Saturday, October 14, 2006

Is there upward mobility for low-wage earners?

Recently, I enjoyed the opportunity to hear Robert Solow, emeritus professor at MIT and Nobel laureate, lecture on his current research involving low-wage workers. As I have written about the minimum wage in the Muscatine Journal, I feel compelled to share Dr. Solow’s research and my comments.

In his sampling of six developed economies with similar characteristics to the United States, Dr. Solow preliminary findings show that low wage earners in the United States become trapped in the occupation. In other counties, workers experience mobility to higher earnings and don’t remain in the low wage occupations. Dr. Solow was clear that personal characteristics are not the lone determinate of the low wage worker. Other variables such as the state of the economy, institutional factors, and public perception of the occupation lead to career and even generational careers in low wage occupations. In other words, the occupation wasn’t the only job the worker could perform. Solow found that low wage jobs in foreign countries are usually performed by youth who are working their way through college or beginning at an entry level position. In his study, Solow chose occupations that could not be outsourced such as making beds in hotels or emptying bedpans in hospitals. Why is it that low wage earners in the United States are trapped in low wage occupations like retail sales?

One reason was foreign countries give high emphasis to post secondary vocational education. His findings indicated that there was a tendency to train our graduates on obsolete equipment that was donated by a business looking for a tax deduction or a way to dispose of out-dated equipment. Dr. Solow was quick to add that everyone agrees that education is the way out of low paying jobs, but no one knows how to get that education to those who need it.

As a way of providing education to low wage earners, I suggest subsidizing low wage earners who have been locked into a occupations paying less than $8.00 per hour for five years. Currently, the Earned Income Tax Credit is given to eligible families to offset social security taxes. I suggest that more programs be implemented to boost the earnings of low wage earners. Dr. Solow deflated the current minimum wage to real dollars and found that a person working for minimum wage today is working for the equivalent of a person working for minimum wage in 1950 which was .50 cents. One such idea that I think would work is to index the minimum wage to the consumer price index, like social security. More programs could be implemented that gives a rise in income to low wage earners.

Almost everyone I meet in education cites the maxim, “The more education you have the more money you make.” I have seen countless graphs and charts to “prove” this. I think educators have this backward. They’ve put the cart before the horse. I think the more income you have, the more you demand education. In the lingo of economics, education is a normal good. That is, if your income goes up, you buy more of the good. I challenge you to look at your own life and answer the question rhetorically. When you expect to have more income either through gift, inheritance, raise, or selling an asset, do you spend more now?
The way we can help our 20 million low wage earners is to provide subsidies in the form of tax credits, employ a flat tax instead of a progressive tax on their earnings so as not to decrease work incentive, inflation adjustments linked to CPI, and income incentives tied to vocational education. Our labor force will look at minimum wage jobs and low wage employment as a window of opportunity to share in economic growth and not a trap.
I want to thank Nathan Mundell for inviting me as his guest at Cornell College and Mr. Robert Weaton for extending me the professional opportunity.