The danger of unearned compensation

Little over a year ago, I wrote a blog post in opposition to an argument that employers hire "an entire person, not just an employee (or fungible unit of productivty)." Zippy Catholic argued in favor of increasing the wages of parents over single people and similar considerations. It was observed back then that this would lead to disaster wherein people would be favored not based on their skill or productivity, but because of their non-economic social arrangements. The recent events in the auto industry serve to drive this point home.

In a way, the American auto industry is a good example of why Zippy Catholic's argument was pure folly. Over time, the American auto makers compensated union workers far more than they were really worth to their employers because of sentimental reasons, and now they are being bankrupted by the costs. It may be an extreme case that he would not defend in this particular instance, but it still illustrates the larger example that the principle of compensating employees more than they are worth is inherently dangerous to the well-being of a company. Even if it comes in the form of a few extra percentage points of raise every year or extending health care coverage to children at no cost to that employee, the employer would still bear additional cost for an employee for reasons unrelated to the business.

Now that trade is increasingly one on a global scale, it would be incredibly stupid to compensate employees based on factors outside the work place. To increase a father's compensation to help him support his kids under the current alleged free trade regime is ultimately to risk sending that man's job overseas to a place where workers are willing to work for less because a lower wage means that they are employed and can actually support their families.

There have to be limits in a global economy, lest everything become a race to the bottom. Most of that can be solved by admitting that "free trade" is a sham, and abandoning it as a foreign policy principle because no country makes any effort to actually engage in it. Whatever the theory is is ultimately irrelevant as free trade has ultimately meant that the United States opens up its economy one way, while other countries maintain mercantilist policies allowing jobs to leave the country without the theoretical balance of trade that is supposed to be achieved by more productive American industries receiving far greater access to foreign markets. Even if this doesn't come in the form of overt regulation, it exists nonetheless in the form of xenophobic economic nationalism in many of our trade partners. Thus the solution to protecting the livelihood of American workers isn't so much throwing unearned dollars their way, but rather a more aggressive, less principled, more pragmatic economic foreign policy that refuses to allow foreign countries to produce for us if they won't allow us to produce for them on an equal footing.

The federal government's refusal to allow GM and Chrysler to experience the agony of bankrupcy court, and thus possibly end their experiment with undeserved compensation will invariably cost many families dearly. Far more so than if they had been cut from the corporate teat and told to find a new job. The younger union employees who are just trying to earn their paycheck while being forced to help pay for the health care costs of three retirees each will have to find new jobs in local economies imploded by the demands of their elders, making it harder to become stable providers.

I do understand the appeal of giving generous compensation to employees, especially ones with families. However, the results in the case of the UAW speak for themselves. In practice, paying one employee more because of social factors must result in other employees either being put at risk of unemployment or receiving less opportunity for increasing their own compensation. The Marxist belief that wealth is a pie to be divided up is true insofar as at any given time, a company has only produced so much wealth and must allocate it as efficiently as it can among its employees and stockholders. It cannot simply will into existence additional money for compensating young, single employees after being very (undeservedly) generous to employees who have families to support; it must produce that additional wealth or take it out of the company's assets. Thus, in the name of generously supporting aging employees with children, the company must burden its younger employees, and that inevitably results in a pyramid scheme in which the older employees reap the benefits of the labor of the younger, usually single, employees.