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Beyond the aforementioned examples, the place where this whole labor-pricing issue is most prominent (and most hotly debated) is undoubtedly the minimum wage. As a theoretical concept, the idea has a lot of intuitive appeal – not to mention moral appeal. Certainly every worker deserves some baseline level of financial security; so why not prohibit companies from paying them anything less than a livable wage (however we might define that)? Unfortunately, though, there are a few issues. For one thing, as commenter guy_incognito784 points out, defining what exactly constitutes a livable wage can be tricky:
A livable wage isn’t a static number, it’s variable. It’s contingent on [marital] status, number of kids, and location. Since you can’t base pay on the first two variables (that’d be wage discrimination and therefore illegal), minimum wage is a fairly inefficient way to combat this issue.
More importantly though, the minimum wage can make it more difficult for the least productive workers to successfully get and keep a job in the first place, by essentially pricing them out of the labor market. As Scott-H-Young explains:
What happens when the market clearing wage for [a particular] type of labor isn’t livable? Well, one thing you could do would be to make it illegal to charge less than a fair wage. So if the current wage is $7/hour, you could make it illegal to charge less than $15/hour.
The objection many economists have to this argument is that supply and demand haven’t changed. The companies who were only willing to employ people for $7/hour have now left the market (because they now lose money at $15/hour).
This means two things:
- Everyone who had a job which was already worth $15+ to a company will suddenly get a higher wage. Yay!
- Everyone who, previously, had the opportunity to work for a position that was worth only $7-$15 is now unemployed. Boo!
If you support a minimum wage, you need to essentially state that the benefit of #1 is greater than the disadvantage of #2.
Perhaps, you believe, that #2 isn’t a big deal because most positions were already worth $15+, but because people were so desperate for jobs the market clearing wage was shifted in employers’ favor.
This may be the case, but it may also be the case that many companies’ prices at which they’ll no longer participate in the market really are lower. And many market-advocates suggest that having a $7/hour job is better than having no job at all.
The minimum wage law requires employers to discriminate against persons with low skills. No one describes it that way, but that is in fact what it is. Take a poorly educated teenager with little skill whose services are worth, say, only $2.00 an hour [in 1979 dollars – the equivalent of about $8.50 in 2023]. He or she might be eager to work for that wage in order to acquire greater skills that would permit a better job. The law says that such a person may be hired only if the employer is willing to pay him or her (in 1979) $2.90 an hour. Unless an employer is willing to add 90 cents in charity to the $2.00 that the person’s services are worth, the teenager will not be employed. It has always been a mystery to us why a young person is better off unemployed from a job that would pay $2.90 an hour than employed at a job that does pay $2.00 an hour.
Commenter ChicagoBoy2011 sums it up this way:
A minimum wage law is not, nor has ever been, a guarantee to make a certain amount of money. A minimum wage law has ALWAYS been a prohibition against making less. Ask yourself [whose] labor suffers the most when we introduce this sort of friction in the labor market and you will be well on your way to truly understanding the impact of the minimum wage on the economy.
Or as Stephanie Kelton puts it:
Right now, the minimum wage is zero. Yes, the federal minimum wage is $7.25 per hour, but as the economist Hyman Minsky often observed, the minimum wage available to the unemployed is $0. You have to be employed to earn at least the federal minimum wage, and millions of unemployed Americans don’t have access to that wage.
Of course, none of this is really an issue if the minimum wage is lower than whatever the market wage for the lowest productivity workers already is. If we had a minimum wage of just $1 per hour, for instance, we wouldn’t expect any kind of significant unemployment problems to arise as a result, since workers would be earning more than that even without the minimum wage law; so the existence of the minimum wage would basically be a moot point. The same would be true if we had a minimum wage that was a fair bit higher, but market wages for the least productive workers were higher still – as in the aforementioned case of Denmark, where even the fast food workers make $20 an hour, so no minimum wage law is even considered necessary. And in fact, even here in the US, where low-end market wages aren’t quite so high, productivity has still risen enough in recent years that about 99% of workers are currently making more than the federal minimum wage of $7.25, while unemployment remains low. So as things currently stand, the minimum wage of $7.25 doesn’t seem to be doing any real harm (even if it’s not really creating much benefit either). Where major problems would arise, however, would be if we tried to set the minimum wage so high that it did exceed the productivity level of a significant share of the workforce. And this is something that I think even the most ardent minimum wage supporters intuitively understand at some level; after all, even they would grant that setting a really high minimum wage, like $1,000 per hour or something, wouldn’t be feasible. They might not be able to articulate why exactly, but the answer is the same basic one we keep coming back to: If the price of someone’s labor exceeds the value of what they produce, employers simply won’t hire them in the first place. Tim Worstall talks about how this can happen even with a more modest minimum wage increase if the affected companies are already paying their employees wages that are close to their productivity levels:
Apple Makes $407,000 Profit Per Employee, Walmart And Retail, $6,300: Who’s The Exploiter?
One of the great puzzles of our times is the fury and venom unleashed when we discuss the wages that Walmart pays to its employees. That those wages aren’t very high is true: but then working in retail isn’t a job that adds a great deal of value. And it’s value added in any particular job that determines what that job is going to pay. A job where the pay is higher than the value added is simply a job that isn’t going to exist. And we can also take a rather more Marxist view of this and point out that according to the standard interpretation of Karl Marx’s work Walmart treats its employees vastly better than Apple does. The reason being those numbers in that headline.
It’s entirely true that we don’t normally look to Karl Marx these days for handy hints on how to run an economy or country. Something that might not be quite so true of the ivory towers of academe, to be sure. But that Marxist point is that the less of the value add that is being expropriated by the capitalists then the better the workers are being treated: less of their labour is being stolen from them. Thus the employer that earns a lower profit margin per employee is a better employer: making big box retail one of the best employers in the country therefore. Yes, of course, it’s an odd way of looking at things but then if you’re going to follow economic idiocy like Marxism then you’re going to end up in some very strange places.
All of this comes from a lovely piece in the WSJ by Andy Pudzer. He’s the CEO of CKE Restaurants (Carl Jr’s, Hardee’s etc) and so is obviously talking his own book. But then we regularly pay attention to newspaper pieces from politicians telling us all how they must have more money of ours to lavish upon their desires, to union leaders telling us that it’s very important that union members get more, even to famous economists insisting that we should all vote for their favoured party. Some of these arguments are even valid (although not those from politicians, obviously) but it is the content of the argument that we must consider, not the source (except with politicians, of course).
His point is really rather simple. Big box retail doesn’t in fact make much profit from each employee it employs:
The situation is far different for America’s retail businesses, where a minimum-wage increase would be most deleterious. Combine every retailer, restaurant, supermarket and retail pharmacy company in the Fortune 500 as a proxy for the retail industry. That is more than 20 companies, including Wal-Mart, Target, McDonald’s, Starbucks and Walgreens.
The total adds up to $36.4 billion in annual profit (about $3 billion less profit than Apple alone), 5.8 million employees (about 60 times as many as Apple employs) and annual profit per employee of $6,300 (1.5% of Apple’s profit per employee).
That amount, that $6,300, is the maximum theoretical possible that retail wages can rise by, without either causing price rises or unemployment. That’s if the owners of those businesses decide to run them as charities, never make a profit. Simply because, with the wages currently being paid, that’s all there is over and above that amount currently being paid out in wages. There just is no more money. And that causes a problem when we come to consider some of the wage proposals out there:
At $12 an hour, the employee would make $7,410 more a year resulting in a loss per employee of $1,110, eliminating the employee’s entire contribution to the company’s success. At $15 an hour, the employee would make $14,290 more a year, resulting in a loss per employee of $7,990.
OK, hands up everyone who thinks that a sensible, heck, even an awake, capitalist or businessman would run a business in order to lose $8,000 a year on everyone they employ? Quite, it’s not going to happen, is it?
So, imagine the Fight for $15 wins and everyone gets that $15 minimum [in 2015 dollars – equivalent to about $19.50 in 2023] plus a union. What is then going to happen? Yes, it might be that those retailers reduce their profit margins a bit but remember what Adam Smith told us about business sectors that make below average profits: less capital gets invested in the sector, the sector shrinks and jobs are lost. Or, of course, they could radically change their labour policy. People like Walmart could move from their current extensive use of low pay and low skill labour to a more intensive use of higher skill and higher paid labour, like, say, Costco. That would mean firing about half their employees: Costco does use about half the labour per unit of sales as Walmart.
Or thirdly they could raise their prices. At which point two things: the major consumers of low wage labour are in fact other low wage earners. Walmart’s target market is not, as we know, those Apple engineers. Nor, really, is Apple’s target market those minimum wage earners. It is generally highly paid people who purchase things made by other highly paid people: lowly paid by those lowly paid. So, price rises in that sector aimed at the lowly paid are going to harm…..yes, the lowly paid. So that’s not a great solution either. And then of course there’s substitution. I’m pretty sure I’ve been told you can buy your groceries at Amazon these days. And that’s a much lower labour content structure of retailing than having stores all around the country. So, if wages rise in walk in stores because of the minimum wage rise then we would expect to see a price difference opening up between those physical stores and online ones. Meaning, given that online uses less labour overall, as people switch to the online suppliers fewer jobs in the sector.
Whichever way around we play this a minimum wage rise is simply going to lead to job losses.
Yes, yes, I am aware of the macroeconomic argument. Poorer people spend all of their wages so if they get more then that’s a boost to aggregate demand. And the effect is indeed there: but it’s not large enough. Michael Reich, one of the boosters of the higher minimum wage, proved it in his report to LA City Council. He assumed that all of the extra pay would be extra demand (it wouldn’t be, perhaps the addition to demand would be 15% of the extra pay) and even then the $15 wage would lead to job losses in LA City. That aggregate demand argument is one of those things that is common in economics: it’s true, but not true enough to be important.
So, given that we don’t want to make people unemployed we should not, as a matter of public policy, raise the minimum wage to $15 an hour, should we?
Which brings us back to Marx. We know why Apple pays very high wages to its engineers: it wants the very best it can find because it can make very large indeed profits out of hiring each and every one of them. It’s entirely usual that businesses, or even business sectors, that have high profit margins pay good wages, those that have low pay less. This is of course one of the reasons why inequality has been rising in recent decades: some sectors of the economy have been roaring ahead, others not so much. Yes, there’s that 0.1% roaring away from the rest of us but at least part (according to some, a lot) of the story is that productivity is rising swiftly in certain sectors and companies and not in most. Pay reflecting that more local, rather than in general and average across the economy, productivity.
But Marx: to him, and his followers, profit is the sweat ripped untimely from the brow of the oppressed worker. The more of the value added that the capitalist is appropriating then the more that the worker is being expropriated. Which means that, given that Apple has the highest margins per worker in the US economy, Apple is the most oppressive employer in the country in that Marxist sense. Which is, obviously, mad, but then that’s what Marxist economics leads you to, such insanity.
All of which leads to an observation. Our underlying point here is obvious, the retail sector simply doesn’t have enough money to pay that $15 an hour. Therefore let’s not do it because we don’t want to make people unemployed. But our associated observation is that the American left is at least Marxian, informed by Marx’s analysis, even if not full on Marxist. And yet they complain and whine bitterly about retail, Walmart and the rest, and delight in the coolness of the products from Apple. Yet Walmart extracts less of that surplus value from its labour force than Apple does: meaning that in that Marxist sense, Walmart is a better employer than Apple. This despite the fact that Apple has actually been convicted of trying a cartel to restrict the wages of its workers, not something that Walmart has even been accused of.
Odd really, isn’t it? I dunno, maybe it’s just that it’s more fashionable to complain about those stores that no self respecting progressive would ever allow to sully their town rather than follow through on the logic of their own beliefs.
Worstall is being overly snarky here, but his central point – that firms with narrower profit margins wouldn’t have enough cushion to absorb a significant increase in the minimum wage, which would lead to job losses – is still valid. Remember, workers must always earn a wage that falls somewhere in the range between “the minimum amount that would make that job preferable to whatever other alternatives are available to them” and “the full amount of value that the work creates for the employer.” So if the wage for a particular job is artificially set at a level that exceeds the upper bound of that range, then that job will simply cease to exist.
Now, having said all that, it’s also true that there is an interesting gray area within that range where it might be possible to increase workers’ wages beyond the bare minimum they’d be willing to accept in a competitive labor market, while still not exceeding the full value of what they produce. So for instance, if you had workers who were producing (say) $20/hr of value, but were only earning a $10/hr wage, there could be some legitimate room for higher wages there. As mentioned earlier, this is the kind of thing that can happen if the labor pool for a particular job is so large that employers don’t really have to worry about competing with each other for qualified workers, since there are plenty to go around. It can also happen if there’s only one employer that’s hiring, so they enjoy monopsony control over the labor market (a monopsony is kind of like a reverse monopoly; instead of only having one seller of a particular product, there’s only one buyer – in this case, a buyer of labor). Imagine the one big employer in a company town, basically. Under these conditions, it might in fact be possible to mandate that the $10/hr workers be paid $15/hr instead, while still allowing them to keep their jobs, since even at $15/hr they’d still be creating positive value for their employers. The problem, though, is that if this were accomplished via an economy-wide minimum wage law, these particular employers wouldn’t be the only ones affected. The minimum wage is a blunt instrument – it affects every employer – so firms that didn’t enjoy monopsony power (or otherwise unusually lopsided bargaining power), and whose margins were already thin, would have to deal with the increased labor costs too, and wouldn’t be able to absorb them as easily. Unlike those other employers whose surplus profits could be turned into higher wages for their workers, these less profitable firms wouldn’t have any such wiggle room. And this would lead to the kind of negative ripple effects mentioned by Worstall above, with the firms having to lay off workers, cut production, and/or increase their prices to try and maintain profitability. If they couldn’t find any way to keep their profits up, it would make it less likely that anyone would want to invest in them in the first place, which would mean fewer of them would be around to hire any workers at all. (And in fact, even the companies that were getting a lot of excess value out of their workers might still run into similar issues if those savings on labor costs were the only thing making up for the larger costs they were incurring on all the other aspects of their operation (like machinery and so on), such that having to pay their workers more would cut into their profits so much that they could no longer attract investment, even if each worker was still creating positive value for them overall.) So the end result would be job losses for workers and/or higher prices for customers.
A better alternative to imposing an economy-wide minimum wage, then, might be to simply identify exactly which firms were earning excess profits due to their monopsony hiring power or whatever, and pass targeted regulations aimed specifically at those firms’ business practices – or alternatively, to just tax their owners after the fact and redistribute the revenue back to the workers. Better yet, we could try to address the problem at its root, by improving the ratio of available jobs to qualified workers who can fill them. So if there’s a surplus of job-seekers but only a few employers to hire them (either because the workers lack the qualifications and skills to find anything better, or because there’s a monopsony issue and only a few employers actually exist), we can make it easier for more employers to enter the market and bid up those workers’ wages; we can give the workers more training and education to make them qualified for more jobs; or if all else fails, and if there are legitimate public works projects that need to be done, we can just have the government hire workers itself until they can find something better (more on this in the next post). Again, the most important thing we can do to improve workers’ prospects is to increase the number and quality of employment options available to them – whether it be by enabling more employers to enter the market and compete for their services, or by improving their productivity so those services are in higher demand by more employers. It’s a point we keep coming back to, but there’s a reason for that; if workers are sufficiently productive – if they’re highly skilled, well-trained, well-educated, etc. – this can empower them to command decent wages for themselves. And if enough of them are able to do so, this can tighten up the labor market for low-income work and thereby pull up wage levels for the less productive workers too – until ideally, the imperfect solution of the minimum wage is no longer even considered necessary at all.
Here’s Hazlitt’s summary of the whole issue:
We have already seen some of the harmful results of arbitrary governmental efforts to raise the price of favored commodities. The same sort of harmful results follow efforts to raise wages through minimum wage laws. This ought not to be surprising, for a wage is, in fact, a price. It is unfortunate for clarity of economic thinking that the price of labor’s services should have received an entirely different name from other prices. This has prevented most people from recognizing that the same principles govern both.
Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.
Yet it ought to be clear that a minimum wage law is, at best, a limited weapon for combating the evil of low wages, and that the possible good to be achieved by such a law can exceed the possible harm only in proportion as its aims are modest. The more ambitious such a law is, the larger the number of workers it attempts to cover, and the more it attempts to raise their wages, the more certain are its harmful effects to exceed any possible good effects.
The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.
The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. This is likely to happen only in rare and special circumstances or localities where competitive forces do not operate freely or adequately; but nearly all these special cases could be remedied just as effectively, more flexibly and with far less potential harm, by unionization.
It may be thought that if the law forces the payment of a higher wage in a given industry, that industry can then charge higher prices for its product, so that the burden of paying the higher wage is merely shifted to consumers. Such shifts, however, are not easily made, nor are the consequences of artificial wage-raising so easily escaped. A higher price for the product may not be possible: it may merely drive consumers to the equivalent imported products or to some substitute. Or, if consumers continue to buy the product of the industry in which wages have been raised, the higher price will cause them to buy less of it. While some workers in the industry may be benefited from the higher wage, therefore, others will be thrown out of employment altogether. On the other hand, if the price of the product is not raised, marginal producers in the industry will be driven out of business; so that reduced production and consequent unemployment will merely be brought about in another way.
When such consequences are pointed out, there are those who reply: “Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether.” But this brave pronouncement overlooks the realities. It overlooks, first of all, that consumers will suffer the loss of that product. It forgets, in the second place, that it is merely condemning the people who worked in that industry to unemployment. And it ignores, finally, that bad as were the wages paid in the X industry, they were the best among all the alternatives that seemed open to the workers in that industry; otherwise the workers would have gone into another. If, therefore, the X industry is driven out of existence by a minimum wage law, then the workers previously employed in that industry will be forced to turn to alternative courses that seemed less attractive to them in the first place. Their competition for jobs will drive down the pay offered even in these alternative occupations. There is no escape from the conclusion that the minimum wage will increase unemployment.
[…]
This is perhaps as good a place as any to point out that what distinguishes many reformers from those who cannot accept their proposals is not their greater philanthropy, but their greater impatience. The question is not whether we wish to see everybody as well off as possible. Among men of good will such an aim can be taken for granted. The real question concerns the proper means of achieving it. And in trying to answer this we must never lose sight of a few elementary truisms. We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces.
The best way to raise wages, therefore, is to raise marginal labor productivity. This can be done by many methods: by an increase in capital accumulation — i.e., by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of employers; by more industriousness and efficiency on the part of workers; by better education and training. The more the individual worker produces, the more he increases the wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid. Real wages come out of production, not out of government decrees.
Finally, here’s Taylor with some concluding thoughts on the subject:
The public policy surrounding the minimum wage […] is complicated because, like everything else, it involves trade-offs—trade-offs that can make both advocates and opponents of a higher minimum wage uncomfortable.
Here’s an insight for opponents of a higher minimum wage to mull over: Let’s say a 20 percent rise in the minimum wage leads to 4 percent fewer jobs for low-skilled workers (as some of the evidence suggests). But this also implies that a higher minimum wage leads to a pay raise for 96 percent of low-skilled workers. Many people in low-skill jobs don’t have full-time, year-round jobs. So perhaps these workers work 4 percent fewer hours in a year, but they get 20 percent higher pay for the hours they do work. In this scenario, even if the minimum wage reduces the number of jobs or the number of hours available, raising it could still make the vast majority of low-skilled workers better off, as they’d work fewer hours at a higher wage.
There’s another side to the argument, however. The short-term costs to an individual of not being able to find a job are quite large, while the benefits of slightly higher wages are (relatively speaking) somewhat smaller, so the costs to the few who can’t find jobs because of a higher minimum wage may be in some sense more severe than the smaller benefits to individuals who are paid more. Those costs of higher unemployment are also unlikely to be spread evenly across the economy; instead, they are likely to be concentrated in communities that are already economically disadvantaged. Also, low-skill jobs are often entry-level jobs. If low-skill jobs become less available, the bottom rung on the employment ladder becomes less available to low-skilled workers. Thus, higher minimum wages might offer modest gains to the substantial number of low-skilled workers who get jobs, but impose substantial economic injury on those who can’t.
There are alternatives to price floors, and economists often tend to favor such alternatives because they work with the forces of supply and demand. For example, if a government wants to boost wages for low-skilled workers, it could invest in skills-training programs. This would enable some of those workers to move into more skills-driven (and better paying) positions and would lower the supply of low-skilled labor, driving up their wages as well. The government could subsidize firms that hire low-skilled workers, enabling the firms to pay them a higher wage. Or it could subsidize the wages of low-skilled workers directly through programs such as the Earned Income Tax Credit, which provides a tax break to workers whose income is below a certain threshold. This policy increases the workers’ net income without placing any financial burden on the employers.
Whichever policy (or policies) we prefer, it’s encouraging that there are so many different angles from which we might tackle the problem of low wages. The minimum wage, unfortunately, seems to be one of the more flawed of these choices – but acknowledging this doesn’t mean caring any less about the lowest-income workers, nor does it mean concluding that we have no other choice but to just leave them to fend for themselves. If anything, caring about these workers should make us want to know exactly which solutions are most likely to help (and are least likely to have negative side effects). And it’s not like we want to rule anything out completely, either; after all, it’s always possible that imposing a minimum wage really might turn out to be a workable solution in certain very specific situations. The important thing is just to be aware that such situations are not universal. Other options for improving workers’ well-being do exist – options that don’t have the same drawbacks that the minimum wage does – and for that reason, they’re the ones we should consider first, rather than just reflexively calling for a higher minimum wage any time the topic of worker pay comes up.
N.W. Rains 