← Pitchfork Economics with Nick Hanauer
Pitchfork Economics with Nick Hanauer
Back to Basics Series: Does the Market Really Pay You What You’re Worth? (with Marshall Steinbaum and Saru Jayaraman)
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- [00:00]
A
Hey, Pitchfork listeners. Goldy here. We've been doing this podcast for a long time now, so we thought we'd take a little break this summer. But we don't want you to miss us too much. So we thought we'd revisit some of the most central episodes from early in our history with a Back to Basics summer series. And as you're trying to maximize your own summer vacation plans, you might want to ask yourself, does the market really pay you what you're worth?
- [00:31]
B
The way to make workers worth more is to give them greater skills, get more higher education degrees. That whole sort of genre of argument is premised on a certain assumption about how the labor market works, that workers are paid what they're worth. And that assumption is false.
- [00:43]
C
I'm an electrician by trade. I make $18 an hour, about the exact same as my uncle who did this back in the 80s.
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A
If it's not marginal product that determines how much you make, what is it?
- [00:55]
D
It's its power.
- [01:02]
E
From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, where we explore everything you wished you'd Learned in Econ 101.
- [01:18]
D
I'm Nick Hanauer, founder of Civic Ventures.
- [01:21]
A
Hi, I'm David Goldstein, senior fellow at Civic Ventures. So, Nick, before I started working for you, I worked for the Stranger in Alt Weekly, where I wrote, like, three, four, five blog posts a day, plus had, I don't know, 600 to 2,000 words due in the paper that week. And I got paid very little money. And then I came to work for you, and you're paying me so much more than I made at the Stranger. So. So, as I understand Econ 101, I'm a lot more productive now with you.
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D
Right? Yeah.
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A
My marginal product is so much higher to justify this higher wage.
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D
Yeah. The super sad part is you're probably about a third as productive and you earn three times as much.
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A
Quality versus quantity, Nick.
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D
Yeah, I don't know what happened. Yeah, that little story is a marvelous illustration of why the principle of marginal productivity is such a lie.
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A
The theory of marginal product says that, well, essentially that you are paid what you are worth.
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D
That's right. Because markets are perfectly efficient and allocate resources perfectly efficiently. The amount people are paid equals their marginal product. Which is to say, if you work for Walmart and earn $7.25 an hour, that's because that's all you produce for the company.
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A
The value that you add on through your labor, that is your marginal product.
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D
That's right. And at the risk of boring our listeners a little bit, it's really, really, really worth reading a quote from a man named John Bates Clark, who essentially invented this theory, actually in response to Marxism. So here's the quote. The welfare of the laboring classes depends on whether they get much or little. But their attitude towards other classes, and therefore the stability of the social state, depends chiefly on the question whether the amount that they get, be it large or small, is what they produce. If they create a small amount of wealth and get the whole of it, they may not seek to revolutionize society. But if it were to appear that they produce an ample amount and get only a part of it, many of them would become revolutionists and all would have the right to do so. It's a shockingly revealing statement. Right.
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A
So what we need to do is make people think that they're getting what they deserve.
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D
Right.
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A
However little it might be that they're getting.
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D
Exactly. And why is that important? Because human societies function on the basis of their ability to sustain cooperation. And cooperation depends on social reciprocity norms. That is to say, I get what I deserve, the society is fair. And this principle of marginal productivity is so crucial to neoliberal economics because it teaches people that. That no matter how much they earn, it is what they deserve. And no matter how much Jeff Bezos or I or whoever it is, earns, that also is deserved. That reward is commensurate with our skills, ability, and work. And that idea is essential for sustaining cooperation, for reducing the possibility of revolution. Because if you violate those reciprocity norms, people don't get scared. They get angry. And when they get angry, spatula.
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A
And remember, this is why the other side, they fight against things like the $15 minimum wage and higher taxes on the wealthy and social services and redistribution. Because it's unfair. It's unfair to the people who worked so hard to earn that money. And you have to understand how ingrained this is. It's not just that you and your wealthy friends somehow are able to convince yourselves that you earned all those hundreds of millions of dollars. Surveys show that the majority of Americans would think that if they're poor, it's their own damn fault.
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D
Yeah.
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A
They deserve to poor and blame themselves for it. And that is like this rubbing salt in the wound.
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D
Yeah, well, I'm not sure it's rubbing salt in the wound. It's certainly the most effective way ever devised to keep poor people poor and.
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A
Rich people rich for you.
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D
Yeah, exactly. And so this principle of marginal productivity is among the most evil ideas ever invented. Because if you can get people to believe that this is essentially a law of nature, just how economies, market economies, work, then you have enforced a status construct in an extraordinarily effective way that benefits the few and disadvantages the many. And it is one of the central tenets of neoliberalism. It's one of the biggest reasons why we have such an unequal society. And it is one of the things that makes reasonable people want to burn neoclassical economists at the stake.
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A
Well, so says you, Nick, but neither you or I are economists. So I want to hear from a real economist on this subject.
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D
That's right.
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A
We got one lined up.
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D
We have a good one lined up. Our friend Marshall Steinbaum, who, by the way, is a classically trained Chicago school economist.
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A
Oh, don't insult him.
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D
Yeah, no, but he's a brilliant guy and is at the forefront of trying to acknowledge that this idea is a lie and teach people that they shouldn't pay any attention to it. So, anyway, it'll be really fun to talk to Marshall about it. He has a lot of very smart things to say about this subject.
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B
My name is Marshall Steinbaum. I'm an assistant professor of economics at the University of Utah. You can find me on Twitter, Con. Marshall.
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D
So you're a brand new professor. We just have to ask, are you going to be teaching Econ 101?
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B
No, not Econ 101. Even better, as far as I'm concerned. My first two semesters, I will be teaching Inequality and Poverty, which is an advanced undergraduate course at the university and a good opportunity to sort of distill a lot of the work that we've been doing in the last five or six years and the enormous advances, in my view, that some groundbreaking economists have made, overturning a lot of the conventional wisdom that would have populated such a course if anybody had bothered to teach inequality 10 years ago or more.
- [08:12]
D
So one of our favorite quotes from you is, it is increasingly possible to have a comfortable, rewarding life as a professional economist and never consider the issue of inequality.
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B
That's right. There's plenty of people doing excellent work on the cutting edge in that domain. But there's also many, many people having comfortable careers, not just ignoring it altogether, but actively downplaying it.
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D
Yeah, I love it. I love it. Marshall. What we really wanted to zero in on in this conversation was an economic principle that we consider to be one of the most evil instantiations of neoliberalism, which is the idea of the marginal productivity of labor. The proposition that if you earn $7.25 an hour. It's because that's all you're worth. That's all that you produce. And so you have written extensively about this and how this relates to power. And so we just wanted to unpack that idea with you and give our listeners sort of a tour of this idea.
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B
So the marginal product of labor is an abstract economic concept that refers, I guess in colloquial terms to the idea that in a given unit of time, a worker working for that time will produce some amount of stuff that has a certain value on the market. And what they get paid for working for that period of time is equivalent in value to the stuff that they produce. That is a kind of equilibrium condition of competitive models of the labor market. And what that means is essentially that you can structure your model of the economy such that that must be true, or else the economy is not in equilibrium, in which case it's moving toward that outcome. So it's sort of self fulfilling prophecy, if you will. And the mechanism by which the economy moves towards that outcome, if it's not the case that individual workers are paid what they're worth, is that if you're getting paid less than you're worth, then of course you will go out and get another job offer from someone who's willing to pay you what you're worth because you're earning a profit for your boss if you're getting paid less than what you're worth. And so somebody else who's willing to shave that profit a little bit, undercut your current boss by offering you a little slightly better wage will make you that offer, you'll go work for them, and that process will repeat until the point where there's essentially no more, more profits to be earned for your boss. That idea that workers are paid what they're worth, and essentially economists can just assume that's the case and go on from there without examining that as a motivating assumption, was prevalent in labor economics for many, many years, starting about in the mid-1950s until say, generously speaking, the mid-1990s. In reality, a lot more recently, that was just a given assumption in pretty much any economic model of the labor market and motivated tons of policy prescriptions. For example, the idea that increasing the minimum wage reduces employment is premised on the fact that people, you know, in a world with no minimum wage, workers will be paid what they're worth. And so for any worker who would be earning the minimum wage, that's a higher wage than what they would be earning without the minimum wage would then be getting paid more than they're worth. What that means is that bosses would be running a loss for employing those people, and therefore they would lay them off. So that's the motivating architecture behind the whole idea that the quote unquote, the minimum wage kills jobs.
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D
Right, right.
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B
It's not true. And that's just one policy application. There's all men. I mean, I write a lot about higher education and student debt where this idea that, okay, well, if we want to increase what people are paid, then, you know, the way to do that is to make workers worth more. The way to make workers worth more is to give them greater skills. The way to get greater skills is to get more higher education degrees. Take on student debt. That whole sort of genre of argument is premise on a certain assumption about how the labor market works, namely that workers are paid what they're worth. And that assumption is false.
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D
And it's, it's not just false. It's been so corrosive to the culture and the economy. Right. Because if you can get people to believe that this is objectively true. Right. That this is essentially an immutable law of nature, you have persuaded them largely to be, you know, you've. You've turned them into domesticated animals, basically.
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A
Why would anybody ask for a raise?
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D
Yeah.
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A
If you're, if, if Econ101 teaches that you're already paid what you're worth, if you were worth more, your boss would automatically give you more money.
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D
Right?
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A
Right, Nick. You'll automatically give me more money.
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D
Exactly. So unpack for us how we know it's just not true.
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B
Oh, my God. Where to begin? So there's sort of the basic, straightforward evidence that workers have been producing more and more stuff and not getting paid more and more. So that's kind of the aggregate evidence that you would get from something like the Economic Policy Institute's chart of the diverging output per hour versus median pay. You know, just sort of straight up, you know, like, all right, here's an aggregate measure of how much we think workers are worth versus how much we think workers are getting. Hey, that's divergent. I think that's fairly convincing evidence. There's evidence from minimum wage experiments. So an implication of the theory that people are paid what they're worth is that when you increase the minimum wage, there will be disemployment. Lo and behold, there isn't disemployment. So an implication of that theory is falsified. Another good test, in my opinion, there's tests about the pass through of individual firm rents to worker pay. That's a fairly abstract idea, but I think it gets, it's something intuitive which is when a given company experiences a windfall, there's a good paper about patents. So companies that apply for and succeed in having patents granted, that makes the company more valuable versus companies that apply for and don't quite succeed in having their patent granted. So you would think that's kind of a good measure of, you know, otherwise similar companies where you know, something good happened to one and that good thing didn't happen to the other one. What is the impact of that on workers wages at those companies? Note that this whole theory about workers getting paid with their worth says nothing about individual companies. That is, there's this idea that workers are worth something on the market and if your current boss isn't paying you what you're worth, you'll go get a raise from a different boss. The idea that when individual companies experience a windfall, their workers share in that windfall to some degree and thus get paid more than similar workers at similar companies that don't experience that windfall suggests a firm specific component of wages that has no place in the theory of marginal productivity. The theory of marginal productivity is about what workers are worth on the market, not what workers are worth to individual firms. And this sort of business about windfalls pass through firm level rent sharing is a theory about firm specific pay or more generally firm inequality in pay. And if it's true that you know the identity of your boss determines at least a component of your pay versus a very similar worker working for a very similar firm, but that firm has a different name, you know, a different boss. If you're getting paid very differently from that worker for whatever reason, that suggests that there's not equilibration in wages across similar workers on the market. It matters which firm you currently work for.
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D
In other words, it comes down to circumstances and power.
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B
Yes. Yeah. And it's highly contingent as you're, as you're suggesting. Like if you happen to be the guy who was there when the patent application was granted at the firm. Even if you know your name isn't on the patent application, that tends to matter for how much you get paid. Of course, it matters a lot more if your name is on the patent application. Yes, but that's another sort of sense in which it's arbitrary because you know your name was on that first patent application and it could have been on the firm whose patent application didn't get.
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A
Granted I'll raise another example, and that is the US Women's soccer team.
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C
Yeah, right, right.
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B
No, gender and race inequality is, I would also interpret as refutation of the idea that workers are paid what they're worth or not. Gender and wage disparities in pay have been obvious. Even in the era when economists pretended the labor market was competitive, they couldn't deny the existence of gender and race disparities in pay. The problem was, given their assumption that the labor market was competitive, they were required in a sense to assume that different genders and different races were worth different amounts in the labor market. So there was this grand search for reasons why people might be paid differently on the basis of race or gender that's inherent in their race or gender and not in the circumstances of power in the labor market, because those were assumed away from the beginning. So I think once we sort of opened up the box of no, it's not worker characteristics necessarily generating disparities in pay or if it looks like worker characteristics, I.e. race or gender being a worker characteristic. It's not because there's something about race or gender per se that makes workers more or less productive. It's because there is a hierarchy of power in the labor market. And that one or two dimensions of the hierarchy of power is race and gender.
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D
Right, right.
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A
And to argue with that interpretation would be. To argue that would be to make a racist argument or a racist and sexist argument.
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B
I don't think, I, frankly, I do not think that's an overstatement. And yet to say that is to sort of condemn whole generations of economists who even now, you know, it's anathema to suggest, you know, could be anything less than motivated by, you know, the most high minded motives.
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D
This proposition, it's an astounding proposition when you really start to turn it in your head how nefarious this is.
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A
It's Econ 101, Nick.
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D
I know it is Econ 101, but.
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A
Could you clear this up, Marshall? Is it actually Econ 101?
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B
Yeah, I mean, insofar as Econ 101 is about looking at where supply and demand curves intersect and saying, okay, that's the price. And then any, you know, any kind of policy counterfactual is modeled as a distortion or deviation from the natural market equilibrium where, where supply and demand curves cross. Yeah, absolutely. This is Econ101 is applied to the labor market.
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D
Yeah. So Marshall, let's talk for a minute about what, why this idea is so attractive to academic economists like why people cling to it so tightly? Because I've had a ton of conversations. You are a massive outlier. I mean there's a. You know, a few people in the academic community are willing to walk away from this proposition. But up and down the chain, including some of the nation's most most influential economists, cling to this idea as a true proposition. And I know some of these people to be good people. Right. They're not evil racists, but they are academic economists. Sorry, I didn't mean that come out quite as mean as it sounded, but academic economists, yeah, what is it? You know, I'll be interested in what you think, but to me, you know, the reason they cling to it is that if it's not true, the whole thing comes tumbling down. Right, the whole construct.
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B
Yeah, I mean, I think it totally indicts a generation or more of economists who achieved great worldly rewards and high prestige. And you know, to suggest that they were anything less than the most high minded scholars is, you know, deeply threatening to be current economists own conception of themselves and their role in the world. You know, far be it for me to psychologize all of this, but I will proceed to do just that. I understand in the realm of psychology there's something called a just world fallacy, which is to say that the things that exist in the world are interpreted as being the outcome of a morally justified process. And I think that the marginal products theory of how wages are set in labor markets has that just world fallacy associated with it. Yes, the distribution of earnings in the labor market is the morally justified result of, you know, just desserts, people getting what they're worth. You know, if we, if poor people are paid too little and are living lives in poverty, and we're sort of concerned about that as morally upstanding citizens and you know, our brotherhood of man suggests, you know, that we should be concerned about this deprivation on the part of fellow human beings. You know, this is sort of saying, well okay, maybe that's fine in moral terms, but in economic terms, you know, this is justified. This is people receiving what it is that they are naturally entitled to in the world. If we want to do something about that, then we have to kind of sacrifice the naturalness of the allocation of resources and of outcomes. And so there's been a consistent tendency in the intellectual history of discipline to draw the boundaries of the discipline in such a way that it excludes challenges to the incumbent distribution of wealth and power.
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A
It's so convenient also that this is very easy to model Whereas it's kind of difficult to model a system that involves prestige, status and power.
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B
Oh, yes, yes. So that was a big, I mean, if you sort of go back into the history of economics when there was a strong tendency in the field to, I would say, take a more realistic view of how labor markets work. Exactly. It sort of ran up against those problems that, okay, it's, you know, it's not that there's one rule about how labor markets work that is everyone gets paid what they're worth. In fact, you need sort of a different model for every labor market. You know, what the real research agenda is to study the contingent realities of individual labor markets and in fact of individual workers or firms. And there's no sort of one generalizable rule there that came to be seen kind of conveniently as unscientific. That is, if you're going to go sort of wander off into the jungle of that kind of research agenda, you know, you're never going to return from that jungle. And so you're going to never going to have anything to say. That's work that has a more generalizable implication than whatever it is you're studying about your particular labor market. And that's not scientific. So the boundaries of what's considered scientific within economics were conveniently adjusted to rule out that research agenda in that, you know, if you sort of start from retrograde assumptions about how labor markets work and then sort of say, okay, well, maybe we should sort of tweak this assumption a little bit bit to get to a more realistic prediction. But you know, ultimately the model has that assumption baked into it. So tweaking it a little bit, you know, it has a very low range of potential application. And so, you know, you're kind of starting from this defensive position and then saying, okay, well maybe if we sort of like creep above the trenches and you know, we can like move the line forward, you know, a tiny bit, or you know, I would say even more relevantly like prevent us from further retreat, you know. Yes, you know, it's a very defensive kind of intellectually high bound approach. And it's understandable coming from, you know, people who have, you know, fought their whole lives against an aggressive neoliberalization of economics and a highly effective orthodoxy that had gained lots and lots of intellectual ground over decades. You know, you don't want to expose yourself all at once. And so, you know, you get people who say, okay, well, I understand that all of this is nonsense, but you know, I have to argue within this kind of framework or else I'll just be kind of thrown out the door without a second thought. I think now what we're getting is a newer, younger generation of economists who's like, you know what? This is all nonsense. You know, at this point we have copious empirical evidence that the orthodoxy of generations is wrong. You know, why should we kind of start from this, from assuming that it's right and then tweaking the model to make it, okay, maybe a slightly less right in the model when it's just nonsense and should be thrown in the garbage? And I think that kind of differential can only ever be a kind of generational type of experience and cycle. I would say.
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D
Marshall, one last question, by the way. This has been absolutely fantastically useful and precise discussion, but what brings you to your work?
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B
Kind of pushing my way through graduate school for six years, starting basically right as the financial crisis was happening and then in the poor labor market. That was its aftermath. You know, I mean, it's not to say that like sort of nothing interesting happened there for me intellectually, but I definitely do not come out of that experience kind of driven to the research agenda that I have subsequently adopted. It was only seeing the sort of radical disconnect between what economists talk about behind closed doors vis a vis the economic problems that they think exist in the world insofar as they believe any economic problems exist. And the reality of, you know, not just, you know, grave economic problems that are clearly not, you know, sort of the natural developments of a perfectly functioning economy, but also the ways that economics is weaponized in the public debate in radically retrograde directions.
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D
Yeah.
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B
And, you know, so that, I mean, I guess what motivates me on a day to day basis is generally getting angry and righteous about something. And there's plenty to get angry and righteous about when you look at the sorts of economic debates that take place in public and even among economists, you know, there's a conceit among economists that, you know, policymakers don't understand economics, the public doesn't understand economics. If only all these stakeholders and voters or whoever you want to talk about understood economics, then we would have the right policies, the world would operate efficiently. And, you know, that is just such a radical misinterpretation of the way policy actually gets made, the way public debate happens and what economics is. I mean, it's economists who don't understand economics and that schema and that as an economist, that's not a state of affairs that I can tolerate.
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A
Well, Marshall, it's always a privilege to be in on a conversation between a self loathing economist and a self loathing plutocrat.
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C
Yes.
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D
I love it. Well, Marshall, thank you so much for your time. This has been awesome and fascinating. We are going to follow your work very, very closely. And certainly we'll talk to you again soon, I hope.
- [26:21]
B
Great. Yeah, no, this has been a lot of fun. I always get worked up when we chat and this was no exception. I'm glad we got to record it this time.
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D
Yeah. Okay. All right, buddy, we'll talk soon. Take care. Okay.
- [26:31]
B
All right, bye.
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A
So, listening to Marshall. Nick, from a theoretical point of view, it sounds like marginal product is. I don't know, what's the technical term?
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D
Bullshit.
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A
Bullshit.
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D
Yeah. Yes. Yeah. Corrosive. Bullshit.
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A
Yeah.
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D
Evil Corrosive. Bullshit.
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A
Right. Of course, the theoretical part aside, what really matters is how it plays out in the real world. And so I had the privilege of talking with Saro Jayaraman, who has long been one of the most prominent voices defending the rights of restaurant hospitality and other tipped workers.
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E
My name is Saru Jayaraman. I am the director of the Food Labor Research center at the University of California, Berkeley, and the co founder and president of the Restaurant Opportunity Centers United. I'm also the author of several books on the restaurant industry, including behind the Kitchen Door and A New Standard for American Dining.
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A
I was looking forward to talking with you. I actually saw you speak once in Seattle when we were debating the $15 minimum wage here.
- [27:45]
E
That was a long time ago.
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A
That was a long time ago. We've been talking about the concept of marginal product, which when it comes to labor, pretty much says that you know the market's going to pay you what you're worth. If you earn $7.25 an hour, you're worth $7.25 an hour. If you make a million dollars a year, you're doing a million dollars a year worth of work. Your experience in the restaurant industry, does the market pay people what they're worth?
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E
Absolutely not. If you look at the restaurant profession, especially in other countries, you'll see that restaurant and hospitality employees are considered professionals. You go to school for many years to be a hospitality professional. So there's nothing inherent in restaurant work that makes it low wage and certainly not low skill for anybody who's ever done it. It requires critical thinking. It requires figuring out how to anticipate customer needs. It requires pleasing customers and managing finance. There's quite a bit of professional skill that's required in working in a restaurant. The reason that the wage is so low in the United States has nothing to do with the skill level of these occupations. It is historical and it is political. And so the real kind of background as to why this industry is such a low wage industry lies in a lot of the research we've done. So the research shows that right now the restaurant industry is one of the largest and fastest growing sectors of the U.S. economy. It's over 13 million workers. One in 11American workers currently works in restaurants. So we're actually getting very close, close to 1 in 10American workers working in restaurants. One in two Americans have worked in the restaurant industry at some point in their lifetime. But despite the industry's size and its growth, it continues to be the absolute lowest paying employer in the United States. Every year the Department of Labor puts out a list of the 10 lowest paying jobs. And every year the seven of the lowest 10 paying jobs are all in one industry, the restaurant industry. And the reason you've got the largest and fastest growing industry in America with the absolute bottom of the barrel, lowest paying job, really is the money, power and influence of a trade lobby called the National Restaurant Association. We call it the Other nra. It represents the chains, the ihop, the Applebee's, the Olive Gardens. And in doing research for my last, we uncovered that the other NRA has been around in various forms 150 years since emancipation of slavery, when it first demanded the right to hire newly freed slaves, not pay them anything at all, and have them live entirely on this newfangled idea that had come from Europe called a tip. Now, in Europe where tipping originated, tips were always intended to be a bonus or an extra on top of a wage. But when the idea came to the states in the 1850s and 1860s, it was right around the time of emancipation. And the restaurant lobby demanded the right to hire newly freed slaves, not pay them anything, and have them live entirely on tips, which was a mutation of the feudal concept of tipping. And that idea that a newly freed former slave population of mostly black women could be paid nothing at all was made law in 1938, thanks to the lobbying of the restaurant industry, when everybody got the right for the first time as part of the New Deal to the minimum wage as part of the new Fair Labor Standards act, except for groups of black workers. So domestic workers were included, excluded, excuse me, farm workers were excluded, and tipped workers were excluded. Excluded. They were mostly black women. They were told they were. They could be given a zero dollar wage from their employer as long as tips brought them to the full minimum wage. We went from $0 in 1938 to the whopping $2.13 an hour at the federal level in 2019. And 43 states in the United States continue with this legacy of slavery with a sub minimum wage for KIPP workers. You know, and I think any of your listeners would be hard pressed to say that anybody in this country is worth $2 an hour. But that is what federal law allows employers in the largest and fastest growing industry in America to pay. And as I've just narrated, it has nothing to do with the effort, skill, intelligence, worth of the occupation, of the profession of restaurant work. It has everything to do with the history in this country of slavery, which frankly valued workers for many generations at $0 an hour.
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A
And if federal law allowed restaurants and hospitality industries to pay $0 and have their workers rely entirely on tips, would they move to that model?
- [33:06]
E
They already do in New Jersey and many Southern states that do not have state law, they only have federal law. We find that restaurants that fall out of the purview of federal law because they're too small to pay nothing at all to their workers and have them live entirely on tips. And frankly, even in states like New New York, which has a sub minimum wage, but it's still a wage, we have heard from many restaurant workers who come to us saying our employer doesn't pay us at all. They expect us to live entirely on pips. So that already happens and it's getting worse. Our newest research shows that the existence of the sub minimum wage and the notion of tips as replacement for wages is spreading across the economy. And in particular, tech companies are picking it up. So Doordash, Instacart, Uber Eats, you know, even of course, Uber and Lyft are now using the notion of tips as wage replacement to have their delivery workers paid nothing at all or to have tips discount workers wages. And because they're independent contractors, they do actually claim we actually don't have to pay our workers at all. They can live entirely on tips. So this notion of tips as wage replacement is pernicious and it already has led to many employers trying to get away with paying nothing at all to their employees.
- [34:32]
A
In a wage based economy, there is this huge power imbalance between workers and their employers. But when you're living entirely or mostly on tips, it also creates this power imbalance between the worker and the customer.
- [34:50]
E
Absolutely. So although the restaurant association likes to paint the picture of the average tipped worker as being a young white man working at a fancy fine dining restaurant earning a ton of money in tips, in truth 70% of tipped workers in America and in every state are women. They are women who work at IHOP and Denny's and Applebee's. And they not only struggle with the highest rates of economic insecurity of any industry, they also have the highest rates of sexual harassment of any industry. And that is because when you're a woman who earns two or three or any subminimum wage, your wage is so low it goes entirely to taxes. You live completely off of your tips, and you must tolerate whatever a customer does to you, however they touch you or treat you or talk to you, because the customer is always right. The customer pays your bills, not your employer. Now, there are seven states that have gotten rid of this subminimum wage. California, Oregon, Washington, Nevada, Minnesota, Montana and Alaska all require the restaurant industry to pay the full minimum wage like every other industry. And in those states, we find not only higher restaurant sales per capita, higher job growth in the industry, higher rates of tipping, lower rates of poverty, we also find one half the rate of sexual harassment in the industry. And that is because women in California and these seven states report that they don't have to put up with harassment from customers because the tips are an extra or a bonus on top of the wage, as they were always intended to be from feudal times. And so they get a wage from their boss that they can count on like every other worker in every other industry. And they're not as willing to put up with the harassment because they know they don't aren't reliant completely on the tips. So absolutely, the power that customers have over tipped workers in the United States, millions and millions of them. In fact, the largest, again the largest employer in the United States is enormous. And it leads to a severe sexual harassment. It leads to lack of safety, security, even sexual ability. Well, it's a severe problem, that power dynamic that not only employers and managers, but also customers have over women in the restaurant industry.
- [37:10]
A
You know, it's clear from recent experience and data that raising the minimum wage has had no negative impact on restaurant employment or on the restaurant industry itself. There was a study done a couple years at Cornell at their School of Hotel Management, suggesting that the restaurant industry should actually lobby for a higher minimum wage, that it increased productivity, reduced turnover, increased profits. And yet the other NRA continues to fight against these efforts. Is it economics? Are they just wrong? Or is there something deeper going on with their hostility towards workers?
- [37:54]
E
Right. So we actually have done further studies, extensive studies with Cornell where we actually surveyed 1100 restaurant owners across the country and found that you can cut your employee turnover in half if you provide higher wages and mobility for workers in an industry that has the highest rates of turnover of any industry in the United States, in some cases it can be 300%. That means three turns in one position in one year. We were able through that process to quantify how much turnover actually costs employers, which is often an invisible cost. They don't record it, they can't see it in their ledgers. The industry has essentially cannibalized itself. The industry right now is really reflecting the hourglass nature of our economy. In our industry, you're seeing huge growth in fine dining at the top and huge growth in fast food and limited service, what they call quick service at the bottom. Those middle tier restaurants, the Olive Gardens, the Applebee's, the Red Lobsters are stagnating because the working families that used to be able to afford to eat in those restaurants can no longer afford to do so. And guess who is the largest workforce among working families? It's the very same restaurant industry. And so by fighting by the nra, fighting, fighting, fighting from raising the minimum wage, fighting as the loudest voice, you know, against both tipped workers and non tipped workers, wages going up, they have killed their own consumer base, particularly for that middle tier of restaurants. We just see it so dramatically in even the quarterly returns now of the Olive Gardens of the world.
- [39:37]
A
Who'd have thought if you destroy the middle class, you'll destroy that middle class consumer base?
- [39:44]
E
Right.
- [39:45]
A
Before you go, just personally, why is it that you do this work?
- [39:50]
E
You know what happens when you've got the nation's largest and fastest growing industry proliferating, absolute lowest paying jobs? What happens is that you go from an economy of 1 in 3 working Americans working full time and living in poverty to now getting very close to one in two in some states. We're already at one in two working Americans working full time or more than full time and living in poverty. And so what happens to a country when half working people can't afford to live, consume, eat? It affects all of us. I cannot think of a more important issue to work on or to fight for than to save our country from disaster. Because that has implications for our economy, but it also has implications for our health when people who serve us in restaurants cannot afford to take care of themselves. It has implications for our democracy because when people can't afford or feel very rejected by the political system, they're not going to vote at all. We have a president named Trump because not just Republicans, but also Democrats have left These workers behind again and again and again at $2 an hour. And so I cannot think of a more important issue to save our democracy, frankly, finally, than to fight against the outsized power of a trade lobby like the National Restaurant association and to fight for livable wages for everyone.
- [41:17]
A
Well, thank you for your work and thank you for taking the time to talk with us today.
- [41:21]
E
No worries. Thank you.
- [41:27]
A
So if I've got one takeaway from the conversation with Saru Nick, is that that $15 minimum wage. Pretty good idea.
- [41:35]
D
Exactly. And you know, in the interest of full disclosure, one of the things that I was really wrong about when I first started working on this was the tip thing. I really had convinced myself that the.
- [41:47]
A
Tip penalty, what the restaurant industry calls the tip credit. The tip credit was an important. That $2.13 minimum wage where between that and the 7:25, the restaurant gets to keep your tips.
- [42:01]
D
That's right. That it was necessary and defensible and so on and so forth. And Saru was one of the people who strongly disagreed with me. And over, over time, I came around to her point of view that indeed, indeed, it's just a stupid way to subsidize restaurants and. Right. It makes perfect sense to eliminate.
- [42:22]
A
We asked you to call in and let us know whether you think you're paid what you're worth. And here's what some of you had to say.
- [42:30]
C
Hello, I'm Dr. Steven Leith in Everett, Washington.
- [42:33]
F
This is Isabella and I'm calling from Nairobi, Kenya.
- [42:38]
C
My name is Tony Baker. I'm calling out of Northeast Iowa. My name is Tim Dube. And Colorado.
- [42:45]
F
My name is Sheila.
- [42:47]
B
My name is Christian.
- [42:48]
F
I'd rather not my name published. I was an executive in Fortune 500 companies. When I had my first child, I went on paternity leave and believed that I was going to go back to work afterwards. When I stopped working, I was making low six figures. And I am currently working a minimum wage job in California. $13 an hour from six figures. Mostly the same kind of work. I am definitely not paid what I'm earned.
- [43:14]
C
Hi, Nick, this is Robert Gwyn. I'm a telecommunications worker in Syracuse, New York. I get paid a hell of a lot of money for not doing a lot of physical work, but more mental work.
- [43:27]
F
I'm not well paid. I make US$500 a month. I think about what I'm doing. I like to think that I'm making a positive impact versus maybe some classmates who after university went into banking or consulting and are paid many, many more times than I am.
- [43:42]
C
I make $18 an hour for what I do. About the exact same as my uncle who did this back in the 80s.
- [43:50]
F
Nursing assistants start out about 12 to $14 an hour, some of them as little as $10.50 or $11 an hour. This is a profession heavily dominated by females who of course are underpaid.
- [44:04]
C
My name is John Kelsey calling from Indianapolis, Indiana. I'm a registered nurse, have been over the past six years. We are pretty much responsible for keeping our patients alive. We're really the first line of protection for our patients, providing around the clock care. It's just astounding really, how low the pay is. We're really getting shafted. I can definitely tell you. I don't get paid for all the.
- [44:34]
B
Things that I do.
- [44:35]
C
And a lot of tradespeople don't get paid what they're worth either. Dentists don't always have financial incentive to do what is best for their patients. An unethical dentist will tell patients that they need procedures that they may not really need, but those dentists do more procedures and they make more money.
- [44:53]
F
Hi, this is Ada Kerman from Marlboro, New Hampshire. I am totally not paid what I'm worth as a parent.
- [45:00]
C
Are we being paid what we are worth? It's a stupid question. We are being paid what we can negotiate.
- [45:10]
A
So we often talk about, Nick, about the tricks in trickle down economics. This is one of the big ones.
- [45:16]
D
It is absolutely one of the big ones. And that quote from John Bates Clark just totally reveals it. Basically openly admitting that we have to trick people into believing that they're getting paid what they're worth or they'll revolt.
- [45:32]
A
When, as you often say, you know, employers don't pay you what you're worth, they pay you what you can negotiate.
- [45:39]
D
Exactly. And the theory of marginal productivity connects deeply to a bunch of other things that we've talked about on the pod. Educationism, Right. Which is this idea that we have inequality and people are poor because they're not well enough educated. Therefore they are paid what they're worth.
- [45:57]
A
Right. If they're just better educated, they'd be earning more money.
- [46:01]
D
It connects to monopoly and monopsony in the sense that pay no attention to these giant companies. People are paid what they're worth.
- [46:10]
A
If there's only one buyer or only one seller and the price is high or low, the way they want it, it must still. It's the market, it's very efficient.
- [46:21]
D
Right. And whether we're talking about the minimum wage or overtime or whatever it is, the principle of marginal productivity Rears its ugly head. And so, you know, for listeners of the pod, there isn't a trick in trickle down economics that's more worth understanding than this principle. Right.
- [46:41]
A
It sounds like Econ101. Rather than being an economics textbook, it's more like a handy guide to exploiting workers.
- [46:50]
D
Yes, exactly.
- [46:52]
A
If it's not marginal product that determines how much you make, what is it?
- [46:56]
D
It's power. Right. Power is the ability to negotiate a fair split of the value created by the enterprise. And so while it is not true that workers should be paid infinite amounts of money, it certainly is true that they deserve a fair split of the value created by that enterprise. And it is also true that we need to have labor standards that ensure that across the economy, businesses pay workers a fair split of that enterprise. And by the way, when you impose these labor standards, while it certainly puts pressure on the most exploitive business models, in general, it's good for everybody because as people earn more money, even if product prices increase, more people can afford more products. And that's how you generate growth in a market economy.
- [47:44]
A
Right. And the empirical evidence for that is that those first 30 years following World War II, they call it the Treaty of Detroit.
- [47:52]
D
Yes.
- [47:53]
A
Where when organized labor was at its strongest, as productivity increased, the average worker's wage increased with it, almost lockstep. So as America got wealthier, the middle class got wealthier too. And then starting Sometime in the mid-70s, there was this total and complete disconnect. And then since then, productivity has continued to rise and median wages have stayed relatively flat.
- [48:21]
D
That's right. And the rates of economic growth at that time have never in our country really been higher, certainly in the last hundred years. I mean, in practical terms, there is something that people need to take away, which is that power in economic relationships is everything. And that in the absence of it, you are almost certainly getting screwed. And so, you know, Americans were taught for 30 or 40 years, among other things, that unions were evil. Right, right. And that they harmed the economy and that they harmed workers and that they harmed.
- [48:57]
A
And that they harmed businesses.
- [48:59]
D
That's right. And that they harmed economic efficiency. And make no mistake, there's a lot of really stupid things that American unions did that they should be embarrassed by. But in the absence of collective action, in the absence of working people working together to negotiate a fair split of the value, they will never get, frankly, what they deserve. And so, you know, I think that there needs to be certainly a new awakening around worker power. And, you know, just folks outside of the most sought after professions. You know, investment banking or, you know, high level computer programming or being a fancy corporate lawyer. You know, everybody else deserves to earn a decent living too. And the only way to do that is through increasing worker power through collective action. Right.
- [49:51]
A
Because if we're not increasing worker power through collective action or higher labor standards, then the only alternative is to increase worker power through pitchforks.
- [50:01]
D
Exactly. Which is less fun for you. Yeah.
- [50:14]
G
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcasts, find us on other platforms like Twitter, Facebook, Instagram and Threads. Pitchfork Economics Nick's on Twitter and Facebook as well. Ickhanhower for more content from us, you can subscribe to our weekly newsletter, the Pitch over on Substack. And for links to everything we just mentioned, plus transcripts and more, visit our website, Pitchfork economics.com as always from our team at Civic Ventures, thanks for listening. See you next week.