Research and Studies, Wages

Higher Wages Aren’t Free, and Why Environmentalists Should Be the Defenders of Efficiency

From, Adam Ozimek, 9 May 2011.

Anyone arguing that employers in some industry should raise wages should have to sit down with a labor market supply and demand graph and explain what it is they’re asking for. As it is most people calling for so-and-so to raise wages don’t seem to be thinking about labor markets, and instead think of wages as something that you can always just raise without any consequences, for instance losses to workers via unemployment.

You can see this in the common refrain that workers would be better off if we had a vastly more unionized economy. Maybe workers would be better off, meaning those that can get jobs would gain. But if you’re going to hold wages above market levels you’re going to decrease employment, so you’ll benefit workers at the expense of those who can’t get a job or who take a lower paying job. Sure, there are exceptions to this, like when a union counters monopsony power. Or when unionization provides workers voice in a way that allows them to communicate more efficiently with management and raise productivity. But to prevent unemployment you need the cartelization of the labor market and subsequent higher wages to be either just enough to offset the lower wage resulting from monopsony power, or you need them to be fully offset by productivity increases. If wages go above this at all, than there will be unemployment. Rarely if ever is any time taken to argue why x% higher wages are the right amount to offset monopsony power. This dfficulty is mostly just ignored, and the fact that cartelized higher wages is an unmitigated good is just presumed.

Tom Philpott, writing at Grist, provides another example of ignoring the costs of higher wages. He tells us about the  ”penny-per-pound” movement that is asking for Burger King, McDonalds, grocery stores, and other food companies to pay a penny more for each pound of tomato so that a particular group of tomato farmers can have their wages raised from $7.25 to $13.25. But what does Philpott think will happen to labor demand if the price of labor doubles? Even if the tomoto farmers promise in the short-run to not fire anyone, in the long-run does he really think that wages can remain at double the market level without downstream buyers gradually shifting to tomatoes grown in Mexico, California, Canada, or from the increasingly competitve greenhouse tomato industry? What will doubled wages do to farmers incentives to replace workers with machines? Consider the following from Philip Martin:

There were many other labor-saving changes in the mid-1960s in response to rising farm wages. Cesar Chavez and the United Farm Workers won a 40 percent wage increase for grape pickers in their first contract in 1966, increasing entry-level wages from $1.25 to $1.75 an hour at a time when the federal minimum wage was $1.25. Farm worker earnings rose faster than nonfarm earnings between the mid-1960s and late 1970s, prompting the use of bulk bins and forklifts in fields and orchards that eliminated thousands of jobs. Conveyor belts moving slowly down rows of vegetables made it possible to pick and pack lettuce, broccoli, and other vegetables in the field, eliminating jobs in packing houses.

Immigration critics like CIS, who Martin wrote his paper for, are quick to point out that there are many labor saving technologies that farmers could employ but haven’t due to low wages. In 1960 there were 45,000 workers picking California’s tomatoes. A decade later, the use of machines allowed the work to be done by less than 5,000. Would a doubling of wages cause tomato pickers to be replaced by machines? I don’t know. But it does put more pressure on the whole supply chain to shift away from these workers. Labor replacing technologies and production shifting to Mexico when that minimizes true costs doesn’t concern me per se, but this is a problem for the workers Philpott wants to help, and an issue he has to contend with.

My biggest problem with Philpott’s viewpoint however, is his contention that “low” agriculture wages tell us that we should oppose the cost minimizing efficiences and low prices pursued by Walmart and the agriculture system in general:

The creed of “Everyday Low Prices,” the zeal to churn out profit by maximizing sales volume and minimizing cost, lies at the root of our food-system dysfunction. Relentless cost-cutting means pressure to move environmental destruction off of corporate balance sheets, creating ecological sacrifice zones. It also drives companies to pay workers as little as possible, creating a vicious circle in which we need cheap, low-quality food in order to feed millions of low-wage workers.

This reflects a view of the world where the predominant way that companies lower prices is through grinding the working man ever  lower. But the history of agriculture and retail productivity in this country is an amazing success story, and the gains are so large that it would literally be impossible for a large percent to have come from driving wages down. Consider a few statistics. In 1950 food consumed at home took up 22% of an average households budget, and by 1998 this had been reduced by 7%. The retail price of food fell by around 25% from 1900 to 2000, and the farm price fell by over half. The current labor force dedicated to agriculture is 1/3 of what it was in 1900, but the level of output is seven times higher. The welfare gains to households that these numbers represent are massive.

Could these drastic changes have plausibly been driven by, or outweighed by, the “pauperization” of farm labor? First note that that over that same time period that food budgets fell from 22% to 7%, the average income for farm families went from below to above that for nonfarm families. It is true that wages for hired farmworkers are extremely low. But they have always been low. You’d never get that sense from Philpott’s piece, but the figure below from Bruce Gardner’s “American Agriculture in the Twentieth Century” shows the ratio of average hired farmworker wages to manufacturing wages from 1920 to 2000. It’s hard to find a “pauperization” of farm workers in there, or a golden age of farmworkers for that matter.

The problem with trying to raise farmers wages by opposing Walmart and low prices in general is that farm worker wages are a very small part of the total bill. The total amount of farm worker wages in the U.S. are just over $20 billion, while the total amount of traditional food store sales in 2009 around $550 billion. Now all the food we buy doesn’t come from U.S. farms, and all food made on U.S. farms doesn’t get eaten by us, but the relative sizes here do give you some idea of difference in magnitude. If these stores were somehow holding wages down 50%, then that would account for less than 2% of the retail price of the food.

In contrast, Jerry Hausmann estimated that by offering lower prices and driving competitors to lower prices, big box stores, including Walmart, have made consumers better off by 25% of their annual food spending.  A study by Global Insight commissioned by Walmart quantified their impact on prices overall:

It estimated that “the expansion of Wal-Mart over the 1985-2004 period can be  associated with a cumulative decline of 9.1% in food-at-home prices, a 4.2% decline in commodities (goods) prices, and a 3.1% decline in overall consumer prices… This amounts to a total consumer savings of $263 billion by 2004.

Walmart doesn’t -and couldn’t- lower prices this much by “pauperizing” labor. They do it through operational efficiencies and driving down the profits of competitors and suppliers.  After all, is it really plausible that Walmart began entering the grocery market because they realized they could beat their competition by driving down agricultural wages that constitute 2% of the food bill? Or did they enter because existing supermarkets had large profit margins due to a lack of competition? Hausmann, at least, believes the latter is true, and provides this graph of rising supermarket profit margins throughout the 90s as evidence:

Farm work is not a well-paid or pleasant job. But if you want to advocate for higher wages for these workers you need to recognize the tradeoffs. And trying to improve the lot of these workers by opposing Walmart and lower food prices is the most expensive and ultimately unproductive way to go about it.

Another problem with Philpott’s argmument is that he is making a huge mistake, one common to environmentalists, in attacking efficiency. There is no greater friend to environmentalism than efficiency. Pollution is private benefits paid for with public costs, and as such is inefficient. Policies that mitigate pollution smartly are efficient. This is why so many economists, even conservative ones, favor a carbon tax: because it’s efficient. Environmentalists should not cede the banner of efficiency to those that oppose regulating pollution. They should not ignore the fact that taxing and regulating pollution can be a low cost policy, and that the right costs to consider are not just private but public as well.

By making themselves the enemies of low costs and efficiency, greens are on the wrong side of history, and they’re ignore the massive gains in human welfare that falling prices and rising productivity have wrought.

Source:, “Higher wages aren’t free, and why environmentalists should be the defenders of efficiency” by Adam Ozimek, 9 May 2011.

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