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Saturday, December 07, 2013

Determining Minimum Wage

They're at it again. Fast food workers are protesting the federal minimum wage ($7.25/hour) and demanding a much more livable $15/hour as the minimum wage. Now, I don't know about you, but I think that something akin to $100/hour would be much more livable, but, hey, I'm not protesting, so I'll keep quiet. Organized by, here's the idea. The wealthy keep getting wealthier, and your average McDonald's worker doesn't make enough to support a family of three, so it's time to boost the minimum wage. That's the rationale: a "living wage."

Let's examine this for a moment. There is a premise here that seems to be taken for granted. That premise is "It is the duty of all employers to provide a living wage to their employees." The fact that a minimum wage worker is typically part time and often not supporting a family of three is irrelevant. A similar view undergirding this demand is "We have a right to equal share of the income." The term is "economic inequality", and economic inequality is evil. The notion of economic equality is only valid in a socialist society. We are not ... yet. These, then, are false premises. So the question becomes how do we determine a minimum wage?

The question might be pointless. The country with the lowest unemployment rate is Switzerland at less than 4%. They have no minimum wage. The last time the U.S. saw that kind of unemployment rate was back just after they first instituted minimum wages. And, of course, that makes some sense since we can obviously see that a government imposing costs on a business might cause a business to cut costs to compensate by hiring less (or going out of business) which would not add to the number employed. But, assuming a minimum wage is a good idea, how would you determine it? A "living wage"? Inflation and cost of living? Standard economic indicators? The fact is there is no formula or set process for such a determination. It just doesn't exist.

According to the New York Times, a 2010 study on raising the minimum wage found that increasing the amount had no effect on state poverty rates. This is primarily because many who are in poverty are there because they don't work and many who are in minimum wage jobs live in non-poverty households. There was the expected outcome that less skilled, less experienced workers lose employment opportunities.

The Huffington Post is quite sure that raising the minimum wage is good for business. Their logic is obvious. Giving more money to workers gives them more money to spend. But the basic premise is the same: "Most Americans agree that workers who toil full time shouldn't be stuck in poverty." Employers owe their employees a "living wage". (Note: Defining "poverty" is difficult in America when 97% have TVs, 63% have cable or satellite connections, and more than half have cell phones. Is that poverty or poor money management?)

Forbes, of course, is certain that a hike in minimum wage will kill jobs and, obviously, increase unemployment. Most of these jobs lost would be to those at minimum wage levels, making starting jobs harder to find for teens and others looking for their first jobs.

It seems that no one is asking is what a wage is. A wage is an economic transaction. That is, Employer X has some money to spend to accomplish a task that will make Employer X more money. Without spending this money, Employer X will lose out on income. That is, if the money paid out to employ this person is more than the income from doing so, it is a bad investment. So, this employer agrees to pay a person that money to accomplish the task. The employee and his or her task is an economic investment. If the investment is large, it may require more money. If it is small, it may require less. The amount is determined by the value of the investment. If Employer X needs one person to answer phones in his/her absence, it's not necessary to expend a large amount of money to do it. The expected return on that investment would be smaller. If Employer X needs one person to design a new device to sell, now we're talking a larger investment from a smaller pool of people with the required skills to do the task and a larger expected return on investment. The wages paid are an investment, not aimed at a "living wage", but at an income, a return. Now, the truth is that most employees do better work when they are respected and appreciated. A wise employer would want to anticipate this fact in the financial equation. But that is still an economic investment anticipating a better return without which it is a bad investment.

So, why not raise the minimum wage to my fanciful $100/hour? Every dollar of a hike in the minimum wage comes out of someone's pocket -- the employer's or the customer's (or both). The minimum wage, then, becomes a way to increase the cost of living for everyone or a method of decreasing employment opportunities, generally at the lower levels, or a means of forcing companies to eat more cost and obtain less profit. If the premise, "It is the duty of all employers to provide a living wage to their employees", is true, then the last is in order, but raising the minimum wage won't obtain it. Laws restricting profit would be necessary as well. But isn't this aiming at a socialist, egalitarian world? Oh, yes, of course it is. That's the increasingly popular view, even if it has consistently proven to be a failure in practice. The question, then, is whether we will remain a capitalist, free-market society or continue our slide toward a socialist society.


Glenn E. Chatfield said...

There is an excellent article about the problems of government mandated minimum wage here:

Thomas Sowell has an insightful commentary:

“Intervention by politicians, judges, or others, in order to impose terms more favorable to one side - minimum wage laws or rent control laws, or example - reduces the overlapping set of mutually agreeable terms and, almost invariably, reduces the number of mutually acceptable transactions, as the party disfavored by the intervention makes fewer transactions subsequently. Countries with generous minimum wage laws, for example, often have higher unemployment rates and longer periods of unemployment than other countries, as employers offer fewer jobs to inexperienced and low-skilled workers, who are typically the least valued and lowest paid - and who are most often priced out of a job by minimum wage laws.

“It is not uncommon in European countries with generous minimum wage laws, as well as other worker benefits that employers are mandated to pay for, to have inexperienced younger workers with unemployment rates of 20 percent or more. Employers are made slightly worse off by having to rearrange their businesses and perhaps pay for more machinery to replace the low-skilled workers whom it is no longer economic to hire. But those low-skilled, usually younger, workers may be made much worse off by not being able to get jobs as readily, losing both the wages they could earn otherwise and sustaining the perhaps greater loss of not acquiring the work experience that would lead to better jobs and higher pay.”

Stan said...

Seriously do we really want to live in a country where the government determines (mandates) wages? It would naturally follow (because it would be a necessity) that the government would determine (mandate) prices as well. And, while we're at it, why not just let the government manage all our money, since we are relinquishing control as it is? The question to me is in what world is government wage and price control the same thing as "a Free Market society"?