Living Wage, or a Functional (Real) Wage?

Interestingly enough, one can think of mercantilist arguments - while still irrational from the standpoint of international trade - as political efforts to ensure a supply side version of a "living" wage, in the form of manufacturing jobs at home. Yet protectionism such as this misses the mark, since automation is responsible for far more lost manufacturing employment, than globalism. Paradoxically, however, technology and automation contributed to manufacturing output so much that - for a long time - they included higher levels of compensation for low skill workers, than what many service sector jobs can provide. Alas, service sector jobs, and their time based output constraints (which negatively impact nominal wage potential), have partially replaced the low skill manufacturing employment options of our recent past.

Of course, who doesn't want wages which cover basic expenses and costs of living? Once anyone experiences life on these terms; understandably, it can be difficult to imagine, or adjust to, other forms of existence. Even though progressives are more likely to advocate for living wage proposals from a nominal standpoint (which would increase service sector wages as well), there's some unexpected crossover of wishful thinking between these groups, regarding supply side versus nominal wage arguments.

As nations are faced with growing debts and revenue obligations, both protectionism and living wage arguments may appear as though a panacea. How does a government tax low skill income which is scarcely high enough to generate further revenue? Especially if that government already faces restrictions on the taxation of high skill income?

Yet both approaches are at best, little more than shifts in general equilibrium conditions, instead of general equilibrium improvements. In a recent CapX article, Tim Worstall decried the faulty rationale on the part of the Trades' Union Congress to create a million new manufacture jobs. While Worstall's reasoning is sound when he claims "More jobs in manufacturing is a terrible ambition for the British government", he nonetheless falls short with his first assertion:

The ultimate economic goal is not to create new jobs, but to destroy them.

How so? It's not the first time Worstall has made this claim. A brief digression might help. His argument has relevance for total factor productivity gains during periods of tradable sector dominance. Additional output gains in these conditions, can translate into more enterprise generating additional employment in new capacities. At the same time, these production gains benefit from decreasing internal labour hour requirements in the relevant "old" firms. The problem? Once non tradable sector dominance sets in, the earlier advantageous framework of tradable sector output gains becomes less certain, since more revenue in aggregate is being slated for non discretionary costs and non tradable sector requirements. Sectoral revenue imbalance means that employment opportunities become more responsive to political and financial realities, rather than fortuitous changes in general equilibrium output.

Present day non tradable sector dominance, is also a factor in the limited effectiveness of a living wage, insofar as its capacity for meeting societal expectation. Plus, higher minimum wage requirements increase workplace expectations and place a higher floor on employment opportunities. Perhaps what is needed, is the concept of a functional wage which serves to augment productivity options on the part of each economic participant. Such options would ultimately increase the value of a wage at a real level, instead of at a nominal level.

Nominal wage constructs tend to function as a passive response to general equilibrium conditions. One could envision a functional wage (compensation for personal time priorities as mass market commodity) as a more active approach. Rather than merely accepting the limits of a given wage, participants could ask: How might I alter, innovate or otherwise shift my local resource capacity so as to improve equilibrium conditions? Is it possible to place my wage capacity into the larger framework of total resource capacity and potential?

Granted, local rules and regulations in normal circumstance, greatly limit the degree to which such an approach is possible. However, in economic settings where the time value of local groups is compensated as a commodity (which allows everyone to take part in time based coordination), compensation for time would be functional in the sense that all would strive for gains in real wage capacity.

Until now, innovation has been possible in fits and starts, and mostly applied - despite loud complaints - wherever it was possible to do so. It is feasible to apply extensive innovation to both our services capacity and our physical environments. Even though individual participants would also be seeking gains for their own ends, they would (once again) often be able to do so in ways which expand general equilibrium potential.

For those willing to take part, ongoing innovation in a time/space continuum, could transform real wage capacity beyond present day horizons. The compounding interest of knowledge and skill in this continuum, could ultimately defuse the time constraint of services based output in many ways. While nominal wages of time arbitrage would appear quite minimal in contrast with present day minimum wage requirements, real wage gains could still outpace what a living wage could provide in many traditional economic settings. Despite the fact we have limited options for improving nominal wages, the potential for improving real wages via production reform is so vast, it boggles the imagination.