Corporate profits, employee wages, and government assistance: is it really this simple??

The recent activity among fast food workers in favor of higher wages, as well as the ongoing debate over how much assistance the government ought to offer the people, have got me thinking:

With things as they currently are, corporations make profits and pay their employees what the market will bear. Since the object is to maximize profit, they have no reason to pay their employees any more than they absolutely have to.

Accordingly, you end up with a class of citizens who can barely afford to live despite working full-time. The slack is (hopefully) taken up by the government in the form of government assistance. The ultimate result seems to be that the corporations are allowed to keep as much of their profit as the system will allow, while taxpayers are forced to support their less-fortunate fellow citizens out of their own pocket.

My question is: how vastly over-simplified is the above understanding of how the system currently works? And if I’m not actually that far off the mark, would there be any detriment to the economy if corporations were required to put more of their profits into a living wage, basic healthcare, etc., thus nullifying the current argument over size of government?

If we did force corporations to share more wealth with their employees, at what point do we cross the line over to socialism, and what would be the detriment in it?


This does in fact appear to be what is actually happening. One piece of information I can add to this debate is that the value of “unskilled” human labor has plummeted over time.

The debates over communism/social in the 1950s, 60 years ago, were during a time when unskilled human labor had a lot more value. A hard working man, even if he did a job that did not require much talent or intelligence or education, could bring home a decent wage - enough to support a family, even.

Today, automation means that machinery controlled by computers is already smarter, harder working, and faster than workers at the lowest end of the scale. The really dextrous, smart robots are expensive, and they cannot yet work in certain environments, but the natural consequence of this is that there are far fewer unskilled jobs, and just as many people seeking them.

This is going to push to market rate for labor down, down, down - it can easily drop below the level needed to stay alive at all.

So the kneejerk “conservative” reaction that socialism= bad needs to be carefully considered here. The debate during which policy was set for the United States occurred in a very different time.

Yes, right now, if you have a degree in engineering or computer science, there are more jobs available than 30 years ago (even with H1B competition). Someone has to design and program those robots.

But, not everyone has the talents needed to do the jobs that pay well. Not everyone can mentally perform the labor needed by an engineer, for instance, while nearly everyone could have performed the labor needed to work a factory assembly line in 1950.

That’s exactly how it works.

That’s why Bush’s tax cuts were only beneficial to the top 5% and that’s why Fed’s QE is only beneficial to the top 5%.

That’s the system you have and, if I’m not mistaken, the only Western democracy that does it like that.

Suppose we calculate business taxes based on the wage gap between management and labor? Companies whose average management compensation is 300 times the average wage of their workers would pay a higher rate than those where management compensation is 50 times that of workers. Pay your workers more, and you pay lower taxes.

They’re not paying what the market will bear, since there is an artificial price control in place (the minimum wage.) If there were no minimum wage, fast food workers would probably earn significantly less. (Though there might be more of them. It’s hard to be certain, though.)

Definitely. Same as any other business expense.

Corporations pay income taxes, too.

It’s a little oversimplified.

In any price control scheme (whether it’s minimum wages or price caps on stuff) there is always going to be a trade-off between the desired social goal and the detriment to market efficiency. When there were price controls and rations during World War II, a black market developed for sugar and ham. When there is a minimum wage, a black market develops for labor (people who are paid under the table.) In any country where currencies are not allowed to float on the market freely, there is a gap between the official government exchange rate and the real-life exchange rate.

At some point, if the difference between the black market and the official market becomes too stark, the official market will fail. In your example, if we significantly raise minimum wage and benefit standards, maybe everyone just says “fuck it” and hires their staff off the books, and the problem becomes so widespread that enforcement is impossible. Of course, that probably wouldn’t happen unless the changes were quite significant.

There’s no bright line that equals “socialism,” but minimum compensation regulations aren’t really a socialist idea. Seizing private businesses and making all fry-cooks state employees would be socialist.

Do you mean they currently don’t have the talents or they don’t have the ability to acquire the talents needed?

If it’s the latter, our society is in greater trouble than most imagined.

Famously, Walmart allegedly provided information to new employees on how to apply for food stamps.

Of course some percentage of minimum wage employees are teens who do not need to make a living. And many do not have dependents and thus are not covered by any social programs. But still, we do pick up some of the bill for their poor wages and benefits.

I’ve never known anyone to work under the counter to avoid minimum wage. Usually it’s done to avoid taxes, or just out of not wanting to do the paperwork to make things legal.

I’m saying the latter. Computer software is getting smarter every year. There are already people in the bottom 5 or 10 percent who are probably dumber than state of the art control systems.

The problem, as pointed out, is the bottom 5% or 10% (or more?). These jobs are “volatile”. The workers are easy to dump, eand easy to replace. The jobs are simple enough that almost anyone can do them. When times are tough, there are a lot more burger-flippers and shop attendants than jobs for them to fill. Without minimum wages, without welfare, the wages could be bid down to almost nothing.

A computer programmer, an engineer, a doctor or nurse or even a mechanic or electrician - these don’t grow on trees. Good workers are not that easy to find. A company that has a reputation for dumping these employees overboard if there’s a downturn that month will hav a lot more trouble hiring - the supply is not as large.

The point to, is that in busy times, the skilled workers are harder to find and the lead time for making new ones is much longer. However, it’s possible to get to the point where even regular workers are in very short supply.

The “socialist” methods - requiring decent wages, more lead time to fire, unemployment insuance - basically try to even out the highs and lows. We want everyone to afford food, a plce to live, clothes. Our society is set up to prefer that people have sufficiently reliable income that they will make credit purchases, will but big ticket items without being worried that in 3 months they might be forced to sell their big-screen TV to afford groceries.

An interestiing variant on this is illegal immigration. The US system does not significantly force employers to ensure they have legal workers. Consequently, employers can always find people willing to underbid whatever the locally grown talent considers their bottom line. If you grew up in a mud hut, five to a room and sharing a toilet probably seems luxurious.

Thanks everyone for your responses.

This cuts to the heart of the matter for me. I understand the logic that the founder ought to benefit more than the management, who in turn ought to benefit more than employees lower down. I don’t have a problem with that in principle, but at what point does the disparity become unreasonable and actually detrimental to the integrity of society? If people really don’t need to be that rich, or if being that rich means taking away resources from others to the point that we end up with a permanent underclass, shouldn’t it be possible to make a reasonable change to the system that still significantly respects the free market? (Key word: “significantly.” I understand that by definition such a scheme would place limits on the market.)

There is a Gaussian distribution of talent and intelligence. Do you dispute this? What do you propose doing with those on the left? Just tell them be be smarter?

An excellent point, and one that I should have considered. Thank you.

The notion that “people don’t need to be that rich” is self-evidently false when applied to me, and self-evidently true when applied to you.

Further, rich people did not become rich by taking resources away from poor people, and the fact that X is rich doesn’t mean that Y is necessarily poor - society is not a zero-sum game.

I have a close acquaintance who is a rich man. He got that way by founding a small business. The business he founded currently employs about twenty people, the physical plant was built on a vacant lot, and it generates a little over a million dollars a year in revenue.

If you like, you could take a crack at explaining how he took resources away from others and forced them into the underclass by creating a successful small business.



The reality is that you as a worker are a commodity which means that management can replace you with another worker drone just like you. This is working its way up to even professional white-collar workers which lowers the overall salary of American workers across the board. That’s why years ago one factory worker could support a family while today families with two incomes is having a tough time.

The issue with corporate taxes is that they are taxed on profit using the rationale that whatever they spend results in profit. It really is like the underwear gnomes

  1. Spend $50,000,000 on naming rights to a stadium.
  2. Profit
    While it does make some sense to not charge them on straight revenue, there should be some limit to it. I could understand taxing them on revenue - (COGS + payroll).

I think something different would be better: get rid of all corporate taxes, then tax all personal salary/wages, compensation, and capitol gains as income.

There are already plenty of limitations on deductibility of business expenses. Businesses can’t deduct fines and penalties from violating the law, certain types of interest, costs that need to be capitalized, etc.

I’m sure one could make a cogent argument that there should be even more limitations on deductibility of business expenses, but to say there should be “some limit” is just misinformed.

No, it’s the ***company ***paying people under the table, so they can pay the worker less than minimum wage and since nothing is officially on the books the company avoids legal consequences.

Management salary has very little to do with the issue. Wal-Mart’s CEO got paid $18 million in 2012. Wal-Mart has 2.2 million employees. If Wal-Mart’s CEO worked for free and you distributed that money to the employees instead, each employee would be paid an additional $9 per year. If their entire executive team worked for free, each employee might be paid perhaps an additional $50 per year.

Yes, it makes for good rhetoric to complain about high CEO/etc. salaries and argue for limitations and caps, because you can depend on a certain fraction of people to support you out of bitterness, jealousy and spite against the rich, but in reality, the idea that high “management” salaries are the reason for low “worker” salaries is laughable, for the simple reason that there are far more workers than managers (especially managers getting paid the 50x and 300x multiples Fear Itself mentions).

Clearly some did not. But do you deny that it is possible that some do? Successful loan shark. Successful drug kingpin.
But people tend to take money from those with it, since that is where the money is. Burnie Madoff, for instance.

CEOs who give themselves big raises while their stock price tanks and workers pay is cut or stagnates seem to be taking something from those with less than they have.