The new social issue making the rounds is something called a living wage or a minimum wage that is double what is mandated to be paid to any workers around the country today. Whether one wants to work as a clerk, excuse me, my bad, an associate for Walmart or a food server for McDonalds the argument goes that such unskilled labor must be paid at almost twice the rate establish now. The issue is portrayed as a moral argument with just a touch of economics for justification. The argument is essentially that those who work as unskilled labor and are frequently underemployed when it comes to the number of hours worked cannot live on the now minimum wage rate. The economic part of the issue is that those who are working their thirty hours a week at Walmart or McDonalds are also obtaining food stamps, an EBT card from social services and thus the taxpayer is paying for part of their monthly earnings. The employers are getting a free ride on their part because they don’t have to pay what should be a full wage and take advantage of the public taxpayer. The argument further states that it would cost Walmart very little to pay a living wage without raising prices. Therefore, increasing the minimum wage to fifteen dollars is the right thing to do.
That is not exactly the best compelling argument I have heard and I have my doubts that it is a compelling argument at all. One of the problems in our modern world is that we have lost sight of the concept, “Who pays and who benefits?” We might read that Walmart made so many billions in profit last year and think, “Hey, they could afford to pay their people fifteen dollars a year.” But seldom do we see in that same news blurb what their percentage of profit is, that is, what did it cost to make that profit. Just what was their profit margin? Okay, they bought goods and services for X and Y amounts and had a labor cost of Z. But what were the other costs? Cost A may have been local and state taxes other than income taxes. Cost B may have been to cost of borrowing money to build new stores and pay for the old ones, or interest on mortgages. Cost C may have been medical plans for some of all of its management and employees. The old saying, “It takes money to make money.” applies to any business. I must remind the reader that there is no free lunch, someone always pays for that meal regardless whether someone else eats it.
One of the tenants in economic theory is that wages are sticky, that is, unlike the price of goods, wages do not necessarily decrease when the supply of labor increases. There is always strong resistance to accepting lower wages for labor performed. There are many reasons why this is so but I do not wish to expand that particular point at this moment. One of the things that labor unions do is inflate wages. Very few unions have ever gone on strike and accepted less wage than its members were getting before that strike. A labor union seeks to control a portion of the labor market through the monopoly it has been given by government. It is simply an agent for the legal transfer of wealth from the employer to the employees. The minimum wage laws act in the same manner. The government mandates or requires that all individuals who are working in its domain should be paid a minimum rate of income. Thus, it affects a transfer of wealth from employers to employees. But there are other forces at work when one restricts the free market. Just as rent control tends to artificially raise rents in a haphazard manner and creating under utilized housing in some quarters and over utilized housing in other while stifling the investment in new housing construction, minimum wage does much the same thing. If I as an employer must pay my employees more income then I will either need to raise prices or improve productivity. If one is selling hamburgers for five dollars a piece and now must pay double the present wage the one must raise the price of hamburgers offered to the public. Is the public wiling to pay six dollars for that same hamburger that only yesterday cost five dollars? If not, then I must get more work out of my employees. If I have six employees and their cost doubles, then I must make do with three and fire three. The only way I can keep all six is if I can find cost cutting savings that would be equal to the raise in minimum wage. That is not a possibility. On the other hand, if I can buy a robot or two that will replace the work of two workers while only costing me the labor cost of one worker, then I invest my capital in those robots and fire one worker.
You see, there are only two ways in improve productivity. Improve the individual productive of each employee, not an easy thing to achieve, or invest in capital improvements, machinery and such, that allow me to use fewer employees because the machinery employed does the work of those fired and at a lesser cost. We have always used some sort of tool or machine to improve our productivity. If I am a farmer and I used a sharp stick to try and plow rows for the planting of crops, my productivity is dependent on my muscle power and its endurance. But if I come up with the bright idea of attaching a long pole to my stick and having several individuals pull that vertical pointed stick in unison the I have increased the productivity of several of us individual farmers. Yes, it takes a cooperative effort but perhaps it means that we can collectively plow ten or fifteen percent more land. And if we get the bright idea of hitching that plow to two oxen then we may have doubled our collective productivity through the use of the oxen muscle power. And so it goes. Sometimes it is technology that makes the difference. Once metallurgical methods improved the quality of metal produced then one could make more precision tools. Better tools allow for more productivity and for the introduction of new products.
But simply mandating a higher minimum wage does none of this. The end result is fewer people are employed for positions of unskilled labor. And what becomes a living wage for a few becomes no wage for many. The higher the minimum wage to higher the entry barrier to employment. What may have been seen as a moral argument for raising the minimum wage becomes a moral argument against raising the minimum wage. The real problem is one of employment. How do we create more skilled and semiskilled employment and how do we train individuals for that employment? The more labor saving machinery that was invented and used on the farms the fewer farm laborers that could be employed. And that also led to the competition that allowed those with greater access to capital to buy up the small farms and place them into larger collections and the need for more efficient machinery to pay a return on that capital investment. As we saw at the turn of the 1800s, larger farms produced more food stuffs and more textile material. The invention of spinning wheels and later of mechanical looms powered by water and then by steam created a need for semi and skilled labor. But those two developments also created an unemployable class of unskilled labor or redundant labor. The Napoleonic Wars and the race to colonize the world created a demand for military and navel personnel. But new colonies only displace some of the world’s poverty. One must be careful for what one wishes, it tends to become real in all too unexpected ways.