Thursday, January 26, 2017

Fair Compensation: Minimum Wage

What is "fair" (or "just?) compensation? How much is your labor worth? Is there some objective method that corporations might utilize in order to compensate their workers fairly? Typically, the morality of compensation falls under the category of distributive justice. The formal principle of justice suggests that it is unfair to pay workers either more than they deserve or less than they deserve. Of course, the obvious question here is which material principle(s) of justice do we employ in determining what those employees actually deserve?" Is it merit, need, equality, or utility? Here are some of the options:

MERIT-BASED COMPENSATION: Based on the material principle of merit it would be unfair to pay the “best workers” the same or less than the “worst workers.” In other words, merit-based compensation is based on compensation. Sometimes “pay” involves salary, sometimes benefits, sometimes it involves other variables (or perks). But how would a corporate leader determine what the "best" means in any given workplace, and would he/she go about “objectively” grading work performance? Stock holder theorists would argue that merit is inseparable from the free market. If you underpay an employee relative to what’s being offered by other corporations for the same or similar work, that employee will most likely resign and take the more lucrative (or attractive) job. If you overpay workers, you’ll have to charge consumers more for your product or service and/or earn less profit and adversely affect stockholders and stock price. Defenders of merit-based compensation argue that compensation also influences employee performance (and employee loyalty). Workers will be more loyal to the company and work longer, harder, and better if they believe that they will be fairly compensated. Do they have merit pay at your place of employment? How is it distributed? Do you think it's fair? Are you overpaid? Are you underpaid?

NEED-BASED COMPENSATION: Based on need, it would be unfair to pay workers less than what they need. Need-based compensation usually incorporates ideas such as a “minimum wage,” or a “living wage.” The problem here is how does one objectively set these standards? How does an employer differentiate between "wants"-(e.g. a new guitar) and "needs" (e.g. a liver transplant)? And unfortunately, the neediest workers are not necessarily the best workers. Sometimes workers are in need because they are sick, incompetent, or just plain lazy. Stockholder theorists argue that need-based compensation ( minimum wage and living wage) are unfair because they involve paying the least valuable workers more than they deserve. Need-based compensation also incentivizes employers to hire fewer low end workers, which leads to unemployment of the least advantaged. Stakeholder theorists argue that corporations have a tendency to exploit their less valuable workers and that exploited workers become alienated from their work, family and themselves. How much salary do you need? If you are ill, do you need more salary or benefits to survive? Do workers have positive right to: home ownership, health care, cell phones, or wide-screen televisions?

EQUALITY-BASED COMPENSATION: Based in equality, it would be unfair to pay any worker more or less than any other worker, regardless of merit, need, or utility. After all, all workers may not, in fact, be of equal value in terms of merit, need, or utility. As a general rule, companies that compensate all workers at the same level, lose the best workers and attract the worst workers. This is called adverse selection. Unions often pursue variants of equality-based compensation, such as basing salary on non-competitive factors such as seniority. Would you want to work for a corporation that equally compensates all workers, regardless of their competence? How long would that corporation stay in business?

UTILITY-BASED COMPENSATION: Based on utility, it would be unfair to pay a less useful employee more than a more useful employee. But how does one determine what "greatest happiness" means in any particular workplace? Low employee wages might make the stockholders and consumers happy. High executive wages might make executives happy, but make everyone else unhappy. Many stockholder theorists argue that corporations compensate executives at a higher level because they have utility; that is, stockholders, employees, consumers, financiers, etc. benefit by retaining these workers. Hence, utility-based compensation is really merit-based compensation.

MARKET-BASED COMPENSATION: Based on market-based reasoning, it would be unfair to pay employees (including CEOs) more than what the market dictates. A corporation’s best overall strategy is always to hire best person for the least cost. The more costly it is to replace a worker, the more you have to pay that worker. If you underpay good workers, they will quit and work for someone that pays them more. Stockholder theorists argue that companies that adopt compensation schemes ignore the free-market tend to go bankrupt over the long run.

In the real corporate world, rationally self-interested corporations simply cannot hire the neediest workers unless doing so provides a favorable cost-benefit ratio (e.g. those individuals are willing to work longer hours for less compensation), unless the government forces them to (Americans with Disabilities Act), or unless government provides economic incentives (Enterprise Zones). Also in the real world, merit and utility usually mean the same thing. The best workers are usually the most useful, in the sense that they contribute more to the company. Therefore, in determining just compensation there are really only two principled alternatives: pay scales based on merit and pay scales based on equality: stockholder theory v. stakeholder theory.

Some small colleges try to pay their professors based, more or less, on equality; that is, they try to pay all professors on essentially the same scale, regardless of merit or utility. Sometimes these compensation policies involve setting up a pay-scale based on seniority, so that long time workers get paid more that recent hires. Of course one might argue that since workers with seniority have more job experience and tend to be the best workers, this is really a merit-based system. I would argue that these schemes are nevertheless equal as long as each worker has an equal opportunity to gain seniority. Many people think that compensation based on equality is fair. But, unfortunately, salaries based on equality often bump heads with economic reality. For example, there are, in fact, more high-paying employment opportunities than engineers. But there are more philosophers than jobs in philosophy. That's why colleges pay their engineering faculty much more than they do their philosophers. When defending these higher wages, college administrators might invoke several different moral principles. Some utilitarians might say that "since there are more engineering majors than philosophy majors, the whole college benefits more from engineering than philosophy, and therefore the higher wages for engineers is justified." Utilitarians might also justify paying football and basketball coaches more than any other employees.

Alternatively, one might argue based on the material principle of equality, that it is unfair to pay engineers more than philosophers if they hold Ph.D.s, write books, and teach excellently. However, if Aristotle were on the philosophy faculty, one might argue, based on the material principle of merit, Aristotle is the most academically accomplished faculty member, and therefore he ought to be paid the most. Then again, even though he may be the most meritorious faculty member, he may not necessarily generate the most utility for the college. Of course, libertarians would probably say that, if the college really wants to have either an engineering program or Aristotle on the faculty, they will, in fact have to pay market value for their labor. Otherwise those rationally self-interested individuals involved will simply exercise their liberty and change their place of employment. The labor market, they say, is not unlike any other market: it is inherently unequal. This fact of inequality means that at least some workers may not be worth very much to the corporation and therefore are compensated at a very low level, perhaps so low that those individuals may not be able to support themselves and/or their families. In the United States, government tries to compensate for the ruthless labor market by instituting minimum wage laws, unemployment insurance, Social Security, Medicare and Medicaid etc.

Minimum wage laws are prime examples of egalitarianism. They are often justified on the basis of Rawl's concept of a social minimum. (Utilitarians sometimes join forces with welfare liberals and argue that minimum wage laws make life better for all of us by reducing poverty, dependency, and crime.) Back in nineteenth-century America, before minimum wage laws were passed, workers were often paid extremely low wages for long hours working under extremely dangerous working conditions. Even children were subjected to working long hours in dangerous factories. Libertarian stockholder theorists argue that "those were the good old days!" when wages and working conditions were set by blind market forces and not by the whims of nosy, "do-good" government officials. In exercising their liberty, factory owners offered wages under certain working conditions and workers, who owned their labor, either accepted or rejected those offers. Once minimum wage laws took effect, stockholder theorists argue, corporations were forced to pay workers more than the market dictates, and as a result corporations couldn't afford to hire as many low wage workers. Hence, stakeholder theorists, by defending a legal minimum wage, inadvertently hastened the advancement of labor-saving technology which led directly to the rise of unemployment and poverty in the United States. Stockholder theorists argue that technology opens up more high-paying jobs for engineers and salesperson; and therefore, if you lose your job to technology, get retrained..

Stockholder theorists conclude that minimum wage laws are fundamentally ill-conceived. They say that the value of one's labor is best left to voluntary choices by buyers and sellers of labor. Hence, if these low wage workers had stayed in school longer and/or chosen more promising career paths, then their labor would be worth more. But when the government protects low wage workers from the consequences of their bad decisions, it encourages future bad decisions, and increases the number of people on welfare. So as a tax payer, I am penalized via the tax code for having made good decisions, while high school drop outs are rewarded by overly generous minimum wage laws, Medicaid, and welfare checks. Hence, government inadvertently discourages workers from staying in school and/or choosing more promising career paths. Why work at all if you can stay at home and collect that welfare check? That’s called “moral hazard.”

Other stockholder theorists argue that low wage jobs provide young workers with the opportunity to learn how to be a worker; and that the lower the wage paid, the more young people can be hired. And that minimum wage laws affect small businesses more than large corporations.  Thus large corporations benefit from bankruptcy of local competitors.

Stakeholder theorists respond by arguing that the fatal flaw of stockholder theory is that it assumes that poverty is usually  caused by irrational or misguided decisions, when in fact, a lot of poverty is the result of natural inequality (the natural lottery) and predatory behavior by more powerful stakeholder groups. Through no fault of their own, many people simply cannot support themselves because they are genetically and/or socially disadvantaged. As Rawls argued, in the state of nature, the distribution of genetic and social advantage is inherently unfair. The fact of inequality, egalitarians argue, does not make it right. That's why our ancestors invented civilization to begin with! So should the government force corporations to pay low wage workers a minimum wage? If so where should that wage be set? What do you think?


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