Photograph by Ted S. Warren — AP

Warren Buffett’s recent statement on wages highlights the idea that hourly pay may be the smallest threat against U.S. workers.

By S. Kumar
May 28, 2015
May 28, 2015

In an op-ed in The Wall Street Journal last week, billionaire investor Warren Buffett argued that any plan to increase the minimum wage “would almost certainly reduce employment in a major way.” Given his past support of average Americans, his statement should not be viewed as a stand against better wages; rather, it underscores the fact that the average American worker faces multiple challenges beyond today’s debate over the minimum wage. Here are three big ones:

Corporate power is growing

For starters, corporations today have disproportionate influence over U.S. workers. Employees can be hired or fired for almost any reason as the U.S. operates under an employment-at-will system. At the same time, the power of labor unions is declining, with only 11.1% of workers belonging to a union in 2014 compared to 20% in 1983, according to the Bureau of Labor Statistics.

In this landscape, major corporations can set wage levels by virtue of being the largest employers. The more people a company hires, the more of the labor market it controls, and the greater its power to bring down the average wage for any particular job. This distortion of market forces by large players can be seen widely in industries like fast food and retail.

Workers are competing with machines

As sophisticated new technologies emerge to automate human tasks, the employment potential for future workers is bound to decline. As Microsoft founder Bill Gates stated in an interview last year, many existing jobs might disappear within two decades due to technology, and an Oxford University study concluded that 47% of U.S. jobs could be at risk within 10 years due to advances in robotics.

Researchers at MIT have also painted a bleak picture for the American workforce, and not just for blue-collar jobs. The availability of cheaper computing power and storage capacity as well as the emergence of artificial intelligence and big data analytics could turn even professional services in white-collar industries, such as banking and law, into technical commodities – easily and cheaply provided by machines instead of people.

Income inequality

Of course, new technologies can also open up new avenues of employment, but mainly for specialized skills. Here, too, most low-wage workers face an uphill struggle. They often have to work multiple jobs just to make ends meet, which leaves little time or resources to gain higher education. Their children, too, face daunting challenges due to substandard education and the inability to secure ‘gateway’ college degrees, which could secure them high paying jobs in the future. Income inequality exacerbates this problem, leaving the majority of workers stuck in a vicious cycle.

Combine this with a shrinking pool of jobs and you have a recipe for disaster.

All this could have a strong negative impact on the U.S. economy, as unemployment is a serious drain on national resources. The more people out of work, the greater the pressures on unemployment benefits, food stamps, and other welfare programs, which then necessitates higher taxes and hampers prosperity for all.

An even bigger problem is that 70% of the U.S. economy stems from consumption, which is correlated to employment and wages. The higher the unemployment or lower the wages, the less the money available for spending, especially in the low-income bracket. While the increasing wealth of business owners, who benefit by paying lower wages or hiring fewer workers, could have a counterbalancing effect, research has shown that wealthier citizens also have a lower marginal propensity to consume (in other words, they save more) than low-wage workers. Therefore, total consumption would still fall.

Buffett’s suggestion is to increase the earned income tax credit, through which the government pads the income of low-wage workers. This can increase their ability to survive and enhance their skills. It’s a good idea, but it still doesn’t address long-term job obsolescence or growing inequality.

In this context, a higher minimum wage would certainly be a good thing. But as Buffett points out, if it reduces employment, it won’t help anyone, so the correct solution is not necessarily a simple government mandate but a dynamic public-private partnership that brings the private sector into the conversation and fosters a national commitment to protecting the American worker.

It’s true that companies like Wal-mart WMT and McDonalds MCD , who have been criticized in the past for not paying people enough, are finally taking steps to increase wages, but this is mainly in response to a temporarily tight labor market. That situation could reverse itself quickly, as pointed out by TheStreet.com. We need to do better than that.

Our most powerful companies need to recognize how their choices impact workers, and therefore the economy, and act cooperatively to raise market wage levels so that the government doesn’t have to. Buffett is right that we need to preserve the integrity of the free market, but the system also needs to take care of the people who make the free market possible.

Kumar has worked in technology, media, and telecom investment banking. He has evaluated mergers and acquisitions in these sectors and provided strategic consulting to media companies and hedge funds.

 

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