Secretary Reich stands out for obvious reasons, he is hardly alone in terms of criticizing my past columns about jobs and labor markets (if you want to join in, see my positions, for example, here, here, and here). Basically, the two main issues are that many people want jobs to serve as a delivery mechanism for social welfare benefits while I (and other conservatives) would prefer to keep the two separate and that liberals seem to have trouble understanding that both sides win in any voluntary transaction.

Beginning with the first point, critics of today's treatment of workers clearly believe that employers should provide every worker with health insurance, paid sick leave and vacation days, a safe and rewarding work environment, and a wage high enough to raise a family of four in comfort. What this ideal is missing is any connection to the real world where the laws of supply and demand operate.

Employers hire workers because they expect the worker to contribute to the company in a way that produces more revenue for the company than the total compensation cost of the worker. That means that to an employer wages, benefits, perks, and payroll taxes all count toward the "cost" of that worker.

If you add to that cost, such as by requiring a week of paid sick leave for all workers, then employers will find that for some workers the cost now exceeds the revenue generated. When that happens, workers lose their jobs. In a similar manner, if taxes or regulations are placed on businesses that lower their profitability, then the revenue side of the equation shrinks meaning that again some workers are no longer worth employing.

One must consider the supply of workers, too. A business will not pay workers more than the least amount that an equivalent worker is willing to accept. If somebody is just as good a worker and willing to work for less, why would a business not take advantage of the cost saving? With all the other inputs a business buys, they try to get the best deal they can and labor is really no different.

Liberals seem to think that out of compassion or for the good of society businesses should ignore these simple economic realities and keep workers employed with pay packages that are more generous than the workers deserve. However, if an employer did this, other employers who were not so kind would be able to undercut the generous employer on price and attract all the kind employer's customers. The liberals understand this facet of market forces, which is why they favor regulations to make all employers act kindly, thus keeping the playing field level.

Unfortunately, while the leveled-by-regulation playing field may keep all employers in business initially, the price of their products still goes up meaning we consumers will buy fewer of them. With less business, the employers will downsize, laying off some workers. There is just no way around it; raising wages without an economic justification based on the job (more productivity or higher demand for the product being made) leads to more unemployment.

The obvious answer to this is to decouple income support from jobs. That is, let jobs pay wages set by the market and then let government provide income support up to the level society believes appropriate. If society, through our democratically elected representatives (Congress and the President) feels everyone working should be earning $10 per hour, let the government provide a payment equal to $10 minus whatever the earned wage is. If you earn $8 per hour, the government gives you $2.

If this sounds familiar, it should. We call such a program the earned income tax credit (EITC) and it is a far superior vehicle for economic support of low-wage workers. One obvious advantage that ought to appeal to liberals is that the EITC is paid for with tax dollars, meaning it is mostly paid for by the top ten percent of income earners who pay about 70 percent of all income taxes. In contrast, higher market wages lead to higher prices meaning that customers pay a share of government mandated wage hikes and benefits. Since many customers at the type of employers who pay lower wages are themselves poor, making them pay through higher prices provides much less in the way of income redistribution than the EITC accomplishes.

Moving to the second issue, I find that liberals who get upset by my columns about jobs cannot understand that the workers they feel are being mistreated actually find their lives improved by the very jobs the liberals are criticizing. The crux of the misunderstanding is the mutual benefits that arise from any voluntary transaction.

It is a tautology that both parties in a voluntary transaction perceive a personal benefit from it; otherwise, they would not take such an action voluntarily. My grocer likes my money more than the food they have for sale and I prefer the food to my money. Not only do we both think we are winning from the transaction, thanks to differing preferences, we both are actually winning.

A potential worker who finds that a job's pay and benefits are insufficient to offset the implicit (what we economists call opportunity) costs of taking a job will turn it down. In such cases, either one's current job or spending the day on the sofa is preferable to the job being offered.

Robert Reich and liberals like him seem to think people are not capable of deciding if they should turn down a job that is not offering sufficient compensation. The fact that people can and do make such decisions was the motivation for the welfare reform undertaken under President Clinton and the Newt Gingrich-led House. Welfare was more valuable than a job and so people stayed on welfare. Welfare reform changed policies so that jobs were preferred to welfare by millions of people because benefits were not removed as rapidly as a person worked. That is income support and jobs were partially decoupled. Thus, jobs were worth taking, and people did so.

Somehow, many people today believe that people have voluntarily taken jobs that make their lives worse. This is insulting to the millions of hard working people in jobs that the liberal elites look down on. Just as when commentators or political strategists suggest that voters are casting votes against their self-interest, we should refrain from suggesting that people (particularly when we are talking about millions of people) are making stupid decisions.

Voters factor many things into their voting decisions and we are unlikely to fully understand such decisions on the basis of a few demographic characteristics. Similarly, people weigh many factors in deciding whether to accept a job offer (pay, benefits, commute, co-workers, personal ethics, etc.). When a worker takes a job, he has decided that he is better off with the job than without it. Commentators might have made a different decision to the same job offer, but the thousands of people who line up to apply for jobs whenever a new Walmart opens suggest that the people in these jobs are not the only ones who think such jobs improve their lives.

When a business makes a job offer, that business owner believes her business will be better off with that employee than with the money the employee will cost the business. When an employee accepts, she believes the job and its pay package is a better deal than the next best alternative the person has (whether that is a current job, unemployment benefits, or doing nothing). Both parties see a potential improvement in their situation and so they reach an agreement.

Rather than interfering in such decisions, those of us who are neither the employee nor the employer should just stay out of the way. The best way to correct any perceived injustice to these voluntary market outcomes is through separate government action, such as the Earned Income Tax Credit. If you ask me about raising the minimum wage, I will oppose you because it hurts some low wage workers. If you want to make the EITC more generous, I will give you my wholehearted support.


Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

Show commentsHide Comments

Related Articles