This post is in response to a continuing Facebook discussion regarding the minimum wage, initiated by my old friend Mitch Kaufman, a PhD candidate at the University of Washington in Seattle. Mitch was always the smartest person I knew, even when he agreed with me. Over the last few years, he has gone from a left liberal to a right libertarian, putting us at odds, which has made him an even more valuable resource for gut checking my beliefs. I always prefer to have the most intelligent and informed debate opponents possible, and Mitch never fails to provide. The discussion evolved into something I could not respond to (for length reasons) within Facebook, and I hope people will follow it out onto the web.
Sadly, the article that Mitch referenced to begin this debate is not nearly as intellectually honest as he is. It has at its heart a straw man fallacy that is pretty obvious, and that I am sure Mitch noticed. As I will discuss below, no one is advocating a minimum wage of even close to a half million dollars per year, in any field or in any profession. Minimum wages are in no way intended to make people rich, or even particularly comfortable. A minimum wage of this magnitude would of course create all sorts of distortions, and would be truly ludicrous policy. The purpose of this post is to articulate a coherent policy argument for the minimum wage, and I hope that Mitch chooses to respond and articulate a coherent policy argument against, rather than the piece to which he originally linked. Any response I get from Mitch will be posted on this blog in full.
For the purpose of our analysis, lets create a hypothetical business stripped down to nothing but the basics, a business in the business of making everyone's favorite hypothetical product: the widget. The organization has several sub-groups within it all working together (and at times, against one another) to produce the widget. Firstly, you have the expenses of the business: the widget components, electricity, heating oil, capital expenses, taxes, everything with the exception of wages that goes into the liabilities section of the ledger. Let's call this "A." Next, you have the employees, who have to be making, at a minimum, a subsistence wage, and not a dime more, lest they either move to another job or starve to death. They shall be "B." Next, you have the business owner, who must also make a subsistence wage. The difference with this person, however, is that the subsistence wage isn't enough. By taking responsibility of a business, they are accepting a larger share of risk than anyone else (though with today's creative liability shields and accounting business, this "risk" ain't quite what it used to be), and have to be compensated accordingly, what we can call a risk premium; otherwise, they could just get a subsistence wage at someone else's business and not have the headaches of ownership. The business owner shall henceforth be known as "C."
Finally, you have the aggregate of sales of widgets, otherwise known as income. For the purposes of this stripped down business, widgets are priced at the absolute minimum that can sustain the business, and we shall call sales profit in the aggregate "D." Therefore, we can construct an equation, where widget sales profits (D) must be no less than the expenses (A), plus the subsistence wages (B), plus the owner's subsistence and risk premium (C). When D - (A+B+C) = 0, we have a successful business that is self-sustaining (excepting fluctuations in the demand for widgets) and has no fat on it at all. If iPads and Pontiacs were priced this way, you'd be able to get the former for about a hundred dollars, and the latter new for perhaps eight or nine thousand. Sadly, this is not what they cost.
The reason for this is obvious; the bare minimum sales price of a widget isn't the same thing as the going rate. If I need a widget, my options are to either make one or buy one. Depending on the manufacturing process of widgetry, making one may or may not be feasible. What it will almost always be, to more or less of a degree depending, is a pain in the ass. People are willing to pay a certain "pain-in-the-ass" premium to not have to manufacture their own widgets. In many industries, you start with "D," then double it, and your sales won't drop off dramatically, if at all. Sometimes, you can only increase by a few percentage points before you start to see a significant drop in sales. It all depends on things such as availability, difficulty in fabrication, capital expense, the elasticity of widget demand, seasonal considerations, etc.
Where the minimum wage comes in to play is in the distribution of this income in excess of the bare minimum needed for sustainability. The thinking is (and this plays out historically) that the business owner will largely pocket the extra, whether it is going directly into C, or he is using it to expand the business by putting it into A. He may even lower the price (D) in an attempt to increase the volume of sales at the expense of profitability of any individual sale. The last place, generally, that he will look to put this money is into B. The reason here is pretty obvious: putting the money anywhere else nets him a benefit. If he puts it into expenses, he can pay down loan principal or get a more efficient boiler, reducing the total of A. He can plow it into C and buy a yacht. If he puts it into D, he can corner the market. If he puts it into B and increases the wages he pays his employees, he still gets the same amount of productivity out of them. There is no benefit, at least not to him.
Actually, it's even worse than that. If there is an economic downturn, he can always lower D to compensate. He can also lower C without affecting anyone except for himself. He can lower A as well by delaying purchases or putting off expansions. What he can't easily do is lower B once he has raised it. This is because wages have a special property, in that they are what economists refer to as "sticky." The idea is that people who get paid more will spend more and increase their financial liabilities. Reducing their pay is difficult, because their liabilities don't change. You get a much worse rap for cutting wages than you do for never raising them in the first place. The bottom line is that there is little economic incentive to raise wages above subsistence from the perspective of a business owner. And throughout most of American and world history, there were little wages available for simple labor above a subsistence level.
It is correct to say that the institution of a minimum wage was a moral decision, not an economic one. We, as a people, decided that working forty or sixty or eighty hours per week entitled you to more than merely not starving. We decided that if a person made a decision to work, that they should at least receive a "living wage," a wage that would empower them to have a decent, if spartan life, and to afford their offspring at least the possibility of societal advancement. So we legislated and required businesses to provide this kind of living, as opposed to subsistence, at a bare minimum. All we did was set a non-subsistence floor to B. To the extent that an excess of D is available, the business owner can still plow it into A or C or back into D. We didn't radically alter the market, merely shift one parameter upwards. Really, all we did was make "subsistence" more expensive. Artificially raising the price of food would have the same effect, as far as the business was concerned. We haven't eliminated the pool of excess D, nor have we dictated how the business owner shall spend it. We've merely drained it ever so slightly.
This can be seen in the actual existence of the minimum wage, which even at its highest U.S. level (Washington State, interestingly), is less than half of the median male wage. The difference between the goofy example of an economist minimum wage that the article presents versus the reality is that there could be a dumb economist who, upon hearing that his salary had risen to $500,000 per year, would be ecstatic. No one hears that they will be making the minimum wage and erupts into applause. Minimum wages are set low for a reason. If someone were to propose raising the Federal minimum wage to $30.00 per hour, I would be horrified, for all the reasons that the article provides and Mitch outlines. Fortunately, no one I know of is proposing that.
I am sure that Mitch would (will?) respond to this all by saying that a truly free market would provide this increase organically, as businesses competing for workers would drive the wages up from subsistence. And in a totally free market unencumbered by non-economic forces, this would probably be true. This explains why wages tend to be higher in areas of high wage competition (read: cities) and lower in comparatively less competitive (read: rural) areas.
The minimum wage tends to do most of its heavy lifting in places like one company towns where wage competition is virtually non-existent. Think of a meatpacking plant in rural Iowa, or for the best example, a mining town in the mountains of West Virginia. Employees at these plants or mines have a somewhat unique experience. They often can't get different jobs, as commutes can be prohibitive. They could always leave home, but in doing so they are leaving their extended family, their home (with its mortgage), their church, in may cases everything they have ever known. This non-economic fact has a very economic impact, one that mine owners have been aware of for decades, resulting in particularly poor wages in these environments. This was the world that the New Deal was created to address, and the minimum wage was part of that policy response.
And to the best of my ability to tell, the policy has been a resounding success. The minimum wage has been in place since 1938, and during that time we've had some pretty high employment figures (2.93% average unemployment in 1953), and some pretty good economic growth. The current consensus among economists is that the minimum wage has, at worst, very slight negative effects on employment. It may not be the economic salve that some proponents suggest that it is, and other policies such as the EITC have better anti-poverty bona fides, but it seems to serve its relatively narrow purpose quite well. And as I have argued, it remains a policy response that is just as vital today as it was when it was instituted.
UPDATE: The original version of this post referred to Mitch as a professor at the University of Washington. The corrected version refers to him by his actual designation as a PhD candidate. Apologies for the error.
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5 comments:
Well argued, from the perspective of someone supporting a system best described as well-regulated capitalism guided by an underlying moral compass. Where does that system exist? It's in the nature of capitalism, and most conspicuously within the mobility afforded by its global manifestation, that it tends to be highly resistant to regulation. The success level of the system's resistance to regulation seems to remain nicely proportionate to the corruptibility of the legislative bodies responsible for creating and implementing such regulation. As a worker in a nation where legislative bribery has been institutionalized in a deeply entrenched lobbying industry, coupled with an electoral process that has unfortunately evolved into a "pay to play" game, I find very little reason to hold out much hope for the kind of labor friendly legislation represented by the blogger. I would support it, naturally. I just think that the answers to rolling back the "working poverty" that is threatening to become endemic lie elsewhere, and that we need to keep an open mind about addressing the problem from a different angle.
"The growth of knowledge is nothing more than seeing what we already know through different eyes, and asking different questions."
-Ngugi wa Thiong’O
I submit that the argument presented by the blogger may be based on the premise of a flawed equation. I'm not convinced that factor "C" is necessary to the the widget production equation at all, and is, in fact, superfluous and a practical drain on the efficacy of the enterprise. What evidence is there that factor "B" could not, in the form of a cooperative entity, readily assume both the risks and responsibilities currently managed by an ownership who provides nothing to the widget production process save a siphon to its profits? Call it a streamlining proposition or selective downsizing.
I'd gladly support a raise in the minimum wage law, but I'll continue to direct the bulk of my efforts into educating my fellow workers about the capitalist structure is rigged against them.
All right. I presented an argument of mechanics, identifying the forces, economic and non-economic that go into a capitalist economy, identified their interactions and tensions, and made my observations on that basis. At this point, I feel compelled to ask you to do the same, and break down to me how a non-energetic (in the Hamiltonian meaning of the Federalist Papers) legislative branch as you have described "B" would be able to make coherent and consistent executive decisions that are usually decided by "C."
Will "B" hold elections to nominate "C?" Or will "B" micromanage every decision, such as holding a democratic vote on switching toilet paper brands in the commune restrooms? If there is to be a vote, will a person who has worked for the commune for fifty years have equal say to one on his first day? How will the workers collective deal with issues such as bad actors and just plain lazy people, an issue that unions have long struggled with? If "B" is to elect "C," is it for a specific term? Are they then compelled to finish out the term, or can they revolt again? Does this mean that solutions that embrace short term pain at the benefit of long term growth or stability (and I am talking in the context of a small business here) are off the table, because bad times will result in a change of leadership, allowing the implementation only of policies with immediate short term benefits, even at the cost of long term prosperity? Capitalism's answer is of course the dictatorship of the entrepreneur, where the boss calls the shots without having to rally the employees behind him, and lives or dies by the effect those positions have on his place in a competitive market. What is yours?
I ask for these concrete policy prescriptions because I believe one of the primary failings of Marxism has been that is tends to be very long on theory and very short on mechanics and specifics. I also recognize the fact that straight-up socialism, not that shit cut with baking soda the way they do it in Finland, has failed each and every time it has been implemented in a society larger than a tribe or a small commune where everybody knows everybody else and the "other" is always externalized. China, the USSR, Cambodia; there are a lot of failures. And I know that a typical response is that socialism has always been imperfectly applied. But the fault then is not in the theory, but in the imperfections of those who apply it. Since the appliers will always be imperfect, as man is not perfectible, your theory must not turn into totalitarian central planning and stagnated growth, even when improperly applied. And I find that hardcore socialism has a tendency to spiral into that mess, much in the same way that unregulated capitalism spirals into an entirely different mess.
My goal, the purpose of my musing and my work, is to find the mechanisms and regulations to tame capitalism and make it compatible with moral society. Other than perfecting man, how do you propose to do the same with socialism?
One more thing: capitalism isn't resistant to regulation; people are resistant to regulation. Loopholes are widespread in non-economic sectors like criminal justice, and corruption is equally endemic (if not more so) in countries under the yoke of socialism. Again, the problem lies in the components, not in the system. If you could perfect a person, communism would be great! For that matter, capitalism too! And fascism! It wouldn't matter. In the case of the impossibility of perfectibility, all systems are flawed by nature.
The chief difference, in my mind, that separates capitalism from socialism and fascism, is that both socialism and fascism embrace societal cooperation and convergence, in the former case around labor and in the latter case around power. Capitalism, however, by design turns the system against itself internally, such that some of the regulation is done not by a governing body, but by the nature of the system itself, in the form of economic natural selection. This self-regulation, limited and insufficient as it might be, is a feature not present in other manners of rule.
Damn that Joe Stalin! It's so hard to get any traction arguing for workers rights when they've always got his nasty set up to throw back in your face.
Seriously though, advocating for an enhancement of the exchange value of labor by means of an employee owned business model is not necessarily a call for state seizure of privately owned businesses in the name of the workers. Many employee acquired enterprises, engendered through ESOPs and other innovative transactions, already thrive within the existing American economic structure, serving as working refuges from the more egregious exploitation of the more popular WalMart/Walgreens business model. Not having been fortunate enough to have ever been associated with any of them, I honestly couldn't "break down" for you how thay manage to keep toilet paper in their johns, but I would imagine that a cooperative group of relatively intelligent people, working in their own best interests, can somehow manage to delegate responsibilities in much the same way that a more traditional, but unnecessary, owner would do it. Companies like Woodmans, Publix, and Avis (to name a few) have already demonstrated that employee ownership can be a sustainable model for business without any special training needed in the Gulag camps. In order expand this idea and spread the model to include a greater portion of working Americans, the key will be for the working class to persistently search for and support political candidates who are sympathetic to labor issues and willing write and pass legislation designed to limit the private sector's current nearly unrestrained ability to suppress the organizing efforts of working people; candidates willing to work for a return to a true, unsheltered progressive tax structure and willing to channel those revenues not to weapons manufacturers, but to rebuilding the infrastructure. You know, candidates like the Democratic party used to slate back in the day.
Guiseppe, you begin by suggesting that I made an argument that I have not. Communism didn't need gulags and Stalinism to fail, nor are egregious human rights violations the cause of its failure. I would argue that communism failed because it was unable, as an economic system, to allocate resources efficiently and compete with capitalist economies. Other than to its satellite states, the USSR didn't export a whole lot, and generally seemed to operate below capacity in terms of its natural resources and human capital. China is not now a communist country in any meaningful sense of the word, but when they were, their exports were often driven by saving face, and were many times desperately needed at home (see Great Leap Forward, The). As a matter of fact, China seems to become more economically powerful in direct proportion to the degree to which it edges away from communism. No, abusive government isn't the cause of the failure of communism, as demonstrated by the fact that equally illiberal capitalist societies (Amerika?) have succeeded where the Soviets failed.
As for Publix and Woodman's, my contention is that these businesses are AWESOME. GREAT. If workers can put together a company owned and operated venture on an industrial scale that is able to compete in the marketplace, I have no argument against it, and will encourage it any chance I get. I shop at Woodman's. I NEVER go to Walmart. There are important distinctions, by which I mean that some in these companies are probably pulling in comfortable six figure incomes in exchange for a greater share of responsibility whilst their baggers toil at a bit more than they would make down the street. I happen to know for a fact that Woodman's doesn't allow low level employees to request time off. If you are scheduled and need to be off, you need to find a replacement yourself. There are also privately owned entities, like Costco, where upper management is far more generous in wages and benefits, takes far less of a share for itself, and is able to compete in the market. I encourage this as well.
I oppose the forcible imposition of the dictatorship of the proletariat and the elimination of private enterprise. I reject state control of the economy. I am not in the slightest bit opposed to a grassroots retaking of the economy by well run, competitive employee owned enterprises. If there are legal barriers to this arrangement in favor of single-person privately owned entities (and there wouldn't appear to be; I submit the success of Avis, Woodman's, and Publix as evidence) then I would support their repeal.
As for candidates supporting the eradication of tax shelters, progressive tax structures, the reduction of defense spending and the increase of infrastructure spending, I'd like those too. Barack Obama meets all of these requirements, though he certainly doesn't go as far as you or I would like (and he has other issues as well. Warning: incoming non-germane rant about drone strikes appears imminent. See my earlier evaluation of the success of illiberal capitalism). The problem is that we have a democracy where about half the people, wrongly or not, brainwashed by church and Fox News or not, believe in a more tax-sheltered world with higher defense spending, and any negotiations to increase infrastructure investment (ie. The Stimulus) need to be paired with increasing tax sheltering (ie. The Stimulus) in order to garner enough votes to pass (and I don't just mean Republican votes; the Blue Dog Democrats were the main obstacle in passing a clean stimulus bill without throwing bones to the wealthy).
Thanks for the comment.
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