How can we raise wages for the average worker and reduce living costs? Should we search for the root causes of the issues, and address them? Most politicians don’t think so. They advocate for intervention with wage & price controls. If salaries are too low, raise the minimum wage. If the cost of rent is rising, cap it. Sounds simple enough.

Looking a bit beneath the surface, we know that raising the minimum wage will price low-wage workers out of the market and replace cashiers with automated checkouts. Small businesses who can’t automate, will simply be hurt and prevented from scaling up. Rent controls won’t increase the supply of housing, and landlords will find other ways to charge for precious space.

But let’s start with wages. What are the real causes of low wages, and how do we address them? Causes of low wages:

Slow productivity growth

Lack of competition of hiring employers

Hidden unemployment / underemployment

Lack of employee bargaining power (related to the above points)

Reduced cost of automation

Mismatch of education to demanded skills

Lack of information for people in the labour market and mobility for people to act on it

Weaponization & distortion of trade

Slow productivity growth is resulting in part from a lack of investment and a lack of competition. Easy returns from consumer lending and property speculation have easy channeled credit into these areas, and not into meaningful R&D. In the US, this is highlighted by repeated property bubbles, consumer debt, and gaping current-account deficits. While the unique position of the US Dollar and foreign trade policy might play a factor here, this can be resolved with domestic policy. Shifting the burden of taxation onto land (more on this later) and consumption, and away from capital/investment and labour, will return incentives to balance.

The lack of competition of hiring employers needs to be addressed by bringing new firms into the market by lowering barriers to entry. These barriers include red tape, occupational licensing, and access to / costs of land, labour, and capital. Shifting the tax burden onto land (reducing the price of entering the property market) and turning income/payroll taxes negative (reducing cost of labour) will further reduce costs for small companies to scale up.

Unemployment / underemployment should be addressed by replacing minimum wage laws with an income supplement (as part of the New Physiocratic League “Three Pillars” plan). The lack of employee bargaining power should be addressed with a National Dividend, which is another one of the Three Pillars; this also addresses the automation issue.

The next two issues should be resolved by firstly providing the citizens with a portal of detailed and clear information about wages for different career paths, sectors, and locations. There is a market failure with a lack of information in this regard. The education system needs to offer school choice in which people are able to choose the type of schooling based on their informed choice, and it should be affordable. The New Physiocratic League platform addresses this with Sectoral Banks.

I will leave the point about trade weaponization for the end.

With the root causes addressed and wages rising, how do you ensure that those wages actually have purchasing power? If wages rise but costs rise at the same rate (or faster), what was the point? The supply of goods, especially basic essentials, will need to rise at a faster rate than demand in order for their relative prices to fall.

The relative fall in prices has happened with some products, but one area where it certainly hasn’t, is housing. The cost of living continues to soar due to rising rents and property values. To increase the supply of housing there needs to be a concerted effort to address overzealous zoning regulations that have artificially capped supply. With the cap starting to lift, a shift in the burden of taxation towards land (a land value tax) is a must. A property tax as is currently in place in most places, discourages supply increases by penalizing people for adding value / units to their property. This needs to be done away with. A land value tax only taxes land, not the structure on top of it. It dramatically shifts incentives towards supplying more housing to the market. The New Physiocratic League proposes a form of land value tax we call a ULT, which adds even more incentive to push affordable homes onto the market.

Finally there is the issue of trade. Geopolitical weaponization of trade, subsidies, subsidized lending, currency manipulation, other distortions, and uncompensated environmental damage have halted many regions’ areas of market comparative advantage from developing. In some cases the distortions have been applied with such vigor that they wipe out entire town economies in an instant. However, consumers benefit from receiving subsidized goods when it shows up in their purchasing power. There is too much to discuss with regards to trade policy for this article, and it is already outlined in the New Physiocratic League’s The New School of Economics, so we’ll get to the conclusion. In short, if tariffs must be applied (e.g. to compensate for egregious environmental practices), then those funds must be channeled towards increasing supply.

Finally, by shifting the tax burden away from labour and using direct cash payments, there will be no need to wait for these policies to start showing results. Enabled by a land value tax, with the Three Pillars, nominal net incomes will rise instantly. It’s cash transferred directly to your account. After the New Physiocratic League policy package has time to rebalance incentives, it will continue to yield results to real incomes with each day.

Unfortunately it is difficult to deliver this on a political campaign. It’s much easier to pitch raising the minimum wage, rent controls, and other heavy-handed interventions in the market. These are not solutions, and will just cause further damage. Expect to see this damage in the near future.