Incomes keeping up with cost of living

“Can someone explain to me why it’s so hard for companies to increase wages in Vancouver?”

This question was asked recently on the Reddit Vancouver forum.  I suspect it is a question which could be asked in many cities across North America and around the world. The question was asked because for many people the cost of housing and the cost of living in general has been rising faster than incomes.

A number of reasons were given in the discussion – maximizing profits for shareholders, a cultural shift towards laziness, in some fields there is a conspiracy to drive down wages by saturating the field with desperate new grads willing to work for peanuts, foreign buyers are driving up the cost of housing, and supply and demand.

Having studied economics this blogger prefers the last one, supply and demand for bodies, but also believes it is a symptom of a much larger problem.

For the most part wages are, with some exceptions,  determined by supply and demand. When unemployment rates were low, workers were able to demand and receive a living wage.  As there have been more and more unemployed people we are seeing more people not keeping up with the cost of living.  Some employers have learned they can do well by paying higher than going wages.  But this works because they can attract the best workers and probably would not work for all firms.

The exceptions to the law of supply and demand are those occupations which are protected from competition by government legislation such as licensing requirements.  Very often licensing is said to be required to protect standards of service to the public.  Doctors must be licensed to ensure we get quality medical care but the licenses also restrict competition and keep doctors incomes high.  Teachers are paid well because they have licenses and strong unions in a legal monopoly.  People are required to send their children to school and mostly the schools are operated by the state.  Government employees also have strong unions and employers that have a monopoly.

The moral of the story is that if you want to have the wages to support a good standard of living, choose an occupation that is legally protected from competition.

Most of us are aware the economy is going through a difficult time but believe it will return to continuous growth.  This blogger is an exception.  Our economy is in trouble because we have used up the most easily accessible energy and mineral resources.  There are lots left but the energy and effort required to extract them make them mostly useless.  If this theory is correct, then we are probably faced with a long period of economic stagnation during which the standards of living of a lot of people will go down.

The answer to the question is that it is hard for companies to increase wages in part because wages are determined by supply and demand and in part because the economy is started into a period of decline during which it will be hard for companies to even stay in business.

Independent contractors and falling living standards

This blogger disagrees with economist Robert Reich when he says the rise of “independent contractors” in the American labor force is a legal trend.  It is an economic trend in which incomes are trending down because of problems in the energy and resource base.

Our economy has recently been through some golden  years of prosperity which have come to an end, probably because we have used up the most easily accessible of the energy and mineral resources.  There are lots left but the difficulty of extracting them is reducing the potential for continued economic growth and maybe even going to force upon us some negative growth. 

One of the consequences is that living standards are falling – at least for some people.  As  wages are sticky and people protest when asked to take a cut in wages employers try to find other ways to accomplish the same thing.  One way is to contract out work and another is to assign the work to independent contractors.  The jobs get done at a lower cost to the employers and some workers have jobs even if at less income.   In some cases the work may be done by different employees. 

This is hardly a trend to make people happy.  If it were up to me everyone would have the same incomes, working conditions and benefits as most government employees.  But economic realities will not allow that.

If there has to be a reduction in living standards then it would be fairer to share it among most people.  One way to do this would be with a universal income scheme.

Low wages and supply and demand for people

One has to have a great deal of sympathy and understanding for those fast food workers demanding a living wage and one also has to fear that the supply and demand for bodies will keep them down.

There are lots of other people, out of sight and/or not counted,  struggling to survive on low incomes.  They too deserve compassion and understanding.

It has been said that the profits of the fast food industry are sufficient to double the wages of all its workers.  This is not the issue.  The issue is that wages are determined by supply and demand.  The reality is that there are more people than there are jobs.  Some firms have demonstrated they can make good profits by paying their employees well but human nature is such that most employers will continue to pay as little as they can.

Technology has reduced the need for workers and reduced transportation costs have increased the supply of workers from other countries.

With the world economy in crash mode the plight of low-income people is likely to continue and even get worse. At the same time a few will continue to get richer.  The one thing which could level the field would be hyperinflation which would hurt everyone.

Another indication of the oversupply of workers is the declining power of private sector unions.  Public sector unions are still doing well because they have monopoly and political power.  I would have more respect for teachers’ unions if they were to go on strike demanding an increase in well fare rates.

I believe subsidies should be given to consumers rather than producers.  Therefore I would like to see some sort of universal income scheme such as a guaranteed annual income or the negative income tax proposed by Milton Friedman.  This probably would not halt the economic decline but would be fairer than the way we now treat people.  It may be that the American dream is just a  dream.

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