Illustration by Ali Bachmann
Essential worker wages
During the COVID pandemic the public became acutely aware of its dependence on “essential workers.” These are sanitation workers, store-shelf stockers, bus drivers, delivery people, health care workers, childcare providers and a host of others. But if the value of their work is so high, why is their pay so low?
Two hundred fifty years ago Adam Smith, founder of modern economics, posed a similar and instructive puzzle: the Diamond-Water Paradox. Why does water, essential for life, sell for a low price, while diamonds, mere adornments, sell for a high price? The value of water in its life-sustaining uses is far greater than its price in market exchanges. In fact, value and price can move in opposite directions: the greater the abundance of water the greater its total value, but the lower its market price.
Applying the insight to essential workers: wages do not measure the total value of what workers produce any more than the price of water measures the value of water. Just as the market price of water lies far below its value, the wages of essential workers under-represent the value of their work.
When goods and services are bought and sold in the market system, those exchanges generate surpluses, defined as the excess of value over price. That surplus value resides in the work-product, not the wage of the workers who contribute to its production.
The surpluses are enjoyed by those who are willing and able to buy the work product. Those with more disposable income can purchase more goods and services and, in turn, acquire more of the associated surpluses. Those who are paid less are constrained by their lesser income to buy less and in turn acquire less of the surplus. Therefore, market forces will distribute the surpluses to the higher-income people who can afford to buy more of that work-product.
If society, through representative government, deems it proper to redistribute to low-income people part of the total value of what their nation produces, there are myriad methods available. Here are a few familiar examples:
Direct transfers
Direct transfers include “in-kind” essentials such as housing, food and heat. They can be delivered in physical form, as with public housing, or with the means to pay for them, such as food stamps, or tax deductions for housing, rent and heat. During the Reagan administration, direct income transfers were implemented through the Earned Income Tax Credit (EITC) through which eligible low-wage workers would receive wage-supplement payments from the tax system.
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Provision of Public Services
The public sector of the U.S. economy provides resources for health, safety, education and other social investments and risk-sharing insurances. When shared public goods are provided at below-cost prices and financed by revenue from a progressive income tax, part of the total value of the national product is redistributed.
Investment in skill and talent
The most important resources in any economy are the skills and talents of its people. The return on investment in “human capital” goes primarily to the individual and secondarily to the society as a whole. The low-income individual cannot make the investment. Furthermore, because there is no direct return to private investors, the investment will not be made through ordinary market activity. In neither case will the market provide optimum investment. If such investment in low-income people is to be made, it will have to be a public responsibility.
Polarized Opinion
Proposals to re-distribute income and wealth are always contentious. “Progressives” argue from the heart, advocating redistribution on grounds that, especially in a nation of plenty, human beings should not have difficulty obtaining such basic necessities as paying rent, putting food on the table, access to medical care or educating their children. Expressed or implied: better-off taxpayers should pay for it.
Self-described “conservatives” argue from their belief that the market system, complemented by charity, provides optimum distribution; government-forced deviation from that optimum diminishes the welfare of the society as a whole. Even certain types of social insurances—Social Security, Medicare, Medicaid—violate their principles of individuality in favor of collectivism, often labelled with the handy pejoratives of “socialism” or even “Marxism.”
The Essential Workers Paradox provides a more rigorous basis for looking at both of these polar points of view.
Default to the Market?
In the 250 years since Adam Smith began the formal analysis of economics, the market system’s strengths and weaknesses have become understood, especially the market’s power to coordinate incentives to produce goods, services and assets. However, it has also become generally accepted that many important economic activities are public responsibilities that cannot be left to the market. A short list of these includes national defense, police and fire protection, construction and maintenance of streets, roads, bridges, harbors, air-traffic lanes, control of pollution and greenhouse gas emissions, as well as “information goods” such as research on medical breakthroughs or the stabilization of inflation and unemployment.
Should concern with income inequality add to this list of public responsibilities? As the essential-worker paradox shows, there is no market mechanism to capture fairness or justice in the distribution of its income and wealth. A society that wishes distribution to align more closely with individual contributions cannot rely on the market to make those changes even if the majority of its citizens prefers it. Representative government must intervene if that change is to take place.
Fortunately, top economists and commentators are contributing to a lively debate on the proper distribution of the national product. For good entry points to this discussion, read Brad Delong, Robert Reich or visit the Center on Budget and Policy Priorities website.
