If Companies Won’t Raise Pay, Lawmakers Will Try to Do It for Them

If U.S. companies needed more evidence that scrutiny around wages is intensifying, they heard it this week during Federal Reserve Chairman Jerome Powell’s testimony to Congress.

The subject came up several times. One memorable exchange was with Senator Sherrod Brown of Ohio. He asked Powell whether the “Fed’s employment mandate is just to ensure that people are employed” or whether full employment implies something more, that “workers earn a salary and benefits that let them fully participate in the 2019 economy and our country.”

Powell dodged the question, instead reminding Brown that U.S. unemployment is at a 50-year low and that the Fed lacks the tools to “affect every social problem.” It’s true that the Fed’s mandate is to maximize employment, not wages, and that the Fed probably can’t raise wages, even if it wanted to. 

But as long as workers continue to receive less than a living wage, no one should be surprised that concerned lawmakers are looking for every opportunity to intervene, however implausible or ill-advised. If companies won’t raise their employees’ pay, the government will try to do it for them.

The Fed’s mandate of maximum employment makes it a tempting target. After all, the point of employment is to make a living, so it’s natural to ask how well the Fed is achieving its mandate when millions of workers earn less than a living wage.

According to the U.S. Census Bureau, the median annual family income in the U.S. was $75,938 in 2017. But in my hometown of Indianapolis, which is among the more affordable cities in the U.S., a family of four needs an annual income of $82,285 to cover necessities such as housing, food, child care, transportation and health care, according to the Economic Policy Institute, a nonpartisan think tank.

That may not seem like much of a difference, but remember that half of U.S. families earn less than the median income, which means that millions of Americans are struggling to afford the basics. Also, EPI’s numbers leave no room for savings, so half of families can’t save for retirement or unforeseen expenses.   

The numbers for individuals are no better. Median annual personal income was $31,099 in 2016. EPI estimates that one adult with no dependents would need $33,530 to cover necessities.

There are other reasons to wonder whether headline unemployment tells the whole story. In theory, employment and inflation should be opposing forces. Low unemployment implies that workers, in aggregate, have more money to spend, which should push up prices. But if low wages are keeping a lid on spending, that might explain why inflation has been muted even as the U.S. enjoys historically low unemployment.  

Also, prime-age workers are dropping out of the labor force. No one knows exactly why, but it’s worth considering whether low wages are discouraging them. I recently showed that the median employee compensation for 10 percent of the roughly 1,000 largest U.S. companies by market value is below the federal poverty level for a family of four. Workers at those companies may conclude that they’re better off relying on government assistance, or at least no worse off.

Brown intends to press the Fed, telling Powell, “I believe the Fed has the authority and the duty to be creative to help workers share in the prosperity they create. My staff will follow up with your staff on ways of doing that.” I’m skeptical that the Fed can offer any help, but I’m confident that Brown and other lawmakers won’t stop there.

Of course, companies can address the problem by simply paying workers a more reasonable wage. Fortunately, big U.S. companies are enjoying record profits, so it wouldn’t be a stretch. It’s also in companies’ long-term interest to do so because it would pre-empt what is likely to be a more intrusive and less effective intervention by lawmakers.

Source: Bloomberg Opinion, https://bloom.bg/2XAKu0H