The theory of marginal product of labor says that every worker is paid exactly what they’re worth—the value that their labor generates. Employers cite marginal productivity to legitimize paying the lowest wages possible, but it’s just another trickle-down scam. Economist Marshall Steinbaum and food labor expert Saru Jayaraman join us this week to expose the lie of marginal productivity and show how it’s been used to exploit workers for centuries.
Marshall Steinbaum is an Assistant Professor of Economics at the University of Utah and a Senior Fellow of Higher Education Finance at the Jain Family Institute. He studies market power in labor markets and its policy implications. He was previously a Senior Economist and Fellow at the Roosevelt Institute, and a Research Economist at the Center for Equitable Growth.
Saru Jayaraman is the Co-Founder and President of the Restaurant Opportunities Centers United (ROC United) and Director of the Food Labor Research Center at the University of California, Berkeley. Saru authored ‘Behind the Kitchen Door’, a national bestseller, and her most recent book is ‘Forked: A New Standard for American Dining.’
No, Productivity Does Not Explain Income: https://evonomics.com/no-productivity-does-not-explain-income/
ROC United Diners’ Guide App: https://rocunited.org/diners-guide/
Saru Jayaraman: How Restaurant Workers Are Inheriting a Legacy of Slavery in the U.S.: https://bioneers.org/saru-jayaraman-restaurant-workers-inheriting-legacy-slavery-u-s-ztvz1712/
Evidence and Analysis of Monopsony Power, Including But Not Limited To, In Labor Markets: https://www.ftc.gov/system/files/documents/public_comments/2018/08/ftc-2018-0054-d-0006-151013.pdf
Antitrust and Labor Market Power: https://econfip.org/wp-content/uploads/2019/05/Antitrust-and-Labor-Market-Power.pdf
Why Are Economists Giving Piketty the Cold Shoulder?
Marshall: A way to make workers worth more is to give them greater skills, get more higher education degrees. That whole 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.
Tony: I’m an electrician by trade. I make 18 dollars an hour, about the exact same as my uncle who did this back in the ’80s.
David: If it’s not marginal product that determines how much you make, what is it?
Nick: It’s power.
Speaker 4: From the offices of Civil Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, where we explore everything you wished you had learned in econ 101.
Nick: I’m Nick Hanauer, founder of Civic Ventures.
David: I’m David Goldstein, senior fellow at Civic Ventures.
David: So Nick, before I started working for you I worked for the Stranger and Alt-Weekly where I wrote 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. Then I came to work for you and you’re paying me so much more than I made at the Stranger. So as I understand econ 101, I’m a lot more productive now with you, right? My marginal product is so much higher to justify this higher wage.
Nick: The super sad part is you’re probably about a third as productive and you earn three times as much.
David: Quality versus quantity, Nick.
Nick: I don’t know what happened.
Nick: That little story is a marvelous illustration of why the principle of marginal productivity is such a lie.
David: The theory of marginal product says essentially that you are paid what you are worth.
Nick: 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 seven dollars and 25 cents an hour that’s because that’s all you produce for the company.
David: The value that you add on through your labor, that is your marginal product.
Nick: That’s right. At the risk of boring our listeners a bit, it’s really, really, really worth reading a quote from a man named John Bates Clark who invented this theory in response to Marxism. Here’s the quote: “The welfare of the laboring classes depends on whether they get much or little, but their attitude towards 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.”
Nick: It’s a shockingly revealing statement.
David: Right. So, all we need to do is make people think that they’re getting-
Nick: What they deserve.
David: Right. However little it might be that they’re getting.
Nick: 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,” that society is fair. This principle of marginal productivity is so crucial to neo-liberal economics because it teaches people 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. 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 bad shit happens.
David: And remember, this is why the other side fights against things like the 15 dollar 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. You have to understand how ingrained this is. It’s not just that you and your wealthy friends are able to convince yourselves that you earned all those hundreds of millions of dollars; surveys show that the majority of Americans think that if they’re poor it’s their own damn fault.
Nick: Yeah, they deserve to be poor.
David: They blame themselves for it, and that is like rubbing salt in the wound.
Nick: 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.
David: And rich people rich.
Nick: And rich people rich, yeah.
David: It works for you.
Nick: Exactly. 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 market economies work… then you have enforcement a status construct in an extraordinarily effective way that benefits the few and disadvantages the many. It is one of the central tenets of neo-liberalism. 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 neo-classical economists at the stake.
David: So says you, Nick, but neither you or I are economists. I want to hear from a real economist on this subject. We got one lined up.
Nick: We have a good one lined up: our friend Marshall Steinbaum, who by the way is a classically trained, Chicago school economist.
David: Oh, don’t insult him.
Nick: But he’s a brilliant guy and is at the forefront of trying to acknowledge that those ideas lie and teach people that they shouldn’t pay any attention to it. Anyway, it’ll be really fun to talk to Marshall about it. He has a lot of very smart things to say about the subject.
Marshall: My name is Marshall Steinbaum. I’m an assistant professor of economics at the University of Utah. You can find me on Twitter at econ_marshall.
Nick: So you’re a brand new professor. We just have to ask: are you going to be teaching econ 101?
Marshall: 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 distill a lot of the work that we’ve been doing in the last five or six 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.
Nick: 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.”
Marshall: 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.
Nick: Yeah. I love it.
Nick: Marshall, what we wanted to zero in on in this conversation was an economic principle that we consider to be one of the most evil instantiations of neo-liberalism, which is the idea of the marginal productivity of labor: the proposition that if you earn seven dollars and 25 cents an hour it’s because that’s all you’re worth. That’s all that you produce. You have written extensively about this and how this relates to power. We just wanted to unpack that idea with you and give our listeners a tour of this idea.
Marshall: The marginal product of labor is an abstract economic concept that refers, 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 an equilibrium condition of competitive models of the labor market, and what that means is 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 towards that outcome.
Marshall: It’s this self-fulfilling prophecy, if you will, and they 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 you will go out and get another job offer from someone who is 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. Somebody else who is willing to shave that profit a bit undercut your current boss by offering you a 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 profits to be earned for your boss.
Marshall: That idea, that workers are paid what they’re worth and 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, 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 in a world with no minimum wage workers will be paid what they’re worth. 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 their worth. What that means is that bosses would be running a loss for employing those people and therefore they would lay them off.
Marshall: That’s the motivating architecture behind the whole idea that, quote unquote, the minimum wage kills jobs. It’s not true. That’s just one policy application. I write a lot about higher education and student debt where this idea that if we want to increase what people are paid then the way to do that is make workers worth more. The way to make workers worth more is to give them greater skills. The way to get greater skills to get more higher education degrees, take on student debt. That whole genre of argument is premised on a certain assumption about how the labor market works, namely that workers are paid what they’re worth, and that assumption is false.
Nick: 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, that this is essentially an immutable law of nature, you have persuaded them to be… you’ve turned them into domesticated animals, basically.
David: Why would anybody ask for a raise if econ 101 teaches that you’re already paid what you’re worth. If you were worth more, your boss would automatically give you more money, right Nick? You’re going to automatically give me more money?
Nick: So unpack for us how we know it’s just not true.
Marshall: Oh my god, where to begin. There’s the basic, straightforward evidence that workers have been producing more and more stuff and not getting paid more and more. 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, just straight-up here’s an aggregate measure of how much we think workers are worth versus how much we think workers are getting paid: that’s divergent. I think that’s fairly convincing evidence.
Marshall: There’s evidence from minimum wage experiments. An implication of the theory of 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.
Marshall: 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 at something intuitive, which is when a given company experiences a windfall… There’s a good paper about patents. Companies that apply for and succeed in having patents granted, that makes a company more valuable versus companies that apply for and don’t quite succeed in having their patent granted. You would think that’s kind of a good measure of otherwise similar companies where 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 on those companies? Note that this whole theory about workers getting paid what they’re worth says nothing 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.
Marshall: 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. This business about windfalls, pass through, firm-level rent sharing is a theory about firm-specific, or more generally, firm inequality in in pay, and if it’s true that the identity of your boss determines at least a component of your pay versus a very similar worker working for a similar firm but that firm has a different name, a different boss… If you’re getting paid very different 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.
Nick: In other words, it comes down to circumstances and power.
Marshall: Yes. And it’s highly contingent, as you’re suggesting. If you happen to be the guy who was there when the patent application was granted at the firm, even if your name isn’t on the patent application, that tends to matter for how much you get paid. Of course, it matters more if your name is on the patent application, but that’s another sense in which it’s arbitrary because your name was on that first patent application and it could’ve been on the firm’s whose patent application didn’t get granted.
Nick: I’ll raise another example and that is the US women’s soccer team, right?
Marshall: Gender and race inequality I would also interpret as reputation of the idea that workers are paid what they’re worth: they’re 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. 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.
Marshall: I think once we opened up the box of no it’s not worker characteristics necessarily generating disparities in pay, or if it looks like worker characteristics… that is, 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’s a hierarchy of power in the labor market, and that one or two dimensions of the hierarch of power is race and gender.
Nick: Right. And to argue with that interpretation would be to make a racist argument or a racist and sexist argument.
Marshall: I do not think that’s an overstatement, and yet to say that is to kind of condemn whole generations of economists who… Even now, it’s anathema to suggest it could be anything less than motivated by the most high-minded motives.
Nick: This proposition, it’s an astounding proposition when you really start to turn it in your head, how nefarious this is.
David: It’s econ 101, Nick.
Nick: I know it is econ 101.
David: Could you clear this up, Marshall? Is it actually econ 101?
Marshall: Yeah, insofar as econ 101 is about looking at where supply and demand curves intersect and saying, “Okay, that’s the price,” and then any kind of policy counter-factual is modeled as a distortion or deviation from the natural market equilibrium where supply and demand cross, yes. Absolutely this is econ 101 as applied to the labor market.
Nick: Marshall, let’s talk for a minute about 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. There’s a few people in the academic community who are willing to walk away from this proposition, but up and down the chain… including some of the nation’s most influential economists… cling to this idea as a true proposition. I know some of these people to be good people. They’re not evil racists, but they are academic economists.
David: You said that like a pejorative too, Nick.
Nick: Yeah, I did, sorry. I didn’t mean that to come out quite as mean as it sounded.
David: Academic economists.
Nick: What is it? I’ll be interested in what you think. To me, the reason they cling to it is that if it’s not true the whole thing comes tumbling down: the whole construct.
Marshall: Yeah. I think it totally indites a generation of more of economists who achieved great wealth and rewards and high prestige, and to suggest that they were anything less than the most high-minded scholars is deeply threatening to current economists’ own conception of themselves and their role in the world. Far be it from 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 the 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.
Marshall: I think that the marginal product theory of how wages are set in labor markets has that just world fallacy associated with it. The distribution of earnings in the labor market is the morally justified result of just desserts: people getting what they’re worth. If poor people are paid too little and are living lives in poverty and we’re concerned about that as morally upstanding citizens and our brotherhood of man suggests that we should be concerned about this depravation on the part of fellow human beings, this is sort of saying maybe that’s fine in moral terms but in economic terms 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 sacrifice the naturalness of the allocation of resources and of outcomes.
Marshall: 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.
Nick: 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.
Marshall: Oh yes. If you 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 worked, exactly. It ran up against those problems, that it’s not that there’s one rule about how labor markets: that is, everyone gets paid what they’re worth. In fact, you need a different model for every labor market. The real research agenda is to study the contingent realities of individual labor markets and of individual workers or firms. There’s no one generalizable rule there.
Marshall: That came to be seen, conveniently, as unscientific: that is, if you’re going to go wander off into the jungle of that kind of research agenda, you’re never going to return from that jungle, so you’re never going to have anything to say that has a more generalizable implication than whatever it is you’re studying about 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 roll out that research agenda in that if you start from retrograde assumptions about how labor markets work and then sort of say, “Maybe we should tweak this assumption a bit to get to a more realistic prediction…”
Marshall: But ultimately the model has that assumption baked into it, so tweaking it a bit has a very low range of potential applications. You’re starting from this defensive position and then saying, “Okay, if we creep above the trenches we can move the line forward a tiny bit,” or even more relevantly, “Prevent us from further retreat.” It’s a very defensive intellectually hide-bound approach, and it’s understandable coming from people who have fought their whole lives against an aggressive neo-liberalization of economics and a highly effective orthodoxy that had gained lots and lots of intellectual ground over decades. You don’t want to expose yourself all at once.
Marshall: You get people who say, “I understand that all of this is nonsense, but I have to argue within this framework or else I’ll just be 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. At this point we have copious empirical evidence that the orthodoxy of generations is wrong. Why should we start from assuming that it’s right and then tweaking the model to make it slightly less right in the model when it’s just nonsense and should be thrown in the garbage?” I think that kind of differential can only ever be a kind of generational type of experience and cycle.
Nick: Marshall, one last question. By the way, this has been absolutely fantastically useful and precise discussion. What brings you to your work?
Marshall: Pushing my way through graduate school for six years, starting right as the financial crisis was happening and then in the poor labor market that was its aftermath… I mean, it’s not to say that nothing interesting happened for me intellectually, but I definitely did not come out of that experience driven to the research agenda that I have subsequently adopted. It was only seeing the 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 not just grave economic problems that are clearly not the natural developments of a perfectly functioning economy, but also the ways that economics is weaponized in the public debate in radically retrograde directions.
Marshall: I guess what motivates me on a day-to-day basis is 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. There’s a conceit among economists that policy makers don’t understand economics, the public doesn’t economics; if only all these stakeholders and voters or whoever you want to talk about understood economics, then we would have the right policies and the world would operate efficiently. That is such a radical misinterpretation of the way policy gets made, the way public debate happens, and what economics is. It’s economists who don’t understand economics, and as an economist that’s not a state of affairs that I can tolerate.
David: Well Marshall, it’s always a privilege to be in on a conversation between a self-loathing economist and a self-loathing plutocrat.
Nick: I love it. 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.
Marshall: Great. 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.
Nick: All right buddy, we’ll talk soon. Take care.
Marshall: Yep. Great talking to you. Bye.
David: 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?
David: Bullshit! Yes.
Nick: Corrosive bullshit.
Nick: Evil corrosive bullshit.
David: Right. Of course, the theoretical part aside, what really matters is how it plays out in the real world.
David: I had the privilege of talking with Saru Jayaraman, who has long been one of the most prominent voices defending the rights of restaurant, hospitality, and other tipped workers.
Saru: My name is Saru Jayaraman. I’m 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 Corked: A New Standard for American Dining.
David: I was looking forward to talking with you. I actually saw you speak once in Seattle when we were debating the 15 dollar minimum wage here.
Saru: That was a long time ago.
David: 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 the market is 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.
David: Your experience in the restaurant industry… Does the market pay people what they’re worth?
Saru: 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 years to be a hospitality professional. 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.
Saru: 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. The real background as to why this industry is such a low-wage industry lies in a lot of the research we’ve done. The research shows that right now the restaurant industry is one of the largest and fastest-growing sectors in the US economy. It’s over 13 million workers. One in 11 American workers currently works in restaurants. It’s actually getting close to one in 10 American workers working in restaurants. One in two Americans have worked in the restaurant industry at some point in their lifetime.
Saru: But despite the industry’s size and 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 seven of the lowest 10 paying jobs are all in one industry: the restaurant industry. The reason you’ve got the largest and fastest-growing industry in America with the absolute bottom-of-the-barrel lowest paying jobs 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 IHOPs, the Applebee’s, the Olive Gardens, and in doing research for my last book we uncovered that the other NRA has been around in various forms 150 years since the 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.
Saru: 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 live entirely on tips, which was a mutation of the feudal concept of tipping. 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 thought 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. Domestic workers were excluded, farm workers were excluded, and tipped workers were excluded. They were mostly black women. They were told they could be given a zero dollar wage from their employer as long as tips brought them to the full minimum wage.
Saru: We went from zero dollars in 1938 to the whopping two dollars and 13 cents an hour at the federal level in 2019, and 43 states in the United States continue with this legacy of slavery with sub-minimum wage for tipped workers. I think any of your listeners would be hard-pressed to say that anybody in this country is worth two dollars an hour, but that is what federal law allows employers in the largest and fastest growing industry in America to pay. As I 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 zero dollars an hour.
David: And if federal law allowed restaurants and hospitality industry to pay zero dollars and have their workers rely entirely on tips, would they move to that model?
Saru: 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 do pay nothing at all to their workers and have them live entirely on tips. Frankly, even in states like New York, which has a sub-minimum wage but it’s still a wage, we have heard from many restaurant workers who have come to us saying, “Our employer doesn’t pay us at all. They expect us to live entirely on tips.”
Saru: 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. Door Dash, Instacart, Uber Eats, even 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. Because they’re independent contractors, they do actually claim, “We don’t have to pay their workers at all. They can live entirely on tips.”
Saru: This notion of tips as wage replacement is pernicious and it already has lead to many employers trying to get away with paying nothing at all to their employees.
David: 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.
Saru: Absolutely. Although the Restaurant Association likes to paint the picture of the average tips worker as being a young white man working at a fancy fine dining restaurant earning a ton of money in tips, in truth 70 percent of tipped workers in America and in every state are women. They are women who work at IHOP and Dennys 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 sub-minimum wage or wages 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.
Saru: There are seven states that have gotten rid of this sub-minimum 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 bonus on top of the wage, as they were always intended to be from feudal times. 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 aren’t reliant completely on the tips.
Saru: Absolutely, the power that customers have over tips workers in the United States… millions and millions of them… in fact, the largest employer in the United States… is enormous and it leads to severe sexual harassment. It leads to lack of safety, security, even sexual assault. It’s a severe problem, that power dynamic that not only employers and managers but also customers have over women in the restaurant industry.
David: 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.
David: Is it economics? Are they just wrong? Or is there something deeper going on with their hostility towards workers?
Saru: We actually have done extensive studies with Cornell where we surveyed 1,100 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 percent; that means three turns in one position in one year. We were able through that process to quantify how much turnover 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 reflecting the hourglass nature of our economy.
Saru: 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.
Saru: By the NRA fighting, fighting, fighting from raising the minimum wage, fighting as the loudest voice against those tipped workers and non-tipped workers wages going up, they have killed their own consumer base, particularly for that middle-tier of restaurants. You see it so dramatically in the quarterly returns now of the Olive Gardens of the world.
David: Who would’ve thought if you destroy the middle class you’ll destroy that middle class consumer base.
David: Before you go, personally, why is it that you do this work?
Saru: What happens when you’ve got the nation’s largest and fastest growing industry proliferating the absolute lower paying jobs? What happens is that you go from an economy of one in three 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. What happens to a country when half of 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 safe 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 Donald Trump because not just Republicans but also Democrats have left these workers behind again and again and again at two dollars and hour.
Saru: I cannot think of a more important issue to save our democracy, frankly, finally, than to fight against the outside power of a trade lobby like the National Restaurant Association and to fight for livable wages for everyone.
David: Thank you for your work and thank you for taking the time to talk with us today.
Saru: No worries. Thank you.
David: So if I’ve got one take away from the conversation with Saru, Nick, it’s that that 15 dollar minimum wage, pretty good idea.
Nick: Exactly. In the interest of full disclosure, one of the things that I was wrong about when I when first started working on this was the tip thing. I really had convinced myself that the tip penalty… what the restaurant industry calls the…
David: Tip credit. That two dollars and 13 cent minimum wage, between and the 7.25 the restaurant gets to keep your tips.
Nick: That’s right. That it was necessary and defensible and so on. Saru was one of the people who strongly disagreed with me and over time I came around to her point of view, that indeed it’s a stupid way to subsidize restaurants and it makes perfect sense to eliminate it.
David: We asked you to call in and let us know whether you think you’re paid what you’re worth. Here’s what some of you had to say.
Steven: Hello. I’m Doctor Steven Lee in Everett, Washington.
Isabella: This is Isabella and I’m calling from Nairobi, Kenya.
Tony: My name is Tony Baker. I’m calling out of northeast Iowa.
Tim: My name is Tim Duvet in Colorado.
Shelia: My name is Shelia.
Christian: My name is Christian.
Speaker 13: I’d rather not have my name published. I was an executive in a Fortune 500 company. When I had my first child I went on maternity 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 dollars an hour from six figures, mostly the same kind of work. I am definitely not paid what I’m worth.
Robert: Hi Nick. This is Robert Gwen. 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.
Isabella: I am not well paid. I make 500 US dollars 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.
Tony: I make 18 dollars an hour for what I do, about the exact same as my uncle who did this back in the ’80s.
Shelia: Nursing assistants start out about 12 to 14 dollars 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.
John: My name is John [inaudible 00:43:35]. I’m 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 are mainly 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 jacked.
Tim: I can definitely tell you I don’t get paid for all the things that I do. A lot of tradespeople what they’re worth either.
Steven: Dentists don’t always have financial incentives 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.
Ada: Hi, this is Ada Crumming from Marlboro, New Hampshire. I’m totally not paid what I’m worth as a parent.
Christian: Are we being paid what we are worth? It’s a stupid question. We are being paid what we can negotiate.
David: We often talk about, Nick, the tricks in trickle-down economics. This is one of the big ones.
Nick: It is absolutely one of the big ones and that quote from John Bates Clark just totally reveals. Basically, openly admitting that we have to trick people into believing that they’re getting paid what they’re worth or they’ll revolt.
David: When, as you often say, employers don’t pay you what you’re worth, they pay you what you can negotiate.
Nick: What you can negotiate, exactly. The theory of marginal productivity connects deeply to a bunch of other things that we’ve talked about on the pod. Educationism, 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.
David: Right. If they were just better educated they’d be earning more money.
Nick: It connects to monopoly and monopsony in the sense that pay no attention to these giant companies. People are paid what they’re worth.
David: If there’s only one buyer or only one seller and the price is high or low the way they want it, it’s the market. It’s very efficient.
Nick: Right. Whether we’re talking the minimum wage or overtime or whatever it is, the principle of marginal productivity rears its ugly head. For listeners of the pod, there isn’t a trick in trickle-down economics that’s more worth understanding than this principle.
David: It sounds like econ 101. Rather than being a economics textbook it’s more like a handy guide to exploiting workers.
David: If it’s not marginal product that determines how much you make, what is it?
Nick: It’s power. Power is the ability to negotiate a fair split of the value create by the enterprise. 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. 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. By the way, when you impose these labor standards, while that certainly puts pressure on the most exploitative 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. That’s how you generate growth in a market economy.
David: Right. And the empirical evidence for that is that those first 30 years following World War II… they call it the treaty of Detroit?
David: Where, when organized labor was at its strongest as productivity increased, the average worker’s wage increased with it, almost lockstep. As America got wealthier, the middle class got wealthier too. Then starting sometime in the mid-’70s, there was this total and complete disconnect. Since then, productivity has continued to rise and median wages have stayed relatively flat.
Nick: That’s right, and the rates of economic growth at that time have never… in our country… been higher, certainly maxed in the last 100 years. 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. Americans were taught for 30 or 40 years, among other things, that unions were evil and that they harmed the economy and that they harmed workers and that they harmed economic…
David: And that they harmed businesses.
Nick: That’s right, and that they harmed economic efficiency. 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 and the absence of working people working together to negotiate a fair split of the value, they will never get frankly what they deserve. I think that there needs to be, certainly, a new awakening around worker power and folks outside of the most sought after professions… investment banking or high-level computer programming or being a fancy corporate lawyer… Everybody else deserves to earn a decent living too, and the only way to do that is through increasing worker power through collective action.
David: Right. 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.
Nick: Exactly, which is less fun.
David: For you.
David: Nick gave another TED Talk, and so on next week’s episode we’re going to take a deep with Nick into his new TED Talk, how it came about, and why it’s really important for all of you to go out and watch it.
Speaker 4: Pitchfork Economics is produced by Civic Ventures. The magic happens in Seattle in partnership with the Young Turks Network. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer. Following our writing on Medium at Civic Skunk Works. And peek behind the podcast scenes on Instagram at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening.