Should We Wage a War on Wages?

As I’ve written about already, Millennials, recently dubbed the largest American population, are earning less and less of what their Baby Boomer parents did. Even with expensive college degrees, Millennials are still making less. What is worse, if you don’t have a bachelor’s degree, your earning potential is the same as it was in 1968. This is widening the gap between the have and the have nots in America. Over time, the growing inequality gap will become a very serious threat to America’s claim as the freest and best society in the world.

I think American corporations need to start hiring kids out of high school and take it upon themselves to provide those employees with education and career advancement opportunities. Given how expensive college is becoming and its increasing necessity, this would enable kids to earn a living, produce for a company and get an education. In an ideal world, companies can allocate surplus funds into the education of their lowest educated, hourly wage workers. Then, the now educated workers can return to their employer and execute more valuable work. This way the companies and individuals both win.

Right now, corporations see hourly workers as nothing more than a business expense–a line item that gets deducted from their bottom line. In reality, these workers are people. They have the ability to learn, grow and evolve. Just because they started in the mailroom or on an assembly line doesn’t mean they can’t become educated, develop new skills, and add significant financial gains as a result. I think companies can do a better job of taking advantage of these highly motivated but low-educated individuals.

Can I Borrow Some Money?

Millennials are doing the same amount of work as their generational predecessors, but are getting paid significantly less for it. In this article, CNBC reports:

“The generational wealth gap has reached ‘historic proportions’ as the average millennial wealth in 2016 (ages 23 to 38) was 41% less than those who were at a similar age in 1989…It’s also true among young families. Households headed by someone under 35 in 2016 had an average net worth of $10,900, which is $8,000 less than it was in 1995. Millennials held an average of $162,000 of assets compared to Gen X’s average of $198,000 at the same age, according to the St. Louis Federal Reserve.”

The Economic Policy Institute, in this article, also showed how much less the middle class is earning.

It comes as no surprise that Millennials are earning less than Baby Boomers and Gen X. That’s just some of the proof.

Education = Inequality 

It turns out, educated Millennials such as myself, can’t actually complain. They are making less than the educated memebers of Generation X, but are doing very well when compared to their uneducated counterparts. Herein lies the real problem.

The gap between the educated high earning Americans and their uneducated patriots is growing ever wider and it’s becoming more and more expensive to get that education. It’s in this divide that you’ll find the real problem. As you can see, Pew research shows that the divide between high school graduate earnings and bachelor’s degree or higher earnings doubled. In 1968, the difference between high school and college meant you could earn $20,000 more a year or 18% more. In 2018, that gap doubled to 36%. You now can expect to improve your salary by $55,980.  When the cost of college is as high as it is today, it’s making it prohibitively difficult for most Americans to earn high wages as high as their parents. Even worse, the gap between those who can afford to go to school and those who can’t has never been wider.

Work Harder, Your CEO Wants Another House

One main problem is that minimum wage earners are making less and less relative to their actual increased productivity. At the same time, CEOs have never been paid better. As you can see in the graph below until the early ’70s, hourly compensation basically went up alongside productivity. If you produced more, you were going to be compensated for such output. Then 1973 came along, and the hourly wage has barely gone up despite the productivity of hourly workers increasing 75% in that time period. 

At the same time, CEO pay has been skyrocketing. As you can see in the graph below, the top 1% of earners are making more and more money. I’m not here to immediately jump to the conclusion that it is underserved. They are the 1%, after all. Maybe they are that talented and are making decisions that generate 138% more value than the rest of American work. I highly doubt it, though. Given inflation is also increasing at a rate higher than wages, something has to change. Otherwise, most of America won’t be able to afford to survive.

What Do We Do?

Most of the solutions I have been reading involved a minimum wage. I’m not sure that is the answer. Having a minimum wage mandate comes with trade-offs that often times hurts workers. In a recent article, The Hill gives some examples. They say:

“Minimum wage mandates aren’t free. They force employers to make difficult decisions and tradeoffs. When government forces wages up, non-wage pay goes down: Workers get less paid time off, shorter breaks, higher insurance premiums, and fewer perks. Some workers lose their jobs.”

I generally don’t think it’s a good idea for the government to mandate a minimum wage. The way I see it, a minimum wage sounds great to voters, but it doesn’t actually improve lives. The workers just end up paying for it in other ways.  Whether their hours get slashed, they lose their benefits, or their job entirely, I don’t get the impression that it is the right solution. Feel free to challenge me in the comments if you disagree.

With that said, the government might be the only entity that could actually institute proper change. Amazon’s recent Alabama union fiasco is a good example of the potential need for government intervention and/or unions. Honestly, I’m not 100% sure what I think about unions and minimum wage yet. I will dedicate a future post to breaking down the pros and cons of a minimum wage and unions. Feel free to educate me as well! I enjoy audience suggestions/feedback.

Personally, I would like to see companies take it upon themselves to invest in their lowest wage employees. Right now, most companies just see them as a line item expense. In reality, they are humans who have the potential to learn and add more value to your business. If the executives provided opportunities for their lowest educated and earning workers to move up and earn their way to executive positions, it would go a long way to alleviate this pain. The only way this happens is if company leadership creates a culture that heavily invests in its people and gives them such opportunities. Right now, this is not happening. Forbes reports as much. They say:

The bottom line is this: lagging wages in the U.S. is not an economic issue, it’s really about management. The spirit is there, but the actions are not.

Just as Marc Benioff, CEO of Salesforce believes “inclusive capitalism” is his mission, and Jeff Bezos is funding a $2 billion fund to help homelessness, and many other CEOs are trying to take on social causes, they are reluctant to act with their paychecks. And this old way of thinking is holding the economy back.

Let me make another important point. In business school we are taught that labor is an expense to be managed. CFOs look at the cost of payroll (which is often 40 or 50% of revenue) as one of the biggest discretionary expenses on the income statement.

But in reality people aren’t an expense, they are an investment. As I like to point out in my talks, people are an appreciating asset: the more we invest in them, the more we see productivity, customer service, innovation, and growth. And in today’s labor market, raising wages lets employers attract the most ambitious people, something every company is striving for now.

I think we have to rethink our accounting practices too: consider labor an investment like machinery. But one that goes up in value, not down.

The Bottom Line

I’d really like to see companies put more money into educating their hourly workers. Human beings are incredible creatures. We can learn, adapt and transform into so much more than we currently are.  Traditionally, companies, particularly those with massive labor forces, have not seen their hourly workers as human beings who have the potential to grow and produce value beyond their hourly wage. If America is going to fix its inequality problem, a good starting point would be for corporations to invest more in their employees, especially the low earning ones. Part of what makes America so great is its ability to find hard-working, humble people, and give them the opportunity to rise above their current station in life. There is no reason the executives at our current corporations can’t choose to pay themselves less and use the money to provide opportunities for their employees. I’m pretty confident it will only lead to outsized returns and improve shareholder value.