Could Politicians Reset the Playing Field for Low Wage Workers?

…by Terrance Hunsley

We really need a policy on work and income.  Automation, robotization and AI may change things in the future, but so far, our society is organized around people working to support themselves and their family, and to contribute to the costs of a humane society.  Most of us believe that people who work full time should be paid enough to do that, but as the pandemic showed us with essential workers, many are not. 

Problem is, for almost four decades and coincident with globalization and the information technology revolution,  the bottom half of the labour market have seen wages stagnate, and thus fall relatively behind the increasing income of the top half. The inequality of incomes is even more severe when we measure accumulating wealth, and the inequality is clearly manifested in lifestyles. These factors contribute to disaffection with government and a fraying of the social fabric.

The increase in inequality is not due to increased work effort or increasing difference in education among the top earners. Inequality in education across the population has been decreasing over the same period that income and wealth inequality have increased. And the income differentials remain as stark when only full time work is measured. If you look closely at people who deliver your packages, look after your aging parents, or provide retail services, you will not see a great difference in education, discipline, or total work effort compared with higher paid jobs. 

For sure, some of the higher earners have skills in high demand and can take risks and be very entrepreneurial and gain large incomes. But some highly-paid workers are also favoured by government. Professions are permitted to set standard fees and limit entry (and thereby competition) into the profession. Public servants have union-protected wages and benefits which far exceed those in jobs with comparable requirements in non-government organizations providing government-subsidized services. CEO’s and senior managers in large corporations have succeeded in capturing the remuneration process from shareholders and they enjoy salaries, bonuses and protection which far exceed their demonstrated talents. 

So do the importance of the work and the contribution to society explain the increasing difference? That they do not, became painfully apparent when the pandemic exposed the exploitative wages and conditions of work for essential workers – perpetrated by both government and private employers. When the supply of these workers has dwindled and workers could have potentially asked for better conditions, governments have undermined them – and distorted the market –  by permitting the import of temporary workers from low wage countries. Temporary workers should be welcomed when they provide qualifications not available in our population, but they should not be used to keep wages down. 

Over the same four decades, marginal tax rates for higher earners have been significantly decreased, permitting those people to save more and accrue even greater wealth. Then with “assortative mating” (like marries like) and the increasing value of inheritances, the economic divide is reenforced. 

We cannot argue either, that inequality is necessary for increased productivity. The past four decades have seen average annual productivity increases of only about half those of the previous few decades. 

The bottom line is that inequality of incomes is as much a function of government policy as it is a result of market forces. Some people are being protected and rewarded by government while others are left out in the cold. It might be an overstatement to say that wealth is built on the exploitation of labour, but some economic historians might consider it not too far fetched.   

 It really is hard to disagree with the argument of Piketty that we are well into a new age of robber barons, and that government policies have aided and abetted. 

So if our political leaders were brave and wanted to make this right, would this be a good time to raise the wages of the lower half, and how might it be done?

The good new is that this is an excellent time to do it, even with high government debts. With the baby boom retiring, we are going to see some labour shortages. There will be pressure to increase bottom half wages, if government allows it to happen. Government policy can also increase the bargaining power of workers. Unions can be assisted to organize workers in disparate workplaces for example using social media. They can have a role in establishing credentials for training and workplace skills.

Because of the current feeble levels of labour organization,  industry sector councils could be established, somewhat on the model developed by the federal government in the early 2000’s. This time though, the councils should be equally representative of employers, workers and consumers. Among other contributions, the councils could recommend wage structures for the industry, with an objective of reducing inequalities. 

Pushing low end wages up would contribute to inflationary pressures, but this will be good inflation as the workers will benefit more from the wage increases, while the costs will be spread across the population. Moreover, we can anticipate that the Bank of Canada will begin to increase interest rates, which should cool down escalating house prices. And if some jobs become redundant or are replaced by automation, isn’t this the very best time for it to happen? Productivity will increase in parallel with living standards of half of the population.   

Increased wages will help, but they won’t be enough to regain all of the lost ground. We need clear government policy to reduce inequality through work. We need a policy which establishes a wage floor as a percentage of average wages. Statistics Canada  reports that average full time wages, (combining union and non-union workers) were about $1200 per week in 2020, or just under $31 per hour.  

So a bold, but practical federal government could establish either unilaterally through establishing a national interest, or preferably in concert with provinces, that the income of full time workers should equal a minimum of 2/3 of the average full time wage, based on the economic region in which they live.  Nationally, this would mean an average floor working income of about $20 per hour. The difference between their actual pay and the minimum would be made up through the Canada Workers Benefit tax credit. Provinces will not be forced to increase minimum wages, but they will have an incentive to do so in order to reduce the cost to taxpayers. And workers will be able to move more freely from exploitative employers who do not offer fair work conditions and normal security and health benefits. 

There will be a need to make some minor statistical adjustments with the implementation of this plan, since raising lower end incomes will also serve to artificially push up the average. But once the adjustment is made, the floor working income of 2/3 average wage can be adjusted annually.

Where to find the money for this? 

As mentioned above, marginal tax rates for upper income people are well below what they were in the 70’s.  Reducing them, contrary to trickle-down economics, did not result in increased productivity, nor in increased work hours. So we can increase tax rates at the high end, and also implement a progressive wealth tax. Wealth is really a better indicator of ability to pay taxes than annual income, and society takes big risks in permitting the excessive accumulation of private power represented by excessive wealth. Moreover,  vast amounts of wealth are about to be transferred from the older generation through inheritance, and a fair portion of that wealth should be diverted to public purpose through a progressive estate tax. There is more than enough money in theses sources to rebalance the playing field for workers. 

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