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Minimum wage hike won’t fix income inequality

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A number of the business leaders who attended the just-completed World Economic Forum in Davos, Switzerland, are not only among that often-reviled 1 percent we hear so much about. They are among the 1/100th of 1 percent.

Microsoft co-founder Bill Gates attended, of course. According to Forbes, which tracks these things, Gates’ net worth of $67 billion makes him the second-wealthiest human being on Earth, after Carlos Slim of Mexico.

Aliko Dangoe of Nigeria, worth $20.8 billion, was there. So was telecoms tycoon Denis O’Brien of Ireland, worth $5.2 billion. Billionaires Vladimir Yevtushenkov of Russia, Enrique Razon of the Philippines, Adi Godrej of India and Augustin Coppel Luken of Mexico were all there.

They were joined by somewhat less wealthy business people and by political, academic and what the WEF calls other leaders of society “to shape global, regional and industry agendas” in an effort to improve the world, according to the group’s mission statement.

Among the top five issues troubling the WEF is income inequality.

Comedian Jon Stewart riffed at length on his “Daily Show” over the irony of billionaires fretting about income inequality. Stewart said he saw no hypocrisy on the part of the Davos attendees. “I believe the real (hypocrites) are the poor people who say they care so much about income inequality but couldn’t be bothered to come to Davos,” he said.

Income inequality is on a lot of minds these days. The president’s State of the Union address tonight is expected to focus on the issue.

Lee Reynis, of the University of New Mexico Bureau of Business and Economic Research, finished a recent talk with a warning that New Mexico’s middle class is being hollowed out.

Reynis used data from a report of the Economic Policy Institute and the Center on Budget and Policy Priorities, which says:

  • The top fifth of households in New Mexico had incomes 9.9 times greater than the average income of the bottom fifth of households. That’s the worst ratio in the country.
  • The average income of the bottom 20 percent of households in New Mexico was $16,319 a year. The average income of the top 20 percent was $161,162.
  • New Mexico is among the five states with the biggest gap between the average income of the richest 20 percent and the average income of the middle 20 percent.
  • New Mexico has been among the five states with the biggest increases in income inequality since the 1970s.

Contrary to some populist opinion, you don’t get rich by making other people poor. Henry Ford gave his factory workers better pay than other manufacturers because he reasoned a better-paid workforce would be better able to buy cars, thereby further enriching Henry Ford. Bill Gates’ fortune was made possible by millions of people with enough disposable income to buy the computers that required his operating systems and applications. A more affluent population, quite simply, is good for business.

The WEF’s pre-Davos report on income inequality warns of declining social cohesion, a lost generation of unproductive workers whose talents and energy are wasted, the risk that marginalized workers will embrace extremist movements, like the neo-Nazi parties emerging in parts of Europe. Migration and free trade will suffer. None of this is good for business.

Of greater concern is what income inequality says about the health of the economy. Reynis said New Mexico has a thin labor market. “We have a workforce that is unprepared” for 21st century jobs, she said, and one of the lowest concentrations of people with bachelor’s degrees in the country. The national unemployment rate for college graduates is about 3.5 percent. For high school graduates it’s about 7 percent, and for dropouts it’s about 11 percent.

Some blame government policy for the phenomenon. Most research shows that free trade on balance is good for the world economy, but there is no question that it comes at the cost of jobs. A lot of people believe government should raise the floor on income by increasing the minimum wage.

If only it were that easy.

The real average wage of the American worker has been almost stagnant since the 1970s because of technology and automation, according to Larry Summers, a Harvard economist and former Treasury secretary. For decades, the economy globally and domestically has been finding more ways to substitute capital for labor. Therefore, capital is rewarded more generously than labor. Those who control capital reap higher and higher rewards. Those who labor reap smaller rewards. This is simply supply and demand.

The law of supply and demand is one of the most inflexible in the world. Sadly, higher minimum wages and an end to free trade will not repeal it.

UpFront is a daily front-page news and opinion column. Comment directly to Winthrop Quigley at 823-3896 or wquigley@abqjournal.com. Go to abqjournal.com/letters/new to submit a letter to the editor.

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