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Social Costs and Low-Wage, Low-Benefit Employers

Posted by Karen Traeger on Nov 26 2012
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By:  Bob Lucore

The nationwide strikes and protests against Wal-Mart on Black Friday have highlighted the problem of low-wage, low-benefit employers. It’s a good time to review some economic factors behind the low-wage, low-benefits phenomenon and the true social costs of labor.

What are the true costs of labor? Labor is human beings. In order for people to live, and provide a supply of labor to the business sector, certain costs have to be paid. People need to be fed, clothed, housed and educated. Somehow the costs of their health care must be met. Most of them will need to pay for raising a family, without which there will be no future supply of labor for employers to draw upon. If these costs are not covered by the wages and benefits employers pay to workers, they will need to depend on the rest of society.

Some businesses are high-road employers, who believe in investing in their workforce, and provide good jobs, with good wages and benefits. In return they expect to get productive, hard-working, dedicated and loyal employees. But there are many low-road employers, who see no reason to invest in employees, who pay low wages, provide meager benefits and calculate that if their employees are not loyal and hard-working, they can fire them and hire someone else, perhaps for an even lower wage. Our economic system creates strong incentives for employers to avoid paying the full costs needed for workers to thrive. In many sectors, including large parts of the retail and service industries, profits are substantially higher when labor costs are cut below the bare minimum.

When wages and benefits are too low, the full social costs of labor are not met. Workers do not make enough to be adequately fed, clothed, housed and so forth. Consider California, where a 2004 study by U.C. Berkeley’s Institute for Industrial Relations found that taxpayers had to pay $86 million annually to cover public assistance for Wall-Mart’s low-wage, low-benefit workers.

In a report released last week by Demos, Catherine Ruetschlin shows that if a wage floor of $25,000 existed for workers of the nation’s largest retail employers, the effect on the living standards for working families be substantial. Income and job growth in the larger economy would receive a huge boost. This would not be done without cost. But wages would more fully cover the full social cost of labor. Ruetschlin finds that large retail companies could cover this cost for less than they spent on repurchasing shares of their own stock last year.

Governments sometimes understand the importance of labor costs and enact legislation encouraging unions, establishing minimum wages and taxing employers to pay for social benefit programs. Such measures can keep economic competition from driving wages and benefits too low. However, in recent decades all of these efforts have been attacked by a well-organized and well-funded effort to minimize government’s role and eliminate unions. The recent protests and strikes at Wal-Mart are one small step in an effort to finally reverse this trend.


Bob Lucore, a long-time ADA board member, is the former Director of Research and Policy for the United American Nurses and has worked for the Teamsters and the Department of Economic Research at the AFL-CIO. . He taught economics for several years at Centre College and Colorado State University and is currently studying Library and Information Science at San José State University. He discussed the economic concepts of labor costs more fully in this academic paper.

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