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A New Social Contract on Wages and Benefits

David Callahan

Over the past two decades, both political parties have basically embraced a low-wage economy in which paltry wages for millions of Americans is offset by favorable tax treatment: both through the EITC and other credits, and low or zero tax rates for earners at the bottom of the economic ladder. Toss in dirt cheap consumer goods at stores like Walmart and it all sounds almost workable. Sure, you don't make much per hour flipping burgers at McDonald's, but you can get a nice refund at tax time and can buy a flat panel TV for $199. 

Or so goes the theory. But a new paper written by Joshua Freedman and Michael Lind at the New American Foundation argue that this "low wage social contract" -- which they explain clearly along the lines stated above -- has been an abysmal failure. They are right, of course.  

Looking at alternatives, Freedman and Lind posit that for various reasons the United States will never morph into a social democracy with high wages for all (as well as higher prices) and universal benefits.

But they do think that the United States can both boost wages and universalize social benefits to create what they call a "middle income social contract." Again, that makes sense and, in fact, we see steps in this direction already: For instance, California's new law raising the minimum wage to $10 an hour will improve pay over the next few years at the same time that Obamacare is kicking in, allowing millions in that state to get health coverage that was previously out of reach. 

It's not hard to fill out this picture of higher pay and better benefits by looking at a variety of developments under way, including labor organizing in the retail and restaurant industry, the Pay It Forward proposals for making college free, and growing discussion of universal pension systems that would be available to all workers. Indeed, California is also on the cutting edge of that last area, with a new retirement savings law that forces nearly all employers to offer workers a chance to stash away money for the future in a program similar to the public pension system for state workers. 

Bringing greater progressivity to the tax code -- to finance universal benefits -- is another piece of the Freedman and Lind vision, and here too we see movement, including the restoration of higher federal taxes on affluent Americans at the start of this year and the passage in -- yes, California -- of a ballot initiative to raise taxes on the rich. 

So the vision set out by Freedman and Lind is anything but a chimera. We can already see the emerging outlines of such a new, stronger social contract -- one well-suited to what they note is the "complexity" of America. 

How this expansive progressive vision might jive with the fiscal constraints favored by Maya MacGuineas -- who also works in the New America archipelago -- I have no idea. Let's leave it to Anne Marie Slaughter to square that particular circle (along with others within NAF).  

I only really have one bone to pick with this excellent paper. Which is that Freedman and Lind may too readily concede that there are insurmountable obstacles to dramatically raising pay for today's low-skilled workers because of the "low profit margins" in service industries. More broadly they write:

A return to the high-wage model of the American social contract characteristic of the mid-twentieth century. . . would be difficult if not impossible due to changes in the global economic structure.  

I think this assumption needs more scrutiny. Yes, it's true that leaps in productivity in America's industrial sector during the 20th century, along with a dearth of global competition, were crucial in enabling such high wages. But today's economy is pretty good at creating wealth, too. And while profit margins may be slim in service areas, some of this nation's largest low-wage employers -- Walmart, McDonald's, Yum! Brands -- have done extremely well in recent years, with huge leaps in shareholder value. Also, many higher end service firms also employ low-wage workers, as do a variety of other highly profitable companies. Clearly there is a lot of wealth sloshing around to be shared with workers. 

And let's not forget that today's low-skilled service sector jobs are not so different in some respects than many of the factory jobs of yesterday. The new low-wage jobs require little education, but so did the factory jobs. While we glamorize the factory jobs of the past, they were often deadening and dead end -- and many factory jobs remain so. However, these otherwise bad jobs became good jobs and a ticket to the middle class because of labor unions. 

As for the global context, the good news is that home healthcare aides and Walmart greeters don't face competition from China. These and many other low-wage jobs can't be outsourced. So while yesterday's well-paid factory workers turned out to be living on borrowed time, it may actually be more possible today to create a truly sustainable social contract for irreplaceable unskilled workers. 

What's more, rising labor standards, wages, and regulatory costs overseas, driven by modernization, democracy, and a new global middle class, could dramatically change the equation for all U.S. workers. Already outsourcing has become less appealing in some situations because of these changes. Just wait until places like China and India have millions of highly educated citizens demanding cleaner air and water. 

Freedman and Lind may be right that we'll never get back to the high wage glory days for the working class. But they should at least engage more creatively with the possibilities that exist.