Ask an economist (like me), and you’ll hear the standard theory we learned in Labor Economics 101: Employees are paid the value of the extra product made by the last worker.
So, auto workers get paid more than lawn care workers because they work in a very productive industry (things made per hour), and the value of the product, an automobile, is very high. On the other hand, productivity in landscaping is lower, and the value of the product, a beautiful lawn, isn’t as high.
For years, the United Auto Workers bargained for higher wages to keep pace with national productivity gains. Meanwhile the higher productivity of automobile workers compared to the national average was passed on to consumers, keeping the price of cars down. That is how we got to where we are today.
Now, a competing wage model is being pushed. The new Delphi idea is that the wages of workers should not be connected to the value of their product or labor productivity. Instead, the view is that there are “unskilled” workers who exist with some limitless supply-in Mexico and China-and that the wages of workers should simply reflect that unlimited global supply of undifferentiated workers. There are several problems with that view of setting wages.
First, because the new “Delphi theory” does not relate the value of the products produced to the work done, it gives a false signal between the contributions and costs of capital and labor to production. It makes labor too cheap, and will stall advancement by discouraging the proper investment in machines and increased productivity.
Second, by making labor too cheap, it violates another established economic principle: Workers should earn enough to reward investments in their skills, by their employers and themselves-what has come to be called “human capital.” Pay teachers less than garbage collectors, and no one wants to invest in the years of schooling it takes to become a teacher.
As it happens, the term “unskilled” is used too often to mean someone without a college education. Modern factory workers are not really “unskilled”-anymore than a major league baseball player like the Tiger’s Rondell White (who hit .313 last year) is “unskilled”- and not everyone has their level of concentration, physical dexterity, knowledge of electronics, robots, tools and eye-hand coordination.
Third, and maybe most importantly, if we do not pay workers based on their productivity, people won’t be able to afford to buy the product. Henry Ford and Walter Reuther both understood that simple truth, and it’s time that Delphi did, too.
If auto workers at Delphi get paid $9 an hour the rest of society will have to subsidize those workers. At $9 an hour, a worker would earn below the federal government’s poverty level for a family of four. This means that other Americans will pay for food stamps, housing vouchers, Medicaid and other poverty supplements to sustain Delphi workers at the poverty level.
Of course, a real family budget would be higher. My Economic Policy Institute colleague, Sylvia Allegretto, has estimated the cost of modest housing, a basic diet, child care, transportation, taxes and other expenditures to maintain a family of two parents and two children in over 400 American communities. Her estimate for a family budget in Flint is $36,420 a year, about twice the federal government poverty line. So, even with government subsidies, Delphi workers making $9 an hour would not have enough to afford the actual basic cost of living in Flint.
When Hurricane Katrina hit New Orleans, many Americans were puzzled why people were left behind. Why didn’t everyone just drive away in their cars? Wake up, America! If you make $9 an hour, you don’t own cars to drive away in. You are struggling to pay rent and put food on the table.
Delphi’s theory of setting wages ought to concern all Americans. If America cannot afford automobile workers, then it isn’t clear which jobs will be left. Hurricane Delphi will have more victims than Katrina.
William Spriggs is a senior fellow at the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C.
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