There are lots of ideas floating around about how to increase U.S. economic growth, with Democrats leaning toward stimulus and Republicans pushing more austerity. Then there's this suggestion: Our economic malaise can end by giving everyone, especially those at the bottom of the economic heap, a raise. It sounds too good to be true, and surely is.
The thinking goes like this: If only companies paid workers higher wages, they would have additional income to spend, increasing demand for goods and services and touching off a virtuous circle of rising investment, more hiring, higher pay and on and on until we reach some perfected plane of economic being.
The Daily Beast's Daniel Gross put it this way:
"Confronted with piles of cash mounting in their coffers, companies generally decide to return it to shareholders by paying dividends, buying back stock, or boosting CEO pay. When you suggest to CEOs that they might be better served by channeling that cash into higher wages, as I’ve done on a few occasions, they look at you like you have a third arm growing out of your forehead. It simply doesn’t occur to them. "This is a serious problem. In fact, I’d argue that the pathology surrounding wages is the most serious problem holding back growth. Yes, there’s a need for infrastructure investment, better training, greater investments in renewable energy, and educational programs. But the last, best form of stimulus available is the only one that hasn’t been tried: paying people more."
This argument has a certain amount of emotional, if not logical, appeal. Why shouldn't companies pay their workers more? U.S. corporations were, after all, holding a record $1.45 trillion in cash at the end of 2012. Much of this bounty is the result of companies holding down head counts after making brutal cuts to their work forces during the recession, driving unemployment to the highest levels in almost 30 years. Rather than rehire the workers they got rid of, many companies are making do with part-time or temporary workers.
Another point that argues in favor of paying workers more: Labor's share of U.S. national income is at postwar lows. (The reasons for this are in dispute, however, and the causes are more likely structural and long-term rather than the cyclical fallout from the Great Recession.)
The flaw with the idea of raising worker's pay in today's economic setting is that it reflects an odd conceit about how businesses function: their goal is -- or should be -- to maximize profits for the benefit of their owners (or shareholders, the same thing). They do this in a competitive environment.
So what would happen if McDonald's Inc. paid its workers a dollar an hour more on average than rival Burger King? There are a couple of options. McDonald's could raise prices to cover the additional cost and endure the inevitable loss of customers to Burger King. Or, it could swallow the costs and hurt profit margins, which probably wouldn’t sit well with investors who have other choices about where to put their money.
No one doubts that the pay at many of the jobs created since the recession ended more than four years ago aren't as good as the ones that were destroyed. The biggest reason these new jobs pay badly is because businesses can get away with it in a labor market that stinks.
Just by way of contrast, it's worth remembering that it wasn't all that long ago that fast-food restaurants and retailers were struggling to find workers during the Internet bubble years. At one point, companies even were paying hiring bonuses to low-wage hires, something usually only found in the highest corporate reaches and Wall Street.
Asking companies to make uneconomical decisions is a non-starter. It's fine to hope as Gross does that companies will feel a cultural or altruistic urge to increase pay. But until that happens, it's up to Democrats and Republicans to figure out other ways of improving economy, no matter how improbable that might seem.
(James Greiff is a member of the Bloomberg View editorial board. Follow him on Twitter.)