Proposition: The minimum wage should be retained
indefinitely, and should be modestly increased periodically.
Economic Background: In purely economic terms, labor is a
commodity (it can be a producer’s good or a consumer’s good) that is priced
according to the same principles as other commodities. The free-market price
for a specific kind of labor will be determined at the price when the amount of
labor supplied is equal to the amount of labor demanded. This, in turn, means
that the price for a specific kind of labor will be determined based on the
marginal productivity of that labor, the productivity of the unit of labor
service that is supplied and demanded for the least important (or most
marginal) use out of all the units of the labor service supplied and demanded
on the market at the time.
Let us illustrate this principle with an example. Say that at
a specific wage rate, 100 people are willing to supply full-time secretarial
services, while 100 people are willing to employ them as secretaries at that
rate. For the sake of this illustration, we will assume that the 100
secretaries have roughly equal skill levels. What is this specific wage rate
that will accomplish this? It will be based on the marginal productivity, or
usefulness, of the secretary that is employed in the least important use, that
is, the 100th use in terms of importance. Perhaps the most important
use for a secretary hired in this illustration would be as secretary to a CEO
of a major corporation, while the least important use for a secretary hired would
be as secretary to an HR manager in a medium-sized business. If the company of
this HR manager was willing to pay $15 per hour to get him a secretary, and a
wage rate of less than $15 per hour wouldn’t be enough to induce 100 people in
this market to offer full-time secretarial services, than the wage rate of all
the secretaries (the market wage rate for this quality of secretary), will settle
around $15 per hour.
How about all the secretaries who work in employments in
which they are worth more than $15 per hour, shouldn’t they get more? Not if
all the secretaries are of roughly equal skill levels, which we are assuming
here. While the people wanting to employ secretaries for more important uses
than the 100th would be willing to pay more than $15 per hour, there
is no need for them to do so. If, say, the secretary in the most important use,
the secretary to the CEO of the major corporation, decided to quit because he
thought that his wage rate was unfairly low, the company could just hire
another secretary of the same quality at the going market price of $15 per hour
(or maybe a bit higher if all the secretaries are currently employed and would
need $16 per hour or so to consider changing jobs). Certainly there is no need
for them to pay a wage rate to the secretary corresponding to the absolute
importance of their economic contribution, which could be as high as $100 per
hour or so.
Of course, the real labor market is much more complicated
than the one in this simple illustration, with worker skill differences,
loyalty factors, location factors, interconnectedness between the markets for
workers in different occupations, different psychic desirability levels of work
in different positions and companies, training costs, and much more, greatly
complicating matters. Nevertheless, for our purposes, the basic principle of
price determination and the simple illustration of this principle will suffice
for now.
Predicted Effects:
1. Creates
unemployment: With
the economic background in mind, let us now consider what will happen when a
minimum wage is imposed. Suppose the government thinks that anything below $20
an hour is too low and not sufficient to support a dignified life on. They
decide to make $20 an hour the minimum wage, effectively preventing any
employer from paying below $20 an hour for labor services. Returning to our
secretary example, this means that the wage rate for secretaries will rise from
$15 an hour to $20 an hour. The catch is that the secretaries in the least
important uses are not worth a lot more to their employers than the $15 an hour
they were being paid. The employers will not just pay $20 an hour for a service
that they consider to be worth less than this. Barred from offering a lower
wage, they will just make do without the labor service entirely, and the
secretary will be out of work. Applying this across the economy, every position
in which workers are worth less than $20 an hour to their employers will simply
be eliminated.
Thus, it’s not that low skilled jobs will be eliminated entirely by a minimum wage. Rather, their number will be reduced by the minimum wage, as the more marginal positions requiring low skilled workers will be rendered uneconomical and will thus be eliminated. Without a minimum wage, these positions would exist and workers would be employed in them, although at a wage that the government deems to be below its preferred ‘minimum’. With a minimum wage, workers who can’t get themselves into a position where the free-market wage rate is more than $20 an hour will be thrown out of work indefinitely.
2. Gives workers who
remain employed a higher wage than otherwise: As mentioned above, imposing a
minimum wage, unless it is pushed to ludicrous lengths, does not entirely
eliminate low skilled jobs. Those low skilled workers who happened to be
employed in positions of higher relative importance would retain their jobs,
and would probably receive a higher wage for their efforts due to the
imposition of the minimum wage. In our secretary example, those secretaries who
weren’t thrown out of work because they occupied positions of higher importance
would now receive $20 an hour rather than $15 an hour, a not insignificant increase
in wage rate.
3. Less production and
higher prices for consumers: Employers don’t just employ workers for the heck of it; they
employ them because they value their services more than the wage rate they have
to pay to secure those services. With a $20 minimum wage imposed, employers no
longer have the benefit of being able to employ workers’ services which they
value less than $20 per hour, in exchange for a mutually agreed-upon wage rate
less than $20. Those workers are thrown into idleness; they can no longer
contribute their labor services to society’s consumers (through the
intermediation of capitalist employers) for a mutually beneficial price. This
leads to less production of related goods and services, which in turn leads to
higher prices that consumers must pay to secure these goods and services which
are now scarcer as a result of the minimum wage.
Another way of thinking about this effect is to think of
pricing based on costs of production. Ultimately, prices are always based on
supply and demand. However, as George Reisman taught me in his economic
treatise, often producers of products that can be fairly easily and quickly
reproduced will not set their selling prices based on the short-term revenue
optimization point that they could achieve purely based on current supply and
demand conditions. Instead, they will set their prices based on their most
efficient competitor’s costs of production of producing that product, plus the market’s
‘going rate’ of non-entrepreneurial/non-speculative profit/interest. Why would
they do this? Because they do not want to lose market share to their existing
or potential competitors. Charging at the revenue optimization point and
reaping unusually large short-term profits would invite newcomers into this
seemingly lucrative field and would provide an opportunity for existing
competitors to undercut the price and take away market share. For example,
producers of table salt, Sifto for instance, could probably reap more very
short-term profits by raising the price of their product. Table salt is
currently so cheap in North American markets that its price would probably have
to rise quite substantially to induce a significant drop in demand for table
salt in these markets. But if Sifto did so, their unusually high short-term
profits would invite more competitors into the industry, and would put them at
risk of losing market share to existing competitors who did not decide to raise
their price, but decided to increase production to satisfy the consumers’
demand for table salt at a lower price than Sifto instead. Similar reasoning
would probably apply to products such as bread, screws, machine parts, and many
others[1].
Raising the minimum wage would raise the costs of production,
sometimes quite significantly, of producers who rely on low skilled labor. They
would be forced to do without the low skilled labor that was worth less than
$20 an hour to them, and would be forced to pay the low skilled labor that remained
a higher wage than they were before. Both of these things would increase the
costs of production of all competing or potentially-competing companies in the
industry. The imposing of the minimum wage would probably have little effect on
the non-entrepreneurial ‘going rate’ of profit/interest, which we can safely
assume would remain roughly the same. The result of higher costs of production
and an unchanged ‘going rate’ of profit/interest would be higher prices charged
to the consumers of the products which require or benefit from low skilled
labor as an input.
4. Capital migration
out of the region: Capital
investment and wage rates have a somewhat paradoxical relationship to one
another. On one hand, low wage rates in a region, other things equal, tend to
attract more capital investment to that region, as most businessmen are always
trying to produce in regions where their costs of production can be the lowest,
other things equal. On the other hand, capital investment in a region serves to
raise real wage rates in that region in general. This is both because saved-up capital
funds are what are used by businesses to pay wages to workers, and because
capital investment not directed to buying labor is usually directed to securing
producer goods that will help make the labor hired more productive (machinery,
tools, office buildings, research & development, training programs, etc…) Because
producer goods are ultimately useless without the labor to use them, labourers
in a region with a relatively abundant supply of producer goods are in a better
position to demand higher wages than labourers in a region with a relatively
scarce supply of producer goods. The labor of those in the former region is
more valuable to employers because it serves to set in motion a more productive
complex of producer goods than the labor of those in the latter region. Ignoring
for the moment the great difficulties of talking about the price of ‘labor in
general’, the least important use of labor in the former region will probably
be more valuable to employers than the least important use of labor in the
latter region. This means that market real wage rates will tend to be higher in
the former region than in the latter region.
Thus, capital investment is attracted to regions with lower
wage rates, but the act of capital investment serves to raise wage rates in the
region. Let us suppose that capital investment, attracted to a region with
relatively low wage rates, resulted in a ‘natural’ raising of those wage rates.
At some point, the region would get to a point where its wage rates were high
enough to cease attracting capital investment due to the lowness of the region’s
wage rates. Other factors in the region, such as the prevalence of law and
order, respect for investors, low tax rates, the relative lack of burdensome
restrictive regulations, an increasingly skilled and conscientious workforce, a
greater supply of domestically-owned savings/capital funds, a good supply of
valuable land and natural resources, and a relative lack of economic and
political instability, amongst others, could still operate to attract capital
investment to that region, but relatively low wage rates would now no longer be
among those factors.
Since the primary purpose of courting capital investment is
to raise real wage rates, there is no use lamenting the fact that capital investment
has in fact raised them, even if it won’t be attracted as rapidly in the future
due to the wage rates that are now relatively higher. The problem with imposing
a minimum wage is that it is as if capital investment has done its job and
raised wage rates among unskilled workers, when in fact this isn’t the case.
The higher wage rates, due to the minimum wage, among unskilled workers results
in attracting less capital investment to the region in which it is imposed, but
the capital investment that would have been attracted by the lower wage rates,
had the minimum wage not been imposed, is nowhere to be seen! Wage rates are
raised not through capital investment, as they would be in a free-market
environment, but through throwing unskilled people who can’t land a position
where their skills are worth more to their employers than the minimum wage, out
of work.
5. Dampens a spur for
low skilled workers to improve their skills and change their jobs: The wage rates set in a free labor
market serve as useful signals to workers. They indicate what skills and jobs
are important to the society’s employers and consumers (state of demand), and
they indicate how rare the ability and willingness to perform these jobs is in
that market (state of supply). If a worker is in a job that has a low
free-market wage, it is a signal that either the worker’s skills or current job
are relatively unimportant to employers and consumers, or that, while the job
is important, too many workers are willing and able to perform these jobs
satisfactorily. Usually, it is a mix of both. In either case, the relatively low
wage rate is a signal from the society’s consumers (producers/employers being
their intermediaries in this regard), telling the worker that he would be more
valuable to them if he were doing something else.
In a free-market, this signal is not just idle hand-waving;
the worker is incentivized to pay heed and to take action. If he does, he will
be rewarded with a higher wage rate, and thus a higher standard of living. This
action might involve moving to a new location, taking night classes to learn
new skills, trying hard to show your employer that you have what it takes to
assume a higher position in the company, or simply taking a look to see whether
higher paying jobs are out there that you are already qualified for.
If a minimum wage is imposed, this spur is dampened for
workers at the bottom end of the wage ladder.
Those that are not thrown out of
work receive an artificially higher wage for the positions they are able to
retain. This causes the wage gap between these jobs and jobs that paid above
the minimum wage before it was imposed to narrow. With this narrowing, workers
have less of an incentive to put themselves in an employment position that is
more useful to society’s consumers than the one they are in currently.
6. General Principle:
The government can intervene with price controls when it doesn’t think that
free-market prices for things are ‘fair’: A government-imposed minimum wage is a price control.
If one thinks that the government can beneficially impose price controls on
labor, then why not on other commodities? Why shouldn’t the government set
maximum prices on ‘essential’ commodities such as milk, bread, and gasoline? If
government can interfere with market prices with little to no cost, as minimum
wage advocates imply, then why shouldn’t they interfere with other ‘important’
prices? A minimum wage advocate would be hard pressed to make the categorical
case that they shouldn’t.
Empirical
Considerations:
As usual, it would be useful if we could use empirical
studies to estimate the quantitative magnitudes of these qualitative effects
listed. But, also as usual, due to the dazzling array of complex,
non-isolatable variables affecting the labor market besides the presence or
absence of a minimum wage, such studies would prove inconclusive at best,
misleading at worst.
My Valuational
Cost/Benefit List:
Benefits: #2.
Costs: #1, #3, #4, #5, #6.
Valuational Comments:
#1: I think that forced unemployment of
people that are willing to work is a horrible fate. I would want to avoid this
fate very much, and I would certainly not wish it on anyone else.
#2: Higher wages for people at the lowest
end of the wage ladder, not taking into account for the moment the negative
effects of the means adopted to attain this end, I think is a good thing.
Putting in a long day of work and getting little in reward in return is no fun
for anyone.
#3: As a consumer, I naturally prefer
lower prices to higher prices for the things that I buy. Also, it should be
noted that poorer consumers are generally more hurt by higher prices for the
things that they buy than richer consumers are. Scarcity of consumer goods is
no good for anyone, least of all the poor who have little disposable income to
spend on such goods.
#4: Influxes of capital investment make a
regional economy dynamic and generally lead to higher real wage rates for
laborers in that economy. I would strongly prefer it if government policies did
not artificially chase away potential capital investment from my region’s
economy.
#5: Again, as a consumer, I am interested
in lower prices and better service. Dampening the effects of the consumer’s
signals to workers leads to a reduced ability of the economy to respond to
consumer preferences. This must be classed as a negative effect for me.
#6: Maximum price controls have been
tried by governments for thousands of years, and have always led to shortages
of the good whose price was controlled and to a relative decrease in the production
of that good. Free-market prices are not meaningless figures, set solely based
on the ‘greed’ of capitalists. They serve important coordinating and
allocational functions throughout the economy and lead producers to be more
responsive to the preferences of consumers. When enough citizens accept that
the government should tamper with prices whenever they see fit, we can expect
that such tampering will be undertaken, and the associated economic scourges of
this tampering will follow (either shortages or unsold surpluses, accompanied
by uncoordinated production in general). I consider all of these things to be
bad, both for myself and for society as a whole, so this general principle is a
negative one in my books.
Conclusions:
Overall: I think that for this policy, the
costs outweigh the benefits. Essentially, in the unskilled worker category, the
unlucky are forced into unemployment and even deeper poverty, while the lucky
get to keep their jobs and improve their economic position somewhat. I don’t
see why we should turn these lucky unskilled workers into a kind of unskilled labor
aristocracy, while excluding other unskilled workers and making their economic
positions much worse off. This is especially unjustifiable when the policy
causes harm to the general economy as well (effects 3-6). Thus, I would
recommend that the minimum wage be completely abolished.
Alternatives?: There is no such thing as a free
lunch; government can’t just tamper with free-market prices and expect to make
people better off without causing unwelcome economic consequences. There is,
however, such thing as a lunch that is openly bought at another’s expense. The
government could force taxpayers to openly subsidize low wage workers instead
of trying to impose a minimum wage rate.
I think that the least problematic way of doing so would be
as follows: Have the government institute a program known as the Citizen
Subsidy program. Every month, every single citizen past the age of majority
would receive $500 a month, or some similar figure. This isn’t supposed to be
enough to live on without working (I recommend a modest in-kind welfare social
safety net for desperate unemployed people), it’s meant as a top-up for workers
receiving low free-market wage rates.
Why must every citizen receive the subsidy, why not confine
it to low wage workers? The first reason is to simplify the administration of
the program and to guard against the bureaucratic inefficiencies that plague
most discretionary or needs-based welfare systems. The second reason is to
prevent the development of perverse incentives. Workers might be loath to
accept a somewhat higher paying position if it means losing all or part of the
subsidy. This, to say the least, is not something that I would want to see
encouraged. Admittedly, a universal subsidy would be more expensive than a
targeted subsidy. However, as long as it was paid for through some kind of
proportional tax rather than a progressive tax, for many people the increased
tax needed to pay for the universal subsidy would just be offset by them
receiving the subsidy themselves, and it would have little effect on them.
I’m not sure if I would personally advocate such a subsidy or
not, as it wouldn’t be without its significant drawbacks, especially on the
heavier taxation side if universal, or especially on the perverse incentive
side if a targeted subsidy is opted for instead. Nevertheless, if you firmly
believe that artificially subsidizing low wage workers is a good idea, I would
encourage you to advocate something along these lines, rather than a minimum
wage. The policy of setting a minimum wage is based on the premise that
government can tamper with free-market prices with little to no harmful
consequences. Along with this false premise, the policy should be discarded as
well.
[1] I
learned this idea from: George Reisman, Capitalism:
A Treatise On Economics (Ottawa, Illinois: Jameson Books, 1998).
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