Minimum wage

I am not a proponent of the concept of a regulated minimum wage. Which (trust me on this) is not a great topic to delve into at your next barbecue, surrounded by your nearest and dearest. Someone is bound to take extreme umbrage and this is friendship ending stuff. Maybe pick something safer… like religion… or politics instead?

Of course having no filter I am likely to say something like ‘those supporting the concept of a minimum wage are either not familiar with economic principles or are particularly malevolent and deceitful individuals’. Which is likely to be frowned upon… by those who don’t appreciate economics, ha ha.

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I feel fairly confident in this assertion however.

The minimum wage is almost always marketed to us by politicians as something that will benefit poor people. After all earning $15 an hour is infinitely better than earning $10, a low income earner gets an extra five dollars an hour. On the face of it that sounds pretty good. In fact the intentions might seem good. The problem is (as with everything in economics) the unintended consequences of any action.

Imagine a group, the numbers are arbitrary but lets imagine 100 people. Each one of those people earns $10 per hour and for the sake of our example this group all works at one company. This costs the company $8000 per day. (double checks math… okay.. we are good)

The minimum wage is increased to $15 per hour. Those 100 workers now cost the company $12000 per day.

In response the company increases inefficiencies and increases automation and fires 33 people to bring down the costs back to about $8000. 67 people now earn $15 per hour… but 33 people earn $0.

The argument that is most often bandied about is that the company earns $16,000 a day and that the company can easily absorb those extra costs. Sure, potentially they could… but why would they? The objective of any company is to make profit. Companies are not the welfare organizations some people believe that they should be…

Which option offers more utility? Which is better, having less people earning more or more people earning less. Personally I’m inclined to agree with the latter, more people earning less money.

The economist, Deirdre McCloskey (one of my favorite economists) offered quite a good example that I like. I’m paraphrasing…

Sugary drinks are bad for your health. Especially in poorer communities who are inclined to consume a lot of carbonated sugary drinks. The politicians place a sugar tax on the soft drink companies. The tax increases the price of the can of Coke (or whatever) and people buy less of it. This is deemed a good use of a tax since on aggregate peoples health improves. Minimum wages are the same. Businesses view an increase in the minimum wage as a ‘tax’ on the labor component of their business and will take the necessary steps to reduce that input cost by consuming less labor. No business will absorb a cost increase ‘lying down’ and will attempt to reduce the cost of that input if at all possible. If there is no way to reduce that cost, they will increase the selling price of the good they are selling to you. 

Ethically someone who supports minimum wages while understanding the economic theory behind it can only be doing it for self serving reasons. For example, a politician who wants to be elected and is taking advantage of often uneducated voters. Increasing the minimum wage seems like a righteous act and the politician seems to be championing the poor. The eventual job losses that stem from the policy down the line are never pinned definitively on anyone, making it the perfect crime.

Sure you can argue that a $10 minimum wage doesn’t allow you to live any sort of ‘meaningful’ life and that poor people need more money. But inflicting a ‘tax’ on the sources of employment is not the way to resolve this.

I do have a very important caveat however to this tirade. The time is coming soon where automation may potentially put A LOT of people out of work very quickly. People that cannot be retrained or reskilled easily to perform other jobs. Combined with people living longer without the means to support themselves, the earning potential of these people is $0 with $0 savings. What do we do with those people? Let them die?

This is where economic theory and especially Libertarianism (insofar as Libertarians want as low taxes and as little government intervention as possible) gets a little murky for me. Do we pay those people… a minimum ‘stipend’ to keep on living? How do we fund that? Taxes? Corporate or personal? Who decides on what is an acceptable amount of money for someone to survive? But not to thrive? Is it right to take from those that have to give to a new ‘useless’ class of citizenry? Who will administer this?

A libertarian might argue… and I am sympathetic to this argument… that family and community (tribal) units need to pick up the slack created by unemployment. I am inclined to agree, only our western civilization has evolved on very ‘individualistic’ lines as opposed to small group dynamics. In any event… I think at the moment we are poorly equipped for the future.

On the plus side automation may not cause the mass job holocaust a lot of people fear… and instead, new jobs will be created… and we will muddle our way through more less like we did through the industrial revolution. I guess we will have to wait and see.

Personally I am not particularly confident of this assertion. Its likely my anarcho-capitalist/nightwatchman tendencies (which makes me more of a libertarian than a classical liberal) and also the perma-bear outlook that permeates my existence (ha, ha) that make me increasingly concerned about our ability as a society to navigate this tricky narrowing that is coming.

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