Minimum Wage laws

This is another position statement.

Emphasis is added to easily find the important points.

Minimum Wage-Definition:

The definition of the Minimum Wage for this discussion is: A minimum amount per hour that the Government requires independent businesses pay to its workers. The key word is “Require”.
A business is not required to hire or retain workers but if it does so, it cannot choose to pay less than the minimum wage for services.

My Position:

I am not in favor of such laws. I do not address wage and hour laws that deal with fairness and contracts. Only the payment of compensation to employees is discussed here. The following discusses the thinking behind my position.

The practical aspects are more important than the ideological. We may address the ideology later but the practical argument is first.

The most often used reason for the minimum wage is to raise the living standard of the lowest paid most vulnerable workers. The reality is that it just does not work.

The reason for Minimum wage laws.

The basic argument for the idea is that when you set a minimum wage that an employer must pay he will either continue to employ his pre-minimum staff at the higher cost and reduce profits and/or increase prices. Therefore workers will have higher income and better lives than they would have had.

Why do Research results show that employment does not decrease?

Proponents often claim that there is no evidence that employers choose to lay off workers and that employment actually increases after the imposition of or increase to a minimum wage.

You must ask yourself how that can possibly be true. If a worker produces five dollars of value, the employer who is subject to the minimum wage requirement must fire that employee if the minimum wage is higher than five dollars unless he does not fire for sentimental reasons. If he does not fire, the employer increases his loss or decreases his profit for every work hour that passes. Most employers are rational and therefore would not continue to inflict such pain upon themselves.

The problem with the research that shows increased or unchanged employment is that it is not possible to know what employment would have otherwise been. This is worth repeating because research like this is cited in every single case supporting a minimum wage. Research showing increased or non-reduced employment after the increase to or of imposition of a minimum wage cannot be correct because it is not possible to know what would have been true if the increase or imposition had not happened.

Other factors also contribute to employment. When those other factors are producing more or the same employment than the minimum wage increase lost, the effect of minimum wage increases, are not visible. It is there nonetheless. Employers (there are always exceptions) behave rationally. They will not employ a person who produces less value that his cost.

Timing of the research

Time also interferes with the research. Employers will make changes as they are able to do so. They may even make changes in anticipation of increases of minimum wages. The before and after measurements are distorted because employers can act before or take some time to transition to alternatives after a Minimum wage increase.

A minimum wage law does not force an employer to hire or retain a worker at the minimum wage. In responding to a rate increase, the employer is perfectly free to fire any worker paid less than the new minimum wage and is certainly free to abstain from hiring new workers at the new minimum wage. Because many employers initially do, in fact choose to raise wages instead of laying people off, we lose sight of the fact that this is purely at the employer’s discretion. The stated aim of the law is only achieved at the option of the employer whose hands the law sought to tie in the first place. The employer retains the option of hiring workers or retaining workers and paying them the increased wage, or firing them and replacing them with a smaller number of more highly paid workers and/or replacing workers with technology.

Also, it is a mistake to assume that merely because a certain worker is retained under the new law, that such retention will be permanent. The sudden firing of a worker can cause disruption that outweighs the marginal lost profits from temporarily keeping a worker who produces less gross revenue than he or she is paid. Rather, the true effects of the law are best seen in the longer term. For example, where have all the theater ushers gone? They were not all fired at once but gradually disappeared as it became more expensive to hire them.


You are already seeing the effects of the recent discussions about raising the minimum to $15. Note the increase in the number self-check-out lanes at supermarkets, home improvement stores and discount stores. In some McDonald’s the cashier/order function is automated. History has other examples. It is not just that the technology makes it possible; the decision to automate is always based upon at cost/benefit analysis.

Another example was when the city of New York applied the minimum wage to elevator operators. When was the last time you saw an elevator operator?


Perhaps we should call the law a mandatory unemployment law. If the employer deems a worker’s productivity to be less than the newly required wage, and chooses not to retain that worker for purely sentimental reasons, it is mandatory that that worker be fired.

What prevents Employers from exploiting powerless workers by paying them less than they are worth?

As we mentioned earlier, employers are rational. They know that if they pay less than the value an employee produces that employee will be lured away by another employer. Competition is at work for employees as well as for goods and services. Employers do not have the power to pay employees unfairly.


Wages Only

Another problem of the laws that require a minimum wage is that only the wage portion of employee compensation is controlled but no employer can pay wages less than the minimum. In an open market, employers are freer to construct compensation combinations that attract and retain their desired employees in other ways besides just wages. When one considers the cost of employees he must add benefits and perks to the total. If he is forced to start with a base of a wage amount that already approaches the employee’s value, he is not able to add attractive benefits and perks.


Other impacts

Also importantly, the allocation of resources will be distorted and production diverted from the most efficient service to consumer demands by the costs of rearranging things. Distortions of the allocation of capital goods from higher to lower-valued uses were visible in the postwar years when increases in the minimum wage drove urban real estate owners to fire elevator operators and replace manually operated elevators with automatic elevators built, installed and serviced by skilled union laborers and to fire movie ushers and replace them with automatic lighting, again installed and serviced by union workers. Consumers suffered because the scarce capital required for this automation was prematurely and uneconomically withdrawn from higher-value uses.


Ask this

If the minimum wage law does not cause unemployment and can raise living standards at zero cost, why keep it so low? Why not have minimum wages of $50 an hour? That way, we can all be upper middle class. The answer is that it would cause mass unemployment because most people aren’t worth $50 an hour. The logic is clear. Why incur any of these unnecessary and destructive consequences of a bad policy?

The effects of mandatory wages higher than the marginal value of employees have been well known for a long time. John L. Lewis was probably the foremost labor organizer of the last century. Bitter mine strikes in 1943 and 1946 earned him the enmity of many, but Lewis persisted. As the coal industry slipped into a long, slow decline and oil replaced coal as the nation's No. 1 source of energy, Lewis fought to protect the income and employment security of miners. In 1948, the UMWA won an historic agreement establishing medical and pension benefits for miners, financed in part by a royalty on every ton of coal mined. The union also acknowledged management's right to automate and to close unprofitable operations. In return, it secured high wages and expanded benefits in the remaining mines. Lewis often admitted that he choose to have fewer people working in the mines living better than to have more people working.

Summary

We should not impose minimum wage laws because they do exactly the opposite of what is intended by its supporters. This is a clear case where government interference produces clearly negative effects. Of course if you get a wage increase due to the minimum wage law it feels good to you but it is negative overall.


The minimum wage law has these effects:

• causes unemployment among the least productive workers;
• reduces wealth, causing prices to rise (same amount of money chasing fewer goods and services causes prices to rise)
• causes replacement of workers with technology, which again, reduces wealth and causes prices to rise.
• raises the cost of living for all

 

If you wish the labour market to be free from government interference then you must also want to remove all government social spending that brings any benefit to workers in low wage jobs. After all, government social spending on the working poor is what has allowed the minimum wage to remain below the minimum acceptable wage over the past few decades.

At the lower end of the wage curve there is a point below which there will be no job takers at that wage offer. This point is not zero and is called the minimum acceptable wage. This has been observed in all economies. In economies with no effective minimum wage and little to no social welfare spending for the employed the minimum acceptable wage tends to be relatively higher than in economies with unemployment benefits and high levels of social welfare spending for the employed. Social welfare spending acts as a subsidy for low wage employment, lowering the minimum acceptable wage and with that, the entire wage curve.

The negative effects of this egregious government interference in the labour market through the combination of a below acceptable minimum wage supported with massive increases in subsidies for low wage workers has been a stagnation of the entire wage curve and the long slow decline of the middle class.

The minimum wage does create some unemployment among the least productive workers but also increases tax revenues.

Since many low wage jobs are in extremely competitive market sectors prices rise little, if at all when the minimum wage is increased. It has been estimated that an increase in the minimum wage to $12 an hour would increase the cost of a Big Mac by $0.20. A 10% increase in the price of beef would have a larger effect than that.

Rising wages always cause some employers to explore new technology to reduce labour costs. Others retreat to lower wage venues. Technological innovation does not happen except under pressure and has a huge effect on the entire economy, increasing the value added of every worker and the wealth of the entire economy.

I will give you a history lesson in that just so you can understand. In the early 1800s textile mills began to pop up in Massachusetts. The wages of the workers from those mills increased the incomes of thousands of families, increasing the things they could afford to buy, raising their standard of living, but also pushing up prices because of increased demand. Workers began to ask for and then demand that their wages keep up with their cost of living. Some mill owners just packed up and left for places with a lower standard of living so they could keep their prices low. Others stayed and with their innovations and improvements were able to lower their prices. The first textile mill left Massachusetts in 1848 in search of lower wages, the largest textile mill in the world a hundred years later was in Massachusetts.

Massachusetts has maintained its place among the highest standard of living and highest median wage places on the planet and is still a leader in manufacturing and innovation, every major tech company has a major presence. Companies in Massachusetts do not make microchips, they make the machinery that makes the microchips. They do not assemble things, they make the robots that assemble things. Other states and nations give away $Billions in subsidies to get a new microchip fab or assembly plant and Massachusetts gets a big pile of that money without giving away anything. GE is moving its world headquarters to Boston.

There is a choice, race to the top or race to the bottom. Those textile manufacturers still racing to the bottom are now moving on to Africa, the end of the line.
In a race to the top a minimum wage is irrelevant. The legacy of the textile manufacturers who decided to innovate and race to the top set Massachusetts on the path that it still follows today.