Minimum Wage Nonsense

The Minimum Wage debate has grown rather silly, in part because it sounds like such a positive policy that will redistribute income to those who supposedly need more income.  The argument goes that those on the lowest end of the wage scale need a minimum income to support themselves and will always need to receive public assistance if their wages are not increased to a certain point.  Well, yes, the poor always need more.  Of course we do not inquire too closely why they are poor and how these individuals might become far more self sustaining.  If I have very few skills that are useful to an employer then my prospects for employment are rather dim.  On the other hand I may have some skills that many employers would find useful but I may be in a location where there is a great surplus of others like myself.

We might think of the problem in the following way.  In any army, volunteer or conscription, there are only so many billets or roster spots.  A company of men, approximately 120 individuals, are organized by rank from captain to private.  There can be only one captain but there will be quite a few privates.  A private can only progress to corporal if he is: one, qualified; two, is perceived the best fit among his peers; and three, if there is an open position.  The smallest unit, a squad would usually have one sergeant or corporal and five privates.  So we can think of the army as a full employment model, that is, everyone has a job and no one is unemployed.  That is great for those in this group, but we may have a great many others outside this group wanting entrance into the army.  If all positions are filled then those outside will not be employed by the army.  Now the army has some basic qualifications.  Usually one must be a male, well, yes the modern army has now admitted females but not in the same numbers a males.  And two one must be physically capable to perform the role, no one in wheel chairs or otherwise impaired may have a job carrying a rifle.  And not everyone enters at the level of private.  An individual may have attended a higher institution of learning and thus, if there is an open position, be qualified to enter as an officer.  Notice that the army rarely hires individuals directly as generals.

What I have describes is a rather simple model of the job market in most areas of America, and indeed, the world.  Notice that there are no more Great Walls to be built by the hands of millions as we have earth moving equipment to replace the populace at large.  Let’s face it, if the Emperor had to keep paying an increasingly higher minimum wage the Great Wall would have been the not so great low fence.  The point is that labor has value and that value is determined by the market, not by legislation.  Once we allow our political officials to intervene  in the market process we distort that process by allowing the allocation of goods and services without regard to their value.  Our intentions may be good but the results are failures.  If one is a carpenter one does not use a hammer in place of a saw or chisel.  Yet that is precisely what minimum wages laws do.  In the end, they make more people unemployable.

Why is that so, why should higher minimum wages insure that more individuals become unemployable.  Because that class of labor, the greatly unskilled or those with the wrong skills have value as employees only at a certain level of wage.  No one works a forty hour a week job for no pay, but we would work for what ever wage we may receive.  If I am a civil engineer I know my approximate value in the labor market for civil engineers.  I am not likely to work for less wage unless there is an over abundance of civil engineers on the market looking for work.  If the city or town where I live there are one hundred positions of civil engineers and there happens to reside in that town or city one hundred and fifty civil engineers then fifty of us will be unemployed as civil engineers.  And those civil engineers who do have employment will find that their collective wages are less than those in another town or city where there is a shortage of civil engineers.  Thus I might do well to move to one of those towns or cities where there exists a shortage of civil engineers.  Or I could try to find a job for which I am greatly over qualified such as draftsman or general laborer.

The real problem is that by increasing the minimum wage and by encouraging unionization of what is largely unskilled labor is that it creates an artificial class of laborer.  Back in 1934 it was thought that by helping unions to organize and increase wages the economy might regain its full employment status once again.  To that end FDR sought to allow government sanctioned cartels of business for the control of industrial output and prices.  The results were that instead of full employment one out of every workers was unemployed for very long periods, often years.  Those union members who had jobs were fortunate because they were making inflated wages while their unemployed brothers made none.  One of the ideas behind the push for unionization was what some economists termed Countervailing Power.  That is, unions kept the large corporations and business trusts from abusing their power.  Well, it seemed like a good idea at the time.  Unfortunately it led to new abuses by organized labor unions and that morphed into organized public labor unions.

If we have a problem with bigness in the business sector, not to mention our own layers of government, then the solution is not more laws and regulations that intrude upon the operations of the economy, but the reduction in size of large corporations.  We need to go back to a time when banks were charted in states and did not grow to a point where they controlled excessive amounts of capital.  And while there are efficiency of size in large corporations, there are great inefficiency as well.  Why does a Boeing Dreamliner costs billions of dollars?  One reason are the wages made by members of the International Aircraft Machinists union.  Throw in the IBEW and a number of other worker unions and the cost of making that plane rises very quickly.  And then we have the various engineers who do the design and other work in the manufacturing of that plane who have organized themselves and demand high wages.  Finally, management takes its cut out of the wage pie.  Does Boeing really need to be so large?  Not really, it could contract out work to companies that would produce the many parts of the air frame, the avionics, and so forth.  In fact, if it did that plane could be built a great deal more cheaply.

But back to minimum wage and fast food.  Yes, we have statistics that show that many states who have enacted minimum wage increases have some marginal growth in job creation.  Of course those who trot out such evidence in support of their thesis that an increase in minimum wages is good for the economy have not investigated just what kind of job growth increased.  If one looks more closely at the data one finds that most of the so called job growth has been in low wage or minimum wage jobs.  Far more mid wage and high wage jobs have been lost in the past six years than have been gained.  That means that there is pressure from those who own the smaller businesses to find ways of replacing workers with automation.  You see, a minimum wage isn’t just the pretax wage.  It includes all those costs that have been added by the various government levels.  Social security contributions by the employer must be added in and those contributions are on a percentage basis.  Then there is the unemployment insurance tax paid by the company.  If any healthcare insurance is mandated by government you must add that in as well.  This is called overhead costs to the employer.  So one is not just raising the wage of the employee but also raising the overhead cost of the employee to the employer.  That fast food hamburger you thought you would eat for lunch just became too pricey.  And when enough of you no longer buy that fast food hamburger then sales drop as do profits and the need for more workers.  In fact, more minimum wage workers are not fired or otherwise laid off.  Now they are back on public assistance and personally thanking you for the lack of their employment.  This is what happens when you do not think through the consequences of your actions and political beliefs.

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