Improving Our Standard of Living (Wattpad Edition)

Chapter 26: Wages

When people are paid higher wages, they can afford a better standard of living.

Wealthier nations tend to have higher wages regardless of their extent of inequality. So policies that promote economic growth are more important than those that redistribute income. If a country is poor, it can't pay everyone high salaries because there's not enough wealth.

The United States' GDP per capita is $55,000. That's about $70,000 per adult. If businesses were forced to pay all workers a minimum wage of $71,000 per year, the economy would collapse. Not only is there not enough wealth per person to support that wage, but becoming an investor wouldn't be profitable anymore. Businesses would go bankrupt because the employees would be taking all the revenue. Firms need surplus money to expand, conduct research, and stay up and running.

Workers are entitled to a fair share of the fruits of their labor. But their salaries shouldn't reach a point that investors stop investing and creating businesses becomes difficult. There needs to be a balance between the group of people that produce most of the world's wealth—the working class—and the group that invests in business creation—the capitalists.

That balance is a Gini coefficient of about 0.25. Greater than that is unnecessary. Less than that may discourage investors and make it harder to create businesses.

Growing the economy via liberalization is the best way to increase wages.

However, if a nation is already wealthy and the wages of, say, the poorest 60% of the population are unusually low, then the culprit is inequality. Growing the economy is still a priority. But why be content with a huge income gap? The country will be better off redistributing (some) income than not.

Other than taxation, policies that promote higher wages are another way to reduce inequality. I'm referring primarily to unions and a decent minimum wage.

First, let's confirm the relationship between wages and equality.

Wages and Inequality

A common argument against higher minimum wage rates, unions, welfare, and other forms of income redistribution is that wealthy individuals can't afford it. They don't have enough wealth to give.

But when gross inequality exists, the rich can afford to allocate more income to the rest of society; otherwise, there wouldn't be so much disparity.

That, reader, is called impeccable logic. A wide income gap is in and of itself a justification for redistribution.

In the United States, the Gini coefficient is 0.40 after taxes. That's substantially higher than the Nordic countries and Switzerland, which have better scores on the Standard of Living Index. In contrast to the US, they have higher tax rates on the wealthy, pay their workers higher wages, and spend more on welfare. They prove that the rich do in fact have plenty of wealth to give, and can be required to do so without harming market freedom and economic growth.

In the middle of the 20th century, the United States' Gini coefficient was around 0.25 after taxes. Higher tax rates on the rich had a lot to do with that, as I showed earlier. Wages were also much higher back then as a share of the economy. That's the other reason inequality was lower.

Adjusted for inflation, the average employee salary today is the same as it was in 1970. That's odd considering the economy is bigger now than it was back then. Wages should have increased in tandem with the GDP. But that didn't happen. As a share of the economy, working class wages have fallen significantly.

According to the Economic Policy Institute, from 1948 to 1970, the growth of corporate productivity and profit grew at the same rate as employee wages. If corporate profit doubled over X number of years, salaries also doubled. As the GDP grew, wages grew in tandem. This was the American Dream. As the country became wealthier, it was expected that everyone with a full-time job would also get richer.