A couple of days ago, I wrote an article about the minimum wage that received a fair bit of attention from commentators who accused me of wanting to reinstitute slavery and other such measured responses. Since I respect my readers slightly more than they apparently respect me, I thought I would address some of their concerns.
The main misconception displayed by many of the comments I received is analysis that goes partway, but stops abruptly before seeing the full picture. There is a belief that we can take money from corporate profits and give it to low income workers, leaving the rich a little less prosperous and the poor a little better off. This belief is wrong. The fact that it is wrong does not mean we must praise the rich or attempt to protect them, it is simply a fact. Whether we like the rich or hate them is immaterial. We are concerned only with what happens.
Let me be quite clear: I am not defending the rich. I am not saying that the rich deserve their money more than anyone else. I am not saying the rich are more moral than anyone else. They almost certainly are not. But it is a fantasy that we can simply take money from them and give it to others without them taking some sort of behavioral response. It easy to point to wealthy CEOs and say that they could do with ten million dollars a year instead of twenty. No doubt, he could do with the ten, but that is not the important question. The important question is what that extra ten million would have done had it not been lost. Contrary to popular belief, the rich do not bury their money in holes in the ground. It gets invested, which means it is available for entrepreneurs who want to start businesses and create jobs. It is available to fund research to create better production processes and allow more opportunities for employment.
Nor was it my intention to disparage workers in minimum wage jobs. I have no doubt that as a group they work very hard, have high aspirations and are perfectly lovely people. But wages are not determined by effort, ambition or niceness. Wages are determined by productivity. If an hour of work generates $9 in revenue, a business cannot survive by paying its workers $10 an hour. That is a hard, mathematical reality, and no amount of compassion or empathy will change it.
Another point that is often overlooked is that there is really no distinction between an employer and a customer. If you hire a painter to paint your house, you are viewed as a customer, but if you hire a painter to paint other people’s houses, you are an employer. This distinction is illusory. The only difference is the duration of contract. Therefore, if you believe that it is fair to require employers to pay higher wages, you must also conclude that it is fair to require customers to pay higher prices. And if an increase of $7.25 to $10 is self-evidently good, then wouldn’t an increase to $20 or $50 be just that much better? I doubt whether even the most ardent labor union leaders would be able to defend such an idea as anything other than absurd.
Wealth in an economy at any given time is finite. An increase in wages without a corresponding increase in productivity means that there has to be a loss somewhere else. A simple example of a household budget will make this clear. Suppose a man working in a factory earns $250 a week. Suppose further that $150 of that goes to rent, $50 to food, $30 to transportation costs, and on this particular week he gets a haircut for $20. Now, suppose that the barber in question (who is after all an employee of his customers) demands a wage increase, citing the fact the he works hard and deserves it as justification. He now demands $25 dollars for a haircut. The haircut is no better than before, it will not last any longer, but the cost has increased. For the factory worker to afford his haircut, he must now cut back elsewhere.Suppose the factory worker cannot reduce his rent, for that is fixed, as is the cost of driving to and from work, so instead he cuts back on food by buying fewer hamburgers every week.
Who wins and who loses in this situation? The barber is certainly better off, but the factory worker is receiving less nourishment than he would like due to the increase in cost. The hamburger vendor is worse off as well, having sold fewer sandwiches than he used to. There will also, in all probability, be certain customers whose budgets are so tight that no such substitution is possible. They will be forced to forego the haircut altogether, no longer being able to afford it, in which case the barber has cheerfully negotiated himself out of a job. The purpose of this analogy is to show that no matter how much we move money around through legislation, wealth is not created and we cannot really control the ripple effects of the policy. The winners and losers may not be who we intend them to be. The only way to increase wealth for everyone is to increase production and productivity, increases that can only come from investment either in capital or technological progress.
The minimum wage manifestly reduces employment, as borne out by the popularity of such sites as Elance and Mechanical Turk, at which freelancers can bid for jobs that sometimes pay just pennies per hour. The fact that people are willing to circumvent federal laws in order to work for lower wages demonstrates an immense surplus in unskilled labor. There are too few jobs for these workers at the current minimum wage, so they are forced to seek grey-market alternatives that pay less. A higher minimum wage will only exacerbate the problem.
Finally, regarding my alleged endorsement of slavery, I would hardly have thought it necessary to point out the difference between a voluntary contract for an admittedly low wage, and a legal requirement to work or be thrown in jail. An abhorrence of the initiation of force forms the core of my belief system, and all of my positions reflect that.
Thanks anyway for reading.