Monday, January 27, 2014

We should raise the minimum wage

Minimum Wage

Every few years new pressure is put on lawmakers to enact legislation to force a “living wage” increase.  Of course, the people who push such ideas have the best of intentions – higher standards of living for those at the bottom of the economic totem pole is hardly something that would be seen as objectionable by anyone with a heart or a conscience.  So why would anyone possibly object to an increase?  As it turns out, there are many reasons.  As with most governmental interference in the free marketplace, Newton's third law of motion is alive and well.  Every action produces an equal and opposite reaction.  Said another way,  "When new winners are created through government fiat, so are new losers."

Who benefits the most and who suffers the most from an increase to minimum wage?  Of course the obvious answer to who benefits the most would be the individuals who are getting a raise.  But many businesses that hire minimum wage workers already run on exceptionally low, and potentially even negative margins.  It is not a given that they would be able to absorb the pay increase and the additional tax burden that a hike in pay would entail.  Who gets hit the hardest?  Primarily the small businessman who doesn’t have deep pockets.  The entrepreneur who doesn’t have extensive capital to draw from.  Many of the smaller and marginal businesses will be the first to fail.  Initially, these small business losers do provide winners…to the mega chain stores with deep pockets who now have fewer competitors and can grab the customers.  Big business wins and the average American slowly loses his ability to go from rags to riches.

Let’s face it.  There are some people who work better than others.  Some people deserve their full pay and some do not.  This is why a flexible pay scale can come in handy.  If a person is a great worker and becomes indispensable to the company, that person would normally be increasingly rewarded with pay raises and perks to keep them from looking elsewhere for work.  But what if they just want someone to sweep the parking lot and keep it looking neat?  That’s an unskilled job that could be filled by any number of applicants.  Why does it deserve the same pay rate as someone who is doing a substantially harder or more complicated job?  Higher minimum wages cause the lower-qualified candidates to be overlooked because they do not generate as much cash for the company.  It is a well-documented fact that each time the minimum wage increases, the young and unskilled labor unemployment rate rises.  It is also why the government has specifically had to exempt certain employers from paying minimum wage to mentally handicapped workers (who incidentally, provide a much needed service where they are given the chance to work at reduced rates).

Along these same lines, companies that are required to pay more for labor often seek out more capital efficient ways to get work done.  This is called “productivity gains” and is generally considered to be a positive thing on Wall Street.  It does, however, have a dark side.  Every computer that takes over a task releases some living, breathing person who used to get paid to do that task.  Consider the telephone receptionist as an example.  How many frustrating calls have you made to a company trying to obtain customer service only to get stuck in an endless techno-loop conversation with a computer who would not let you speak to someone who could actually help you solve your problem?  Labor is expensive, but computers work cheap...even if they can't quite get the job done right.

Another thing that people often neglect to consider is that businesses exist to make a profit because they must take risks to make that profit.  If the business plan is not effectively written or effectively implemented, the business owners may stand to lose significant amounts of money.  Therefore, before they risk their capital, they will want to be reasonably assured that it will be able to be returned to them at a profit. For this reason, all effective businesses build profit margins into their expense calculations – one of which is labor expense.  If labor costs increase, the business owner will often have no choice but to increase the retail costs to consumers.  Most end consumers are familiar with this and recognize this phenomenon as “inflation”.  It is the basic reason why something that used to cost $5 a few years ago might cost $10 today.  And while there are a number of other factors that play into the creation of inflation, labor costs and the need to maintain profit margins are certainly a large part of those factors.

There’s an old adage that says, “If you want more of something, subsidize it.  If you want less of it, tax it.”  In other words, classical behavioral science will tell you to reward behaviors your want to see more of and punish those that you do not want to see.  The minimum wage destroys the lower tier worker by offering the same pay for more desirable jobs.  Who would want to clean out a sewer, for instance, for the same pay that they can get flipping burgers at a fast food restaurant?  Or do air conditioning work on a 150 degree rooftop for the same rate that they could be a janitor in a high rise building?  Distortions are created in the marketplace that establish equal rewards for unequal jobs.  Many jobs that would have been filled in a free marketplace go unfilled when wages are artificially set.  This creates an imbalance which is eventually filled by the unregulated black market.

In my opinion, one of the reasons why illegal immigration is so high in America is because of the minimum wage (though there are other reasons, for sure).  Let’s assume the desires of the current minimum wage lobby groups becomes law and farmers are soon required to pay strawberry pickers $15 an hour to pick strawberries.  The cost of strawberries would be prohibitively high (if they could find workers at all).  This high price for the berries would cause demand to drop.  That is, until someone found a way to hire people who would happily perform this unskilled task for $4 an hour.  But since minimum wage laws prohibit that, the hiring would have to be undocumented, black market labor.  Such is the draw for illegal immigrants.  They may be accustomed to living on $2 an hour wages if they can find a job at all – so a $4 an hour job might be a big step up for them.  They agree to work for cash (no paper trail) and the farmer has a way to control his costs so he can sell his strawberries for a reasonable price and make a profit.  The businesses make decent money and don’t have to provide costly benefits for their employees.  The flip side, though, is that the employees do not have any governmental safety advocacy or recourse against unfair business practices – because they know they could be subject to deportation if they are found to be working or living illegally in the country.  Besides being potentially unsafe and unfair to the worker, this arrangement allows millions of workers and employers to avoid paying any employment related taxes which strains the social safety-net infrastructure by shifting their tax burden onto those who are working legally.

Additionally, when illegals are hired, those who live and try to work legally must compete for work in a tighter job market.  In order to stay off of the government dole, they must work.  But if they lack certain marketable skills, they may not be able to find work.  In a free marketplace, this would cause some people to agree to work for less money in an effort to make themselves more desirable to prospective employers.  Alas; it would be illegal for them to do so.  And if the employment arrangement is discovered, both the job of the individual and the livelihood of the one who hired him could become endangered.  The minimum wage interferes with an individual’s right to be able to freely contract with another individual for exchange of goods and services.  In some cases, it even prevents charitable organizations from allowing the recipients of their efforts the dignity of being able to work for their assistance without cumbersome regulations and bureaucratic red tape to cut through.  It seems that the government would rather have people living on the street than earning their keep by working for a sub-minimum wage.

Tossing all thought about illegal immigration to the wayside, it is important to realize that corporations around the world are always looking to find ways to make a cheaper product to get an edge on their competition.  Most larger companies will not do this illegally because they do not have to.  They can simply outsource jobs to places where the labor is cheaper and the regulations are less burdensome.  This is why inflation has remained relatively benign over the past few decades even though the money supply has increased dramatically and the minimum wage has more than tripled in some states.  Corporations simply move the jobs to Asia, where the workers will do the same job for 1/5th of the price.  A hike in minimum wage simply will make outsourcing even more appealing.  It's big business's legal answer to illegal immigration. The higher we price our starting wage, the more world businesses will simply thumb their noses at our labor force in favor of cheaper labor elsewhere.  What we mean to help the people on the bottom rung will actually end up causing more pain as unemployment rises.

So while there certainly are winners in a minimum wage increase, we must never forget that there are also losers. Governmental generosity always has casualties, and frequently those casualties appear as “friendly fire” hurting the ones whom they are supposed to be helping.  All people of conscience want to see their fellow man lifted up and it often seems like the easiest and cleanest way to do that is by a legislative pen stroke.  Just remember, ideas have consequences.  And they are not always the consequences that we might want to see.

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