One of the main concerns with a free market in some Catholic circles concerns cyclical shocks. The unexpected downturns, like a global pandemic, or simply a new recession can wreak havoc on the middle class. Things like creative destruction, which destroy what’s old with new creativity can create a constant state of change. We get great new things when that happens, new technology, new devices, new innovations, but that also means creativity can spell the end of whole industries. When Ford invented the car, for example, the whole buggy industry ended. Look at what the digital-based economy has done to mail service, to bookstores, to compact discs, and to shopping in general. These kinds of shifts and uncertainties can cause swings of high unemployment and more instability in family and community life.
So, what is the solution to this continual disequilibrium in our economy, the constant ups, and downs because of change and innovation? One answer might be the flexible wage. Singapore is one country that has integrated this system into their economy. In Singapore, during an economic crisis wages adjust downward very quickly. This is because in Singapore 30% of your wage is variable with 90% of companies. What this means is in bad economic times your wages go down, so company costs go down and you retain your employment as a result. Notably, Singapore also does not have unemployment insurance or welfare programs like most other countries do. They developed this model in 1985 in response to turbulent business cycles. With the flexible wage, during difficult times, rather than employees losing jobs, employees retain the jobs with a lower wage to weather the storm. In addition, they have a payroll funded savings program which is mandatory but also flexible. During difficult times they lower the individual’s and firm’s mandated contribution to their own savings to allow for more take-home income.
What does prevailing Catholic social thought think about this scenario? This is the idea that Michael Watson and Dr. Grattan Brown (a former faculty at Belmont Abbey College) explored. Is an environment that gives employers the ability to transfer some of the uncertainty to employees during bad times, but also keeps them employed, a free-market solution that ensures better outcomes for all? In most countries, like the U.S., the company bears the loss of downturns solely, due to fixed wages. When rough times hit employers, they must reduce costs and therefore often must cut employees. Rarely do companies in difficult times even propose to employees the idea of decreased wages, as most employees would balk at the idea. With a flexible wage of 30% employers can weather the storm, fire less, and more quickly rehire in good times. In addition, with a flexible wage environment, you will also see a lower overall unemployment rate as the cost of hiring for companies is lower. Unemployment is a scourge we want to minimize so from a Catholic view flexible wages are good. This arrangement also creates a greater sensitivity and understanding between employees and employers, with employees feeling more invested in the firm.
Flexible wages also find a universal appeal to both the left—liberals—and the right—conservatives. For the left, under a flexible wage economy businesses share profits with employees, essentially bringing corporate ownership to the workers. For the right, flexible wages are crucial to the free market and lessen the need for government intervention into the economy. There should be an appeal to both sides of the political spectrum, and from the Catholic view, both are good. Greater employment brings greater stability in communities and families. However, it also forces a change in the thinking of each market participant pushing each person to think more long term and to save more in anticipation of a potential future reduction in wages. In Singapore, citizens must save for healthcare, mortgage, and retirement, with each individual bearing more responsibility for themselves and their families.
How could flexible wages have played out during the Coronavirus outbreak? Would we have seen much lower unemployment? Would our rebound go faster? A flexible wage environment would have lessened the pain, and when the recovery comes, firms would be hiring much faster. We would not see a slow return but a fast one. It could have been quite the safety net for the overall economy. It is always much more efficient to retain knowledgeable employees through bad times at a lower wage, then to let them go and start again. With the pandemic, we saw reduced output across the economy, a flexible wage may have saved employers from letting employees go, bringing more stability to the economy overall. Has the time come for America to learn to think beyond the next paycheck, share in the success and risks with your employer and move to a flexible wage system? With an election cycle upcoming you may have a new option to choose.
Congratulations to Belmont Abbey College Assistant Professor of Economics, Michael Szpindor Watson.
He just published, together with Dr. Grattan Brown, Profits for All: Flexible Wages in a Free Economy. Read an excerpt here.