Fixing Income Inequality Without the Minimum Wage

AP Photo
The Associated Press

Demonstrators bent on forcing McDonald’s to dramatically raise wages are doomed to fail, but their rage is well founded and inequality requires much better solutions than boosting the minimum wage.

McDonald’s sales and profits are already sinking as Americans increasingly patronize competitors like Panera or Chipotle that offer a better quality meal and atmosphere, albeit at a somewhat higher price.

Raising McDonald’s starting pay to $15 an hour would increase the cost of a quarter pound hamburger meal from about $6 to about $8 and drive even more diners to competitors. Ninety percent of its restaurants are run by franchisees, often in choice locations, and many would likely shut down and convert their property to more profitable activities.

Recently, that story played out in San Francisco and Seattle, where restaurants and other businesses either closed or reduced hours for workers as new laws hiked the minimum wage to unrealistic levels.

Simply, the notion touted by liberal activists that a law raising wages will create more spending power and more jobs is neither supported by economic theory nor those real world experiences.

Yet, for the working poor things remain very tough.

Nowadays, workers need a great education to get on a good career track—and that is either too expensive or inaccessible for too many Americans.

A liberal arts diploma from a nondescript state college too often is not worth much more than driving an Uber cab or slightly better work environment and another dollar or two an hour serving coffee at Starbucks.

Expanding community college education won’t help a lot. While those relatively inexpensive institutions train workers for booming sectors like health care and information technology, too many students enroll in programs aimed at transferring to four-year liberal arts colleges and have terribly low graduation rates.

Shifting more community college students into their vocational tracks would help. However, the economy, as it is currently managed and organized, could not create enough good-paying jobs for graduates from expanded technical programs to absorb 20 million unemployed and underemployed prime working-age American adults.

The United States normalized trade relations with China during the Clinton Administration and sought strengthened commercial ties with the rest of Asia. Countries in the region have exploited better access to U.S. markets, while manipulating their currencies and imposing various administrative barriers to U.S. exports.

Consequently, the U.S. trade deficit with Asia has grown to about $400 billion annually, and the U.S. economy has grown less than 2 percent a year since 2000. By virtually every measure, wages and family incomes for most ordinary Americans have fallen, while bankers, engineers, and other professionals, who can directly market their services abroad, have seen their incomes rocket.

Now, President Obama wants to negotiate a new free trade agreement in Asia through a Trans Pacific Partnership, but more trade with Asia is a fool’s journey if the policy is not to erase the $400 billion annual trade deficit with the region—and that is not mentioned among the president’s negotiating objectives.

Balancing trade with Asia would create more than 3 to 6 million good paying jobs—still not enough to absorb all the unemployed or underemployed but a good start.

To assist those still struggling, many of the income support programs for low wage Americans—such food stamps, free and subsidized medical care, and disability benefits—are too easily accessible—and abused—by the 7 million unemployed men between the ages of 25 and 54 who refuse to look for work. Those should be consolidated into the Earned Income Tax Credit to more generously reward work among low income Americans, instead of paying for indolence.

For too long, national policies have stacked the deck against working Americans. We won’t get the country turned around until we stop cultivating false hopes with minimum wages laws and instead put workers first through realistic international trade policies and income support programs.

Peter Morici is an economist and business professor at the University of Maryland, national columnist. He tweets @pmorici1.