A story of three average residents on Elm Street in Suburbia, USA:
Meet Joe. He graduated from high school just three months ago. While he ponders his future, he will continue to live rent-free with his parents. But he’s tired of riding the bus to get around town, so he wants to earn money to buy a car.
Next door is Jeffrey, a single father with four children. They each need clothes, food, and after-school daycare. Their mother is doing hard time upstate. If Jeffrey misses even one more house payment, he could lose everything.
.
Across the street, we meet Janice. She’s a successful career woman and an astute investor with an MBA from Harvard. Her employer went out of business last year, so she has enjoyed the time off to travel and pursue her hobbies. But now she wants to find something productive to occupy her days.
Big news! The Euphrates Book Company has just chosen their town as the location for a massive new distribution center. Before they can even break ground, protesters travel in from far and wide by the hundreds to picket the building site. Congressman Carruthers gives a speech to decry corporate greed. The company earns billions in profit each year, so they all demand that the company pay a living wage – plus generous benefits – to its workers. Union organizers aren’t far behind.
As the building nears completion, Euphrates buys a full-page ad in the Daily Chronicle: They will soon need to hire hundreds of people to staff the facility. Joe, Jeffrey, and Janice all apply for the same job, unloading trucks on the early-morning shift. None of them have done this kind of work before. As luck would have it, they all get hired.
As a routine matter, the company starts all of their warehouse workers at the same training wage. After six months, they each get evaluated for a possible raise and maybe even a promotion. As it turns out, all three of our friends end up with the same scores. They’re equally productive, equally competent, and they all have good work habits. Great!
So how about that living wage? Sure, it seems like a noble and virtuous thing to pay our workers enough money to live on. But how do we calculate it? Easier said than done.
In our example, all of our workers are novices. They are equally proficient in the same job. At the end of each workday, they have each made the same contribution to the company’s bottom line. By every objective standard, they’re all equally valuable to the company. How do we calculate their pay?
I figure, we have three options, each of which will produce its own set of winners and losers. We can pay them according to individual merit, or according to their need, or according to the employer’s ability.
1) Pay according to merit
In our capitalist society, for most business owners, it seems most natural to pay our workers according to their individual merit. Those who produce the most, should earn the most. This color- and class- blind arrangement rewards hard work and best serves the company’s interests. Under this arrangement, all three of our workers will earn the same wage.
2) Pay according to need (living wage)
Joe has never had a job before, and he has no urgent need for this one. The car he desires to buy, is a luxury and not a necessity. Should he earn less, because he doesn’t really need the money? He could live very well, with $7 per hour.
Jeffrey is desperate. He’s drowning in debt and can barely feed his family. For him, this opportunity is everything. Should he earn the most, because he has the greatest need? On his previous job, he could barely meet expenses at $20 per hour.
Janice is set for life, debt-free, with money in the bank. Technically, her living wage is zero. (That is, she already has plenty of money.) But with $10 per hour, she could easily pay her monthly bills and leave a greater inheritance to her children.
Joe, Jeffrey, and Janice are alike in many ways: they live in the same city and neighborhood, with equal access to public transportation. Their homes cost about the same, and they travel the same distance to work. Shall we shortchange Joe, because he has simple needs? Must we pay Jeffrey the most, because he has the greatest need (although he makes no greater contribution and the company didn’t cause his problems)? Should Janice work for free, because she doesn’t need the money at all?
If we pay them according to their need (very different) instead of merit (exactly the same), it will upend the economic model that made our country prosperous in the first place. To divorce compensation from productivity, is madness. As if we’re handing out participation trophies for T-ball, where everybody wins and nobody keeps score.
Now, what if their circumstances change? If Joe moves out to live alone in an apartment, should he get an automatic raise? If Jeffrey’s ex-wife starts paying child support, should we pay him less? If Janice’s house burns down, should we double her pay to help her rebuild?
3) Pay according to company’s ability
In the opinion of some, successful companies (such as Euphrates) should pay their workers more, simply because they can. They should share the wealth. Fair enough. But what if the company’s circumstances change? What if they start losing money, year after year? (Remember, the activists demanded higher wages because of Euphrates’ huge profits.) Should they now be allowed to cut everyone’s pay?
(Think about it: All of these questions make perfect sense with a need-based compensation schedule, predicated on huge corporate profits.)
If this becomes our new normal, then who among us would ever be so crazy as to open a new restaurant, or factory, or supermarket? How many of us would bother to learn a vocational skill, or to excel on the job, if they can get the same weekly paycheck by entitlement instead of education or hard work?
Of course, this is not why young Milos Euphrates started his company. He did it to make a living, to feed his children, and treat his wife to nice things. In time, he succeeded far beyond his wildest dreams; so he gives generously to charity, and endowed a chair at State U. He drives the speed limit and treats people as he would like to be treated.
After 30 years in business, Milos has paid billions in taxes. He employs tens of thousands of people in twelve states. Locally, many of them shop at Fred’s Grocery and lunch at Aunt Betty’s Diner. His suppliers struggle to keep up, with hiring binges of their own. Together, these workers have purchased enough cars and homes to populate a small city. Which generates yet more taxes to fund schools, police, firefighters, and other important public services.
For this, Milos might expect a handshake of thanks from the local community. Instead, he faces the derision of strangers who think he should do much more. They think his money is theirs. If he tries to keep the cash he earned by the sweat of his brow, they call it greed; but if they can redistribute it by the iron hand of the state, they call it justice. Really?
I look back to my old neighborhood in Los Angeles, where we were surrounded by growing family businesses: Blum's Liquor Store, Don Quixote Antiques, Jim's Market, Max's Lawnmower Shop, Keystone Cleaners, Kodama's Landscaping, Jay's Jayburgers, Nicola Twins Market, and Sunset Nursery. Back in the day, we called it a virtue when you risked everything to start a new enterprise. We celebrated success and rejoiced with you. When you shared the wealth, we were grateful. Give my kid a job, and you’re the neighborhood saint. Supply uniforms for the Little League team, and we carried you on our shoulders.
And today? Increasingly, candidates like Bernie Sanders scorn the successful and heap praise on the unaccomplished.
Clearly, we have short memories. When the first national minimum wage was instituted during the New Deal, unemployment soared among black workers; even more, for black teens. Previously, low wages had enabled them to learn a marketable skill without the expense (and delayed gratification) of college or trade school. But when they lost the right to negotiate with an employer, they also lost their only path to upward mobility.
In the long run, many well-intended government decrees end up doing more harm than good. Rent control and easy credit drive up the cost of housing. Student loans enable colleges to raise their tuition. Economists know this, but they get overruled by politicians in need of votes.
When did we become a nation of selfish, covetous whiners? What does it say about us, when our political candidates promise to hand out endless free stuff? (They wouldn’t say it, if they didn’t think we would be attracted by it.) We need more people like Milos, not fewer. We should reward his initiative, not punish his success.
Or maybe we’d all be better off if he had just settled for a part-time job at the local Starnes & Fogle bookstore.
Meet Joe. He graduated from high school just three months ago. While he ponders his future, he will continue to live rent-free with his parents. But he’s tired of riding the bus to get around town, so he wants to earn money to buy a car.
Next door is Jeffrey, a single father with four children. They each need clothes, food, and after-school daycare. Their mother is doing hard time upstate. If Jeffrey misses even one more house payment, he could lose everything.
.
Across the street, we meet Janice. She’s a successful career woman and an astute investor with an MBA from Harvard. Her employer went out of business last year, so she has enjoyed the time off to travel and pursue her hobbies. But now she wants to find something productive to occupy her days.
Big news! The Euphrates Book Company has just chosen their town as the location for a massive new distribution center. Before they can even break ground, protesters travel in from far and wide by the hundreds to picket the building site. Congressman Carruthers gives a speech to decry corporate greed. The company earns billions in profit each year, so they all demand that the company pay a living wage – plus generous benefits – to its workers. Union organizers aren’t far behind.
As the building nears completion, Euphrates buys a full-page ad in the Daily Chronicle: They will soon need to hire hundreds of people to staff the facility. Joe, Jeffrey, and Janice all apply for the same job, unloading trucks on the early-morning shift. None of them have done this kind of work before. As luck would have it, they all get hired.
As a routine matter, the company starts all of their warehouse workers at the same training wage. After six months, they each get evaluated for a possible raise and maybe even a promotion. As it turns out, all three of our friends end up with the same scores. They’re equally productive, equally competent, and they all have good work habits. Great!
So how about that living wage? Sure, it seems like a noble and virtuous thing to pay our workers enough money to live on. But how do we calculate it? Easier said than done.
In our example, all of our workers are novices. They are equally proficient in the same job. At the end of each workday, they have each made the same contribution to the company’s bottom line. By every objective standard, they’re all equally valuable to the company. How do we calculate their pay?
I figure, we have three options, each of which will produce its own set of winners and losers. We can pay them according to individual merit, or according to their need, or according to the employer’s ability.
1) Pay according to merit
In our capitalist society, for most business owners, it seems most natural to pay our workers according to their individual merit. Those who produce the most, should earn the most. This color- and class- blind arrangement rewards hard work and best serves the company’s interests. Under this arrangement, all three of our workers will earn the same wage.
2) Pay according to need (living wage)
Joe has never had a job before, and he has no urgent need for this one. The car he desires to buy, is a luxury and not a necessity. Should he earn less, because he doesn’t really need the money? He could live very well, with $7 per hour.
Jeffrey is desperate. He’s drowning in debt and can barely feed his family. For him, this opportunity is everything. Should he earn the most, because he has the greatest need? On his previous job, he could barely meet expenses at $20 per hour.
Janice is set for life, debt-free, with money in the bank. Technically, her living wage is zero. (That is, she already has plenty of money.) But with $10 per hour, she could easily pay her monthly bills and leave a greater inheritance to her children.
Joe, Jeffrey, and Janice are alike in many ways: they live in the same city and neighborhood, with equal access to public transportation. Their homes cost about the same, and they travel the same distance to work. Shall we shortchange Joe, because he has simple needs? Must we pay Jeffrey the most, because he has the greatest need (although he makes no greater contribution and the company didn’t cause his problems)? Should Janice work for free, because she doesn’t need the money at all?
If we pay them according to their need (very different) instead of merit (exactly the same), it will upend the economic model that made our country prosperous in the first place. To divorce compensation from productivity, is madness. As if we’re handing out participation trophies for T-ball, where everybody wins and nobody keeps score.
Now, what if their circumstances change? If Joe moves out to live alone in an apartment, should he get an automatic raise? If Jeffrey’s ex-wife starts paying child support, should we pay him less? If Janice’s house burns down, should we double her pay to help her rebuild?
3) Pay according to company’s ability
In the opinion of some, successful companies (such as Euphrates) should pay their workers more, simply because they can. They should share the wealth. Fair enough. But what if the company’s circumstances change? What if they start losing money, year after year? (Remember, the activists demanded higher wages because of Euphrates’ huge profits.) Should they now be allowed to cut everyone’s pay?
(Think about it: All of these questions make perfect sense with a need-based compensation schedule, predicated on huge corporate profits.)
If this becomes our new normal, then who among us would ever be so crazy as to open a new restaurant, or factory, or supermarket? How many of us would bother to learn a vocational skill, or to excel on the job, if they can get the same weekly paycheck by entitlement instead of education or hard work?
Of course, this is not why young Milos Euphrates started his company. He did it to make a living, to feed his children, and treat his wife to nice things. In time, he succeeded far beyond his wildest dreams; so he gives generously to charity, and endowed a chair at State U. He drives the speed limit and treats people as he would like to be treated.
After 30 years in business, Milos has paid billions in taxes. He employs tens of thousands of people in twelve states. Locally, many of them shop at Fred’s Grocery and lunch at Aunt Betty’s Diner. His suppliers struggle to keep up, with hiring binges of their own. Together, these workers have purchased enough cars and homes to populate a small city. Which generates yet more taxes to fund schools, police, firefighters, and other important public services.
For this, Milos might expect a handshake of thanks from the local community. Instead, he faces the derision of strangers who think he should do much more. They think his money is theirs. If he tries to keep the cash he earned by the sweat of his brow, they call it greed; but if they can redistribute it by the iron hand of the state, they call it justice. Really?
I look back to my old neighborhood in Los Angeles, where we were surrounded by growing family businesses: Blum's Liquor Store, Don Quixote Antiques, Jim's Market, Max's Lawnmower Shop, Keystone Cleaners, Kodama's Landscaping, Jay's Jayburgers, Nicola Twins Market, and Sunset Nursery. Back in the day, we called it a virtue when you risked everything to start a new enterprise. We celebrated success and rejoiced with you. When you shared the wealth, we were grateful. Give my kid a job, and you’re the neighborhood saint. Supply uniforms for the Little League team, and we carried you on our shoulders.
And today? Increasingly, candidates like Bernie Sanders scorn the successful and heap praise on the unaccomplished.
Clearly, we have short memories. When the first national minimum wage was instituted during the New Deal, unemployment soared among black workers; even more, for black teens. Previously, low wages had enabled them to learn a marketable skill without the expense (and delayed gratification) of college or trade school. But when they lost the right to negotiate with an employer, they also lost their only path to upward mobility.
In the long run, many well-intended government decrees end up doing more harm than good. Rent control and easy credit drive up the cost of housing. Student loans enable colleges to raise their tuition. Economists know this, but they get overruled by politicians in need of votes.
When did we become a nation of selfish, covetous whiners? What does it say about us, when our political candidates promise to hand out endless free stuff? (They wouldn’t say it, if they didn’t think we would be attracted by it.) We need more people like Milos, not fewer. We should reward his initiative, not punish his success.
Or maybe we’d all be better off if he had just settled for a part-time job at the local Starnes & Fogle bookstore.
.
Sensible thoughts!
ReplyDelete(I think I know this girl by a different name.)
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