Zeal For Truth

The minimum wage is a popular and well-thought-of piece of legislation which many people believe is only helpful - or, may have some drawbacks but is more helpful than not. Fortunately, the minimum wage can be looked at objectively by examining how general economic law works as well as socially, by examining what kind of affects the minimum wage has on real people. This two-part article is designed to look at the minimum wage at a fundamental economic level and then for its broader impacts on society.

Removing Morality
For the first part of this article, a pure economic analysis, we must put aside anecdotes and emotional arguments. For example, “but he’s a waiter and deserves minimum wage!” is not a valid point right now, because we are going to look at pure economic law and effects. If the reader comes into this analysis unwilling to engage the material for what it is, then the reader should be honest with himself and admit that he does not want his preconceptions on the idea to be challenged.

Many times, this results from not taking a moment to remove the subjective morality or “fairness” ideas that one brings with them into an argument. Besides, we will deal with these entirely in part II - so just hold your horses.

Wages as Prices
What is a wage anyway? Often, people don’t make the connection that wages are just another price in the massive global market of good and services. Just like a new bike has several components and interactions on the market that determine it’s price, so to does a person’s time and skills - their labor - fetch a price based on these same phenomena.

We only separate out wages into a special category because in modern society, this price has a significant impact on the seller (the employee is selling his labor; the employer is the buyer of labor) because his livelihood, status and often his access to opportunities are dramatically affected by the price he can fetch on his labor. But those are moral considerations, and you promised not to go there until next time, remember?

We have to understand that a price on a wage is reached when there is mutual consent - the employer wants the labor more than he wants the money from the wage and the employee wants the wage more than he wants his time. So if a price can be reached, then it is because both parties believe that they are better off.

People have to trade this way because there is scarcity - not only are material goods finite, but time is finite as well. So demand and supply can’t shoot up into infinity. If it were so, we could legislate a minimum wage as high as we liked and there would be no consequences. However, because things are finite, there is a limit to how high we can raise a wage through legislation.

How Wage Prices Are Determined
Jobs and wages do not come about by employer generosity (or, on the contrary, greed). That is, companies don’t just provide jobs for kicks and don’t pay wages as charity. They actually have a demand for labor in order to get something done - the end result of which is likely for their profit (either financially or maybe idealistically [they need labor to build a free hospital in Sudan]). If they don’t think this way then they lose money and go out of business (and provide no jobs by the way).

On the other hand, laborers are not slaves by nature - they only want to trade their time if it benefits them. In most cases, this is to seek a wage that provides at least their basic subsistence and usually a little more than that - again this is profit.

These two parties meet somewhere above the employee’s minimum value on their time and somewhere below the employer’s cost for what the labor produces. The price is driven down by the scarcity of demand - the less demand for labor, the lower the price that laborers will have to set for their abilities. The price is driven up by how talented, experienced, educated, hard-working, skilled and so on the laborer is. The more talented the laborer, the more objective value he has in the market.

What a Price Floor Does
If then, a wage is just like any other price, than a price floor (a minimum price allowed) is going to have a universal effect. If we legislate that gas, for example, must be at least $5 a gallon to help those poor oil companies, then a lot of people are going to go without gas, simply because they can’t afford it (other will have to cut back significantly in other areas to pay the increased price). It might elevate all the profits from gas for just a little while, but the customer base is going to shrink a lot more than it normally would. So you may have the average customer paying more for gas, but you will have so few of them that, in time, the gross profit is going to actually be less. Neither of the parties benefits.

Say it’s a price floor on wages now. The minimum wage is $15. It’s not just a matter of everyone currently making $5.15 getting a whopping raise. Rather, many of the employee’s customers (employers) can no longer afford their service. In fact, so many employers would be unable to buy labor at that rate that over time, the net profit on labor is going to go down. In fact, the scarcity of jobs is going to rise so much that those employees still left will make less money because supply and demand have been adjusted against them. There are less laborers to compete, but there are even less jobs, so all parties lose.

Raise the Sea - Float All Boats?
Many think of the minimum wage (and price floors in general) like a sea of water that carries boats with it as the water level rises. But employees are not floating - that would imply that their value is totally subjective. Rather, they have anchors, made of all the talents and skills, which hold them to the bottom. The anchors only get longer as more talents and education (and the like) are gained by the employee.

Realize that each employee is a unique combination of skills, experience, training and talents - no two are alike. They earn a unique price for their labor on the market. We’ve already established that someone working for $8 is not making that because their employers likes them “eight dollars worth” or is generous or mean, but $8 is the price that his labor can fetch on the market. What happens then when the minimum price allowed for labor rises above $8? Objectively, our $8 man is drowned because it’s not like his talents and abilities (which got him the price in the first place) increase along with the wage floor. No, we have raised the water level over his head, and drowned those least able to swim.

Tomorrow we will cover the social aspects of a minimum wage and take into account what kind of effects this has on working people and their families. This is the realm where most of the support for a minimum wage comes from.