The author was invited to sign the following petition that recently appeared on change.org. This post is a response to this petition.

Petition:

“Every hardworking American deserves to earn a LIVING WAGE. Every small business needs CUSTOMERS. By raising the minimum wage, we create more customers for business–like Henry Ford did when he paid his workers the unheard-of wage of $5.00 a day so that they could afford to buy Ford cars. With every employed adult earning a living wage, we reduce the ranks of those on WELFARE and increase SELF-RESPECT. We protect FAMILIES by reducing divorce and dysfunction at the lower end of the socioeconomic scale. Instead of taxing people to pay for welfare, customers pay for this benefit through a slight rise in the price of goods and services they purchase from those with minimum wage jobs.”

Response:

Your aims are noble enough, to a) reduce the number of persons who receive assistance from the welfare state, b) to reduce the tax burden of the same, and c) to create more customers for business. Your proposed method of achieving these wonderful aims is, however, far from satisfactory.

Every hardworking American deserves to earn a LIVING WAGE.

Even if the concept could be defined objectively there is no such thing as a “living wage”. There is only what has been produced and this may be below, at or above the amount “necessary” on which to “live”. Nobody works for a money wage but rather for the goods and services that it can buy and a minimum quantity of these do not magically fall from the sky and present themselves for consumption.  Nor can The Congress make them appear by waving the legislative wand – they have to be worked for by someone.

Consider first of all an economy where I produce goods for only myself. If I bake three loaves of bread in a day then three loaves of bread is what I have. If, however, I bake eight loaves of bread in a day then eight loaves of bread is what I have. Assume for argument’s sake that the former situation is barely sufficient to keep me alive and the latter allows me to live comfortably. If I have produced only three loaves then three is what I have to enjoy at the end of the day. If this causes me to live at near-starvation point then nothing except more productivity on my part can change that. If, on the other hand, I have produced eight and can live handsomely from them then again it is only because I produced them.

This fact does not change when I do not produce goods for myself but instead offer them in exchange for other goods. If I swap my three loaves of bread for steak then the steak is now my “wages” for having worked to produce the bread and the bread is now the butcher’s “wages” for having produced the steak. But if the three loaves that I have paid the butcher is barely enough to keep him alive then why should I expect a quantity of steak in return that will do any more for me? Why do I “deserve” to earn a “living wage” when I can barely offer the same to the person producing it for me? Does he not “deserve” it also? Where does his “living wage” come from if I haven’t produced it?

None of this changes in a highly complex, industrial society where goods are not exchanged directly but for money. My wage is paid out of my employer’s revenue and his revenue is achieved only as a result of the productivity of the employees. Therefore if I am to earn a given wage then my productivity must enable my employer to earn at least that much in additional revenue as a result of employing me (and often much more as the total cost of employing a person is often much more than the wage paid). If the costs of my employment equal additional revenue then employing me is a break-even business and, while my employment is barely sustainable, there is no incentive for the employer to continue it. If the costs are greater than revenue then I am making a loss for the employer and I will have to be laid off.

Minimum wages therefore place a threshold of productivity which the worker must achieve before he can be legally employed; for if my ability or skill means that I cannot produce enough to enable my employer to earn enough revenue to pay me the minimum wage then I will simply not be hired. Highly skilled and experienced workers will have little problem in achieving this threshold (unless the minimum wage is set very high). But low-skilled or inexperienced workers, the very ones whom you appear to be saying are in need of help, may find it next to impossible. All you do is raise the bar over which they have to jump to get a job without improving their means to do so. Indeed, you totally impede any path to them gaining such means for the worker cannot use price as a bargaining tool. If he was unskilled or inexperienced he might happily say to a prospective employer “yes, you would pay $8/hour for someone with experience. How about I, not yet blessed with experience, do it for $5?” If the employer accepts he/she is compensated for the lack of ability or experience by the reduction in price; the worker, on the other hand, gains employment during which he may learn a valuable trade or skill that may enable him to progress to higher levels of productivity and, hence, higher wages at a later date. Even if he doesn’t quite achieve that, at least he is employed and such employment is likely to mould him into a responsible adult with self-respect. However, with an imposed minimum wage above $5 (in this example) this option is closed to both the employer and employee. The worker will simply not be hired.

The absurdity of the minimum-wage is highlighted even more when you consider what its advocates are really arguing. Presumably you think that if am not employed by an employer (i.e. I do work with a value of $0) it is fine for that employer to pay me $0? And also, if your ideal minimum wage is set at $8/hour and I do $8 worth of work for the employer, it is fine for me to earn $8/hour? But if I work to produce anything between $0 and $8 suddenly that is evil and immoral and should be outlawed. Why this lacuna? Why is producing $0 or $8+ fine but producing $4.50 is not? Is $4.50 not worth $4.50 in the same way that $0 is $0 and $8 is $8? Why is it that if I produce $0 it is moral and proper for me to be paid $0 yet if I produce just $0.01 for my employer the latter should be forced to pay me the “living wage” of $8? Further if I am not being paid for my productivity but instead am being paid a legally enforced form of charity then aren’t I in just the same position as if I was on welfare?

Finally, it is the fact that minimum wage legislation impacts upon the low-skilled or inexperienced that makes it so destructive. For these people are likely to be any combination of young, “unprivileged”, with few educational merits, or disabled – in short the most vulnerable in society who are more likely to succumb to a life of delinquency or welfare-dependency when faced with no other option. Such a person is likely to respond rather coolly to your demands for a “living wage” if he can’t get any wage at all.

By raising the minimum wage, we create more customers for business

If it is that easy then why not have an infinitely high minimum wage? Why stop at $6 or $8, why not raise it to $20, $100, or $1 000? In fact, why just not make everyone millionaires? Think of all those millions that will be spent in small businesses around the country!

Your proposal rests upon the fallacious theory that workers need enough “purchasing power” in order for businesses to expand production. The causal relationship is precisely the other way round – it is increased productivity that permits an expansion of purchasing power. Going back to the example of bread, if I bake three loaves of bread what I have is three loaves of bread with which to barter. If I bake eight loaves of bread I now have eight loaves of bread with which to barter. Eight loaves of bread will trade for more than three loaves of bread. I have more “purchasing power” because I have been more productive.

What, then, will be the effect of your proposal upon achieving your stating aims?

Regarding first of all those adults who are unemployed and are fully supported by assistance from the welfare state, why will raising the cost of employing them induce employers to do so? If they were not prepared to employ them to do a certain job at a lower rate, why on earth would they suddenly, all else being equal, be inspired to do so at a higher rate? Let’s say you go to the grocery store and see chicken on sale for $5/unit, having never bought it before. You decide that at that price it is too expensive for the benefit it will give you and you decline to purchase it. Suddenly, the Government decrees that everywhere chicken producers are not earning a “living wage” and decrees a minimum price for chicken of $8/unit. Hurrah, the plight of the exploited chicken farmers is over! But if you did not purchase the product at $5/unit why would you be any more inclined to purchase it at $8/unit? It’s the same thing, only now more expensive. Has the minimum price helped the chicken farmers vis-à-vis you in anyway whatsoever? If anything, wouldn’t lowering the price be the correct thing to do induce you to buy chicken? Exactly the same is true for businesses hiring employees. The same amount of productivity on offer for a higher price induces no new purchasing whatsoever. It seems impossible, therefore, that your petition would reduce the ranks of the unemployed who are dependent upon welfare.

For people who are both employed but remunerated at a rate below what you would call a “living wage” and who are partial recipients of welfare, raising the minimum wage will (if their current wages are below the proposed threshold) increase the costs to business of achieving the same amount of productivity. Employers have only the same stock of goods to sell to customers but now they must pay more for their employers to produce them. Revenue therefore remains equal while costs increase. How might employers respond?

First, they might gradually replace the employees with capital equipment (i.e. machines and tools). For now, with the cost of labour increased, the cost of capital relative to labour is lowered and it becomes more profitable to replace workers with labour-saving devices. However, as there has been no genuine saving (by necessity the cost of capital must be between the old wage and the new wage – if it was lower than the old wage then capital will already have replaced labour without your proposed minimum wage; if it is higher than the new wage then labour will remain employed) there are no spare funds with which to employ these workers elsewhere. So workers that were formerly partially employed would now be fully unemployed as a result of your proposal and, furthermore, will have increased the burden to the welfare state and its associated tax demands rather than have caused a decrease to either. An analogy is that if you were a purchaser of chicken at $5/unit, the new price of $8/unit you find to be too high and you switch to cheaper substitutes.

Second, the employing business may decide to absorb the extra cost from profit. But what if the increased wage completely consumes the profit margin so that the business now makes a loss? A business that loses money will have to close shop and the workers will, once again, simply have to join the ranks of the unemployed. If profit margins are so slim it means the employees were barely affordable before and their employers were no doubt straining to control costs to stay afloat which would – crucially – keep those people employed. But along you come to forcibly raise their costs thus destroying their profit margin and guaranteeing nothing to the workers but unemployment.

But assuming that a profit remains and the business can stay afloat, a lower profit margin means decreased funds for investment which the business can use to expand. It is such expansion that requires the business to increase its demand for workers, and increased demand results in increased wages. If they cannot do this then wages cannot be increased naturally. Furthermore, in the economy as a whole not all businesses will be affected in the same way. Labour-intensive industries will be the hardest hit while capital-intensive industries will suffer more lightly. Investment funds will therefore be withdrawn from the labour-intensive industries and diverted to the now more profitable capital-intensive industries; or the labour intensive stages of production will disappear overseas and the US will be left only with capital-intensive industries – plus an increased amount of unemployment from the displaced workers.

However, your proposal appears to indicate that businesses will attempt to pass these costs on to their customers. If the customers who have to bear the burden of the increased costs are the same people who have received the new, higher, wage, then you are not any step closer to weaning them off the welfare state. If their income increases but so do their costs then in real terms they are in exactly the same position as they were before. What are you going to tell them? “Congratulations, your wages have been doubled! But now you have to pay twice as much for everything as you did before!”

If, however, the burden is borne by those who do not receive an increased wage then, all else remaining equal, the customers can only do one of two things. Either they will reduce the quantity they purchase from the business, or they must divert spending from elsewhere in order to meet the added cost. If the former, then while the business’s nominal revenue may remain the same the quantity of goods needed to achieve that revenue is reduced. Reduced production therefore requires downsizing and downsizing means workers will be laid off. If customers divert spending from elsewhere then the businesses from where they withdraw funds will suffer from reduced revenue and they will lay off workers. The result in either case is increased unemployment and increased dependency upon the welfare state. Furthermore, the poor customers will have to suffer both from the increased costs of their purchases and from increased taxes to fund the now expanding welfare state.

Finally, regarding your desire to help small businesses, which type of businesses are more likely to be disadvantaged by a minimum wage? Large, multinational businesses which huge reserves of capital or the new start-up with limited investment and an unestablished market? Which of the two benefits more from being able to hire employees cheaply and which is likely to struggle from being forced to pay more for those same workers? Minimum wages, like all employment regulation, are a boon to large, established and politically connected businesses that can more easily absorb the increased costs while forcing their smaller rivals, the ones you are trying to help, out of business.

It is clear, therefore, that this proposal will not fulfil its noble intentions and, worse, will have the very opposite effect of exacerbating the very problems that it seeks to eliminate. For these reasons (aside from the fact that I am neither a US citizen nor resident) I cannot accept your invitation to support your petition and I urge you and everyone else whom you invited to abandon it.

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