Posted By matt on March 4, 2015
So, the day after I post about crazy NY, the governor ups the ante and starts a program to raise the minimum wage. There’s even and handy fact sheet.
Now, because economics isn’t taught in US schools (I had to learn it from reading and podcasts in the last 5 years or so), let me explain some fundamentals that seem to be lost on our dear governor. I’ll do it as a story.
Alice and Bob work for BigBoxCorp, and they make the minimum wage of $8.75 an hour. Now, Alice is a rockstar, and generates $15 in value for the business, resulting in $6.25 in surplus. Bob is kind of average, and generates $10 in value, resulting in $1.25 in surplus. The minimum wage is raised to $10.50, which means that Alice’s surplus is now $4.50 in surplus, but Bob is now generating -$.50 in surplus. So, what happens? Bob gets laid off, and is replaced by either a better worker or a robot. So much for helping to raise folks out of poverty.
Meanwhile, the surplus Alice generates is reduced, which means that the company has less extra capital to use. One could naively assume this means “less profit”, but that would fail to realize that profit is what is left over *after* other expenses, such as (to name a couple of choice ones) research and expansion.
If a business has extra money they can expand into new markets, open up new branches, expand operations or otherwise get bigger, hiring more people and generating more jobs. Slow down their surplus, you slow down their growth.
Similarly, if they have extra money they can do more research, which means development of new products. Stuff like our computers, iPhones, etc. don’t come out of thin air, they come from research and development which is either funded by outside investment (which is surplus generated by one company which an investor takes and puts into another company) or by internal investment (surplus generated by a company’s existing products which are used to finance research in new products).
Now, if you assume that a company will not compromise their surplus (often called a “margin”), then they’ll have no choice to raise prices, which means that the extra $1.75 that Alice is now making suddenly doesn’t go as far because all of the things she’s going to by suddenly cost more!
The above is also true of people looking for jobs – if Carla and Dave are looking for jobs, and Carla is, say, a high school dropout and Dave is a high school graduate, and you have to pay them both the same, who are you going to hire? Based on the data given, most folks would pick Dave, due to his greater education. On the other hand, if Dave wants $10.50, but Carla will work for $9, then you may hire Carla, because you can pay her less and that compensates for her lesser education. Carla takes the job, goes to night school, gets her GED, and improves her lot in life. However, the minimum wage prices Carla out of the market, so now she’s unemployed and can’t improve her lot as she would have been able to do if she had the freedom to negotiate.
Going a bit big picture for a moment – prices and their cohort, wages, are a way for the market to signal what is of value – what is needed, where resources should be spent, etc. all wrapped up in this one thing. People command a low wage because their skills are generally either common (not specialized) or simply not in demand. You can be the world’s greatest performer of cartwheels, but if that is not a skill in demand, then it will not command a high wage. Similarly, you can be a great bagger of groceries, but so many people have that skill that you will also not command a high wage. Forcing companies to pay more than the market rate for these skills does not change this underlying reality, and eventually this will cause companies to investigate other options, such as automating those skills or eliminating them all together. Witness the proliferation of self checkout systems in grocery stores. Even though customers generally don’t like them, they’re still becoming more common, because grocery stores can’t afford to keep prices where they are while increasing their operating costs by $35/hour (assuming a $1.75 increase for a 10 lane supermarket with a checkout person and bagger on each lane) unless they have a corresponding increase in volume (which there’s nothing to suggest that they would). If you can eliminate 4 lanes by having them be a self checkout, with only 1 person watching over them, then you go from $70/hour ($8.75, the old minimum wage * 8 people (4 lanes, 2 people per lane)) to $10.50 an hour (the new minimum wage, for the attendant) + the additional overhead of the machines. As soon as that “additional overhead” is less than $59.25/hour, you get yourself some automated checkout machines and lay off 7 of your people.