Ted W. Hall & Aly S. Jeddy
Milton Friedman’s famous proclamation, that without economic freedom there could be no political freedom, now has a sequel. From rioting in the banlieue of Paris to the swelling tide of anti-Muslim sentiment across Europe, recent events reveal this: economic integration must precede cultural assimilation. This is the essence of what Europe does not get and what the U.S. must never lose. While many in Europe clamor to ban the veil, the real threat to European cohesion – an underclass barred from the continent’s prosperity by rigid labor laws and an oppressively high minimum wage – remains veiled. Rather than legislate cultural assimilation, Europe would do better to create the economic integration that is its necessary precondition. The U.S., too, should learn from Europe’s example as the debate continues about whether to raise its minimum wage by 40% or more.
Specifically, the European wage ladder is missing the first several rungs. The minimum wage in France, to use that country as an example, is US$ 11 per hour, compared to $5.15 in America. This is a deliberate policy choice to use labor laws as part of the social safety net. This approach, however, structurally destroys the European equivalent of every job in the United States that pays between $5.15 and $11 per hour. As immigrants arrive into societies like France, they find that they simply cannot work their way up from modest to more lucrative jobs. Rather, they must go from zero to $11 in hourly productivity immediately upon arrival. Many immigrants lack the skills to achieve this feat. Unable to muster the escape velocity required for economic integration, they first struggle, then despair and, in extreme cases, riot. Forced to hover around the base of the ladder indefinitely, they stop looking upward because that goal is unattainable. Many begin to look inward. Some begin interpreting their religions and beliefs with a fanaticism that reflects more their need for personal reaffirmation than the original tenets of their faith.
The U.S. presents a stark alternative to this situation. In the United States, because jobs start at $5.15 per hour (less if you include the undocumented economy), the lowest rungs of the wage ladder are not out of the reach of even the least skilled immigrants. They can work their way systematically upward, closing enormous economic gaps over time. Consider the experience of Hispanic immigrants to the United States. Setting aside the issue of legal versus illegal entry, from 1990 to 2010, the number of Hispanics in the United States will triple from 20 million to 60 million, an annualized growth rate of 5%. The purchasing power of this group, however, will grow twice as fast, increasing six-fold over the same twenty year period, from $200 billion to $1.2 trillion. Even more impressive than this absolute growth, here is the relative story: median Hispanic household income is growing at 2.7% per year versus 1.3% for non-Hispanic white households. The cumulative effect of this prosperity is breathtaking: it means that today there is an economy the size of Mexico’s embedded in the United States, growing at a growth rate that rivals India’s. Treat your immigrants this way and not only do they not riot, they don’t even show up for rallies to demand easier naturalization and citizenship processes for themselves.
The implications of this difference between France and the U.S. are profound. In France, for workers with what the OECD calls “medium” levels of education, the unemployment rate is 7.9% for natives versus 14.4% for foreign-born ones. In the U.S., for the same skill category, the unemployment rate is actually higher for natives, standing at 6.7% as opposed to 5.7% for foreign-born workers. Strictly comparable earnings data are harder to come by, but what are available only reinforce this story dramatically. In the U.S., the average foreign-born worker earned $26,176 in 2006, which is 5% higher than the national average of $24,898. Available data for France shows a complete reversal of this picture: there, immigrants’ disposable household income lags that of non-immigrants by a third.
This comparison of the United States and Europe – of which France is representative on this dimension – is instructive. First, it underscores why the potential negative impact of raising the minimum wage on employment is not the only legitimate policy consideration. As the U.S. debates a 40% hike in its minimum wage, an important part of the dialogue should be the recognition that removing rungs from the base of the employment ladder reduces economic participation and mobility, thereby reducing social stability and cohesiveness. This is the more powerful counterargument to increasing the minimum wage.
Second, it explains why even though the United States is leading the charge in Iraq and Afghanistan, it is the Danish, Dutch and other European Muslims who are most visibly agitated about the state of the world. American Muslims simply have too much to lose. They have a stake in the society in which they live. That is no small difference. It puts what the U.S. must never let erode in sharp relief: what is dangerous is not Muslims, but any reduction in the size of their stake in the dream and the reality that is America. Europe, take heed.
Third, it argues for a substantial liberalization of European labor markets. Social safety nets should not be built out of the fabric of high minimum wages. Wage structures should be designed to create jobs, not eliminate them. Designing the lower rungs of the wage ladder out of the system does not lead to a more fair society. It leads to a fundamentally unstable society founded on an unjust demarcation of the haves from the will-never-haves.
Rather than pointlessly evoking its terrible history of religious intolerance by outlawing veils, Europe should give its immigrants a reason to engage with the rest of its citizenry that creates mutual understanding and, ultimately, builds societies. Liberalizing and re-centering labor markets around more reasonable minimum wage levels would be a good place to start. Isolation pays no dividends and assimilation cannot be legislated into existence. Economic incentives, especially over time, however, prove irresistible.
Mr. Hall is Managing Director of Mayacamus Associates.
Mr. Jeddy is a Partner at McKinsey & Company.