Minimum Wage (Part 2)
This is part 2 in a three-part series on increasing the minimum wage. It addresses some of the issues which complicate the process of changing the minimum wage or instituting a living wage. Part 1 addressed some of the popular opinions and arguments for and against increasing the minimum wage and part 3 concludes by outlining a plan to implement a living wage.
Why It’s Complicated
If Robert Greenwald is right that the minimum wage should be a living wage for full-time employees, why can’t we just all agree to do that? It’s a fair question. We probably could all agree to it, but implementing it is an entirely new can of worms. It involves a lot of variables and a lot of moving parts. Understanding why it is difficult requires considering the factors that drive wages, how they affect basic expenses, automation, living situations, and the role of government.
Markets and Scarcity Drive Wages
Wages are not based on the value of the work, but rather on markets and scarcity. People regularly choose whether to make purchases based on a personal analysis of cost and quality. You may choose to use a contractor, grocer, or mechanic based on cost, quality, or both. Consumers typically want the best quality for the lowest cost. However, some choose to sacrifice cost for the highest quality, others sacrifice quality for the lowest cost, and still others find the “sweet spot” where they feel like they are okay paying a certain amount for a certain level of quality. Most business owners know reasonably well how much their customers are willing to pay for an oil change, a pound of grapes, a gallon of gas, a burger, or a new roof. No matter how good the quality is, nobody is paying $1,000 for a package of ramen noodles.
Employers shop for labor under the same market conditions. They all want to hire Superman for a pair of pennies, but they also choose to compromise on one end or the other. They also know how much they are willing to pay for a particular type of labor. No matter how good a cashier is, nobody will pay $1,000 an hour for him or her to ring up groceries.
However, the way we determine how much we are willing to pay for something really comes down to supply and demand. It’s the reason chicken eggs are cheaper than caviar, why gas prices go up when oil is limited, and why clothes are cheaper on the clearance rack. High supplies decrease prices, low supplies increase them, high prices decrease demand, low prices increase it, high demand increases prices, and low demand decreases them. The same phenomena are true of labor. A job that most people are willing and able to do does not pay well because there are a lot of people in the labor pool. However, jobs that fewer people are willing or able to do (like being a neurosurgeon) are quite lucrative because there are not a lot of people in the labor pool. Like everything else in the market, high supply decreases wages and low supply increases them. Wages also attract or repel potential employees. People are more likely to want to work a job paying $100k annually than one that pays $25k. Finally, if somebody really needs a job done, they will pay a lot for it, but they are less likely to pay very much for work they can live without or do themselves.
In short, wages are determined by how much an employer is willing to pay for a job and how little an employee is willing to work for. If an employee will work for as little as $10 and an employer will pay up to $10, then a job exists. If an employee will not work for less than $12 and the employer will not pay more than $8, then no job exists. Perhaps the employer assumes the work, perhaps it is split among other employees, but if the offered wage and accepted wage do not meet up, then the job disappears. Changing the minimum wage an employee can accept does not necessarily change what the employer is willing to pay. If the job is only worth $10 to the employer and the minimum wage is $15, the job goes away.
Wages Drive Costs
Suppose that the employer really has to get the work done and there is no one else in the organization who can take on the job. At that point, the employer has to either shut down the business or hire someone at a greater cost than they are willing to pay. Often, the unwillingness to pay above a certain wage is not a matter of greed, but of budget constraints. The business has to cover its basic operating costs before it can increase payroll, turn a profit, or do anything else. If the budget does not include enough money to hire someone, but it’s a matter of life or death for the business, then what? The business will have to find the money somewhere in its operating costs or pass along the increased payroll costs to its customers. A federal minimum wage increase means that operating costs will increase across the country as suppliers, supply chains, and utility companies increase their wages to comply. So the most likely outcome is that the business will pass along the expense to its customers in the form of higher prices.
There is, of course, another way to keep prices down and get the work done. Automation is the way of the future. The machines don’t need overtime pay, health benefits, lunch breaks, or Christmas bonuses. They never call in sick, they’re never late, and they never have bad attitudes. Many businesses have bought into this model and we now have drones, conveyor belts, and self checkouts throughout the business world. These certainly help keep costs low, but they do so at the expense of a human job. Automation will eventually happen whether or not we increase the minimum wage, but doubling the minimum wage will certainly speed up the process. The silver lining is that record unemployment alone is better than record unemployment and a massive cost of living increase, but I would prefer to avoid both and make a gradual shift to automation that doesn’t hurt so many people so badly.
The Downward Spiral
Then again, perhaps those higher prices are for the best. After all, they are the literal price we pay to ensure that those earning the minimum wage live with dignity, right? That is unless the increased price of essential goods and services means that the new minimum wage again fails to meet earners’ basic living expenses. It would be bad to force record unemployment and a massive cost of living increase for no real gain. A $15 an hour minimum wage may be helpful when gas is $2 a gallon, but once it skyrockets to $10 a gallon, that life of dignity evaporates pretty quickly. And I’m sure the big spenders in Congress are salivating at the thought of how much new revenue they will get to burn through as a result of doubling the minimum wage without adjusting the tax brackets. The reality is that our economy is very interconnected. No matter the minimum wage, in a free market, the cost of essential goods and services will always rise in response. As it exists now, the minimum wage will rarely, if ever, be a “living wage,” and will never be sufficient to afford the American dream. But it doesn’t have to be this way.
Continue reading with part 3 to learn about my suggested solution to this problem.