Foldvary: The Working Poor
|June 28, 2004||Posted by Fred Foldvary under Progress Report, The Progress Report|
The Working Poor
by Fred E. Foldvary, Senior Editor
Henry George wrote in Social Problems that ‘There is in nature no reason for poverty.’ Workers are kept poor by human institutions, not by any deficiencies of natural resources. The origin of poverty is market-hampering intervention, not overpopulation. Government is the institution with the greatest power to keep people poor. Government policies that tax wages, restrict enterprise, and push the poor to unproductive fringes, these create and maintain the poverty suffered by the working poor.
People in developed countries working at minimum wage earn just enough to provide themselves with necessities and a few standard wants such as a television set. Many of the working poor in the less developed parts of Latin America, Asia, and Africa live at subsistence, where they barely have enough food and minimal medicine. How does this poverty come about?
Poverty is basically a low wage level. The non-working poor have no wage at all. Low wages are connected to unemployment, because a large pool of idle workers seeking work helps keep wages down. But even with full employment, the wage level of the working poor can be at subsistence or worse. Why?
The basic wage level of an economy is that of unskilled workers. Those who have productive skills and talents obtain a premium for their human capital. So to understand the plight of the working poor, we need to understand the economics of the unskilled wage level. There is an economic ‘law of wages’ that tells us that the wage level for an economy is set at the margin of production, the fringe areas with the least productive land.
Workers in more productive areas do not get higher wages, net of taxes and living costs, because if they did, the workers getting lower wages would come running to get the higher wage. The mobility of workers creates competition for jobs that equalizes the wage level. We might see higher nominal wages in a large city than in a small city, but if the cost of living is also higher, the real wages are the same.
So the puzzle is, why is the wage at the margin so low? There are three reasons. The most important reason is that the margin has been artificially pushed out to a less productive fringe. In a growing economy, land values and rents keep rising, so speculators will buy land with the expectation of gain. The gain is magnified with leverage, the ability to borrow most of the funds. Many speculators avoid developing the land, waiting for others to develop first so that they can get higher prices for their land.
So those who want to provide real estate for current use have to move the margin of production out to what was submarginal land, decreasing productivity and thus also lowering the wage level. In developed economies, the nominal wage might not decrease, but the real wage is lower due to the higher costs of commuting and the higher taxes to build and maintain excessive infrastructure out to the new fringes. Per-capita infrastructure costs are lower in the city center, so rents rise to soak up the difference. With higher living costs, workers end up poorer.
The second reason is taxes on wages. The poor may pay little if any personal income tax, but they pay high social-security taxes as well as sales taxes or value-added taxes on goods, including indirect taxes such as tariffs. Their rent payments to landlords pay property taxes.
Third, and most importantly, the working poor get taxed when enterprise gets taxed. Employers must pay taxes for social security, unemployment insurance, workers compensation, and so on. Employers must also comply with costly regulations on labor, as well as litigation. All this makes labor more costly, so employers economize on the quantity of labor they hire. Licensing laws, costly permits, and other restrictions create more barriers to enterprise and employment.
Government’s response has been to impose even higher taxes on employers who hire the working poor. There is a federal minimum-wage law, higher minimum wages in some states, and even higher ‘living wage’ laws in some cities. The higher wage is a cost to the employer, in effect a tax. This has two bad effects. First, higher labor costs reduce employment even more. Second, at the higher wage, the least productive workers will not get hired. This higher unemployment leads to higher welfare costs for taxpayers, and the higher wages get passed on to customers as higher prices.
Now that we understand the cause, the remedy is clear. Eliminate the interventions. First, untax labor and shift public revenue to land rent. Workers then keep their full wage, raising their net wage. Tapping the land rent for civic services eliminates the land speculation, so the margin of production will shift to more productive areas. There will be infilling in cities instead of sprawl. Then eliminate all taxes on employment, including workers compensation and unemployment insurance. With full employment and no tax on wages, workers can now get their full pay in cash instead of non-taxable benefits, and they can provide and choose their own insurances.
Eliminating restrictions such as mandatory licensing, as well as legal reforms reducing excessive litigation, will further increase employment and raise wages. Better school choice would also help, by increasing human capital. True free trade and the public collection of site rentals raise wages to the economic maximum. In a free market, there is a natural minimum wage set at the margin of production. The natural minimum wage would be substantially higher than today’s government-set minimum wage, and there would no longer be any working poor.
Not only that, when the land rent is shared equally, a major source of income inequality disappears. Whether the rent is paid directly as a people’s rental dividend or used for public revenue for generally equal public benefits, the working poor would have a higher standard of living because they would both get their full wage and also an equal share of the land rent.
But today, in almost all economies, a wealthy elite soak up the gains from increasing productivity by collecting the rent, while workers get tax-punished. Unfortunately, reformers who think of themselves as progressive do not understand this. In their unknowing state, they blame superficial causes, such as corporations. They seek superficial remedies such as higher minimum wages. They are too busy organizing communities to learn the root causes of the problems. Only a tiny few are learning the Henry George realities.
We geoists may sometimes feel frustrated by public resistance, but we should instead be proud and happy, because we are keeping alive the understanding of the cause and the remedy, which if not for our efforts would be extinguished and lie dormant in books. But we need to go further and understand the political causes of resistence to the remedy, and its cures. Geoism needs to expand into the field of public choice to provide a more comprehensive answer to the problem of the working poor. It’s not enough to speak economic truth to power. We must also confront the ultimate problem, political power.
Copyright 2004 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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