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Keep Goose That Lays Golden Eggs

The government should stay out of the labor market. Setting living wage standards is counterproductive.

April 01, 1999|DIANA FURCHTGOTT-ROTH | Diana Furchtgott-Roth is a resident fellow at the American Enterprise Institute and coauthor, with Christine Stolba, of "Women's Figures: An Illustrated Guide to the Economic Progress of Women in America" (AEI Press, 1999)

America's economy leads the world. The Dow hovers around 10,000, unemployment is at a record low of 4.4% and last quarter's GDP growth rate was 6.1%. So why is there a movement afoot to kill the goose that is laying the golden eggs--to replace our system of market pricing for wages with a socialist ideal of setting wages according to some arbitrary system of value?

These days the socialist ideal is manifesting itself in a push for a so-called "living wage" for low-income Americans and "comparable worth" or "pay equity" for women. Claiming that the federal minimum wage of $5.15 is too low, many municipal governments have instituted mandatory living wages ranging from $6.25 to $9.50 per hour plus benefits. The Los Angeles living wage is currently set at $7.39, and any company doing business with the city has to pay it to workers as contracts come up for renewal.

It's already illegal to pay different wages to men and women who do the same jobs, but the AFL-CIO and the feminists are going further: They are pushing for comparable worth or equal pay legislation in 22 states, so that men and women who do different jobs "of equal value" would be paid the same. These groups are planning a blitz of events around the country on Equal Pay Day, April 8.

A new study by the AFL-CIO and the Institute for Women's Policy Research asserts that women face a wage gap of $3,000 or $4,000 per year because they have chosen different jobs from men. But setting wages by cost-of-living indices or by others' earnings makes no sense because wages are affected not only by the supply of workers but by the demand for different services. Job requirements affect only how many workers are willing to take jobs, not how much the employer is willing to pay for the work product.

Look at a large firm such as Boeing. Boeing could not hire a single Ph.D. in engineering for under $75,000. But it could hire all the Ph.D. historians it wanted for $30,000. The jobs appear identical: doctorate required, must do research, write memos, attend boring management meetings. So why are the salaries so different? Is it some insidious, pernicious plot? No. The demand for any occupation is derived from the value of the goods and services produced, which is why football players are paid more than lacrosse players.

The facts are clear: Artificially raising wages reduces the number of workers employed. Even worse, it hits hardest at new entrants to the labor force by preventing them from getting their feet on the bottom rung of the career ladder and working their way up. Many workers are entry-level, but they do not stay that way for long. If raising minimum wages truly improved incomes, why not just increase the minimum wage dramatically and save on investments in education, training, technology and infrastructure?

In our technology-oriented global economy companies have many choices about numbers of workers hired and plant location. Higher wages mean that companies change their production processes to use more machines and fewer workers, or shift production to countries with low wages. Naturally, this isn't going to happen tomorrow, but it will happen the next time the company has to decide whether to hire that extra person or build that second plant.

The American economy is steaming ahead. But today's new job opportunities render union membership unnecessary, and it has been steadily declining, from 24% of wage and salary workers 25 years ago to just 14% today. It's in the interests of union management to try to reverse this trend by falsely promising members artificially high wages. And a false promise it is, because these wages cause more job losses than they put money in pockets: Union members generally earn above minimum and living wages, so they don't profit from the increases; they are primarily blue-collar workers, who would fare poorly under comparable worth schemes. The best system for union members and for all Americans is to keep the goose that lays golden eggs and keep the government out of the labor market.

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