Minimum wage

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Careful, here comes a pretty big rant. Read at your own risk.

Lots of people in the US and Canada are talking about minimum wage. The debates seems to be about raising it to 15$ an hour, or not doing that.

I am against it, for several reasons.

First of all, I believe that different jobs have a different value. This means that you can never pay everyone the same, it has to depend on several factors, including the actual value the employee brings the company.

I am not saying that it’s okay to abuse employees and pay them less than they are worth if you’re the boss. I just happen to believe that no one is entitled to a job, or to free stuff. Every job is a trade of money for services, and just like when you sign any contract or buy anything, this is only fair if both parties agree. The boss is allowed to pay you less than you are worth, even if that makes him an asshole, and you are allowed to leave. The contract lasts until one of you doesn’t want it anymore.

This means that if you raise the minimum wage faster than inflation, and make it as high as the salary of other workers who were paid a lot more before, then those workers also deserve a raise since they are more valuable. If they don’t also get a raise, this means that they become underpaid, as they are more valuable yet paid the same as the minimum wage employees. This means that any business that employs as little as one person paid less than 15$/h today, has to raise everyone‘s salary tomorrow, or else end up being unfair to their most valuable workers, and risk losing most of them. This means almost every single business in the country.

Then, when you are the owner of a business, and you instantly have to give a decent raise to every single one of your employees, the money has to come from somewhere. Here are your options:

1: You pay from your own pockets, making your own salary a lot lower to absorb the money loss from the raises.

2: You raise the prices of the services you are providing, in order to get enough income for the raises.

3: You don’t change anything, and therefore the company profits will take a big dive.

4: You outsource to a country with a lower minimum wage.

5: You fire enough employees to be able to pay the same total wages as before, and you overwork the remaining ones.

6: Replace most minimum wage workers with machines that cost a lot less, since machines are actually pretty close to be able to do most of these jobs today, so they definitely will very soon. Until then, you can replace some of the workers, and avoid the overwork problem of #5 while still saving money and firing people.

Let’s talk about the first three first.

For option 1 and 3, the bigger the company, the more damage it will do.

For option 2, the company size doesn’t matter that much, since more employees means a bigger total raise, but also usually a bigger customer base.

Now, as a minimum salary worker, you might have great respect for big company owners. In that case you probably think they worked hard, took big risks, and generally deserve their money. If that’s the case, you wouldn’t want them to lose a ton of money over this. On the other hand, you might also hate them with all of your might, because they fatten their wallets with people like you, and are rich from barely doing anything with money that you deserve. If that’s the case, you probably also think they’re selfish assholes. Now keep in mind that the owner can choose which option he’ll take. How likely is it that he will take option 1 if he’s so greedy? The same reasoning applies to option 3. It’s obvious to everyone that most big businesses could afford to pay that raise either from the millionaire owner’s pockets, or the profits pool. It’s also painfully obvious that as long as the owners are allowed to choose, they won’t choose this option.

I think we can all agree that most businesses will end up choosing option 2, or a mix of the three with more of option 2. We’ve already established that pretty much every single business in the country has to make that choice.

This means that a huge majority of all goods and services available in the country will instantly get more expensive. Maybe by 10%, maybe by 50%, maybe by 200%.

Everybody deserves a living wage? That might be what you think, but in that scenario, everybody gets a living wage for about a week. Then, the cost of life climbed so much, that you’re back to square one. The American dollar also dropped in value in the process.

Now let’s talk about option 4. Option 4 is completely unavailable to small family businesses, which means the least “evil” of all the owners have less options and will get hurt more.

Obviously, option 4 is also unavaiblable to all businesses that rely on local customers, like a fast-food place. You can’t make the burger in India and give it to the American within a reasonable delay. So either way, 4 won’t get that much love. But for the ones who can, they might very well do it. If you’re working for them, then you’re out of a job.

Do you know what’s good to know about the minimum wage? It’s the minimum. This means that, out of all the working people in the country, you are equally placed with the least valuable people in the country. There is literally nobody under you. Obviously, some minimum wage workers are better at their jobs than others, but not by enough for their employer to even think about giving them more than the minimum. This usually means that their value as an employee is lower than minimum wage, and they’ve received a raise because it’s the law. This also means that any random person picked off the streets has a good chance of being able to do your job with minimal training, and statistically, they are about 50% likely to be better than the original employee at it. Maybe the employee is worth more than that. At least, his cognitive dissonance probably tells him that, no matter if it’s true or not. But in that case, he should ask himself, why isn’t anyone willing to pay me more? Either they disagree with him about his value, or they are actively trying to screw him over. In both cases, if our worker truly is more valuable than what he is currently paid, this means he could easily either negociate a better salary with his boss, or quit and find a better job and/or a better boss somewhere else. We have to keep in mind that our value is literally decided by the market. If every single employer in the world doesn’t see my value, it literally means that I don’t actually have any. If every single employer that I meet seems to agree that I’m only worth minimum wage, then they are statistically more likely to be right. If my employer is trying to screw me over by paying less than what he thinks I am are worth, then I’ll go negociate. He won’t let me go if I truly am that valuable, so I have the upper hand. And if I actually am worth minimum wage or less, then my next move is to figure out how to become more useful, more efficient, and overall a better employee.

For all of you that tried and that didn’t work, you’re obviously very unlucky. Of course there’s no way you’re actually wrong about your value, right?

Also, Minimum wage jobs exist for three types of people. First are teenagers who want a little bit of money for themselves, while still living with their parents. They don’t need enough for living expenses, just to go to the movies every now and then and eat fast food with friends. Second, the people who are bad at negociating, and will settle for a job way under their actual skills. That’s probably what every non-teenager who works one thinks they are, but some of them are wrong. Then, there are the fully grown adult who either never tried or failed to learn a skill or two that are actually useful to a business and that not everyone can do.

Do all those people deserve a living wage? Well, I’d have to say yes. I think that, in modern society, we are no longer living in the jungle, and we should look out for each other. Not everyone has the same potential, and some people are literally unable to work some better paying jobs. But the thing is, there are also some lazy people. Maybe it’s 1%, maybe 50%, maybe 99%. There’s no way to know for sure, because all the lazy people either think they aren’t, or are actively trying to hide that they are. Considering psychology and patterns, you have to take into account that denying them 15$/h will actually motivate some of them to go and learn to do something that will net them a better job. And even better, this will also motivate some percentage of the teenagers to do the same before it’s too late. Obviously they won’t all be motivated, but nobody can tell exactly how many. Is it worth the trade-off? I don’t know. That’s everyone’s decision to make. Obviously we don’t let them die of starvation, we’re past that point in modern society, I think.

But we need to create programs to allow people to at least get some decent skills for free. I am against free college, as many people work hard to provide this extremely valuable service. On the other hand, with the internet, it would be very easy to create courses about pretty much anything, once, from the pockets of the government, and then let people use it. That’s completely different from maintaining thousands of buildings and paying millions of teachers every year for free. Obviously, that’s an half-assed idea. I’m not even american, so I’m definitely not gonna create this program anyway. I just figured I’d give an idea for an alternative, considering that I’ve criticized raising minimum wage so much. It’s not a magical idea either. There would be some maintenance necesary, to make sure the content of the courses is always up to date and true. Some people need actual help when learning, so at least some teaching jobs would need to stay. But there is no way i see those fees ever coming anywhere near close to the cost of making all superior education free with our current methods. Keep in mind that real colleges would still exist. They are too expensive nowadays, so the internet thing would be a cheap alternative for people who can’t afford real college. Obviously some employers wouldn’t trust that as much as a real college degree, but in the end, as long as some competent people that used it are hired, this will make the businesses that discriminate against them suffer relative losses, as they hired a lesser employee because of their bias. Over time, this will probably solve itself, or at least become minor.

With those kinds of programs, it would definitely become a choice to not learn. There would be no “it’s too expensive” excuse. Anyone not actively improving their own skills with the goal of finding a better job would literally be saying that they refuse to contribute to society (not including people with physical or mental handicaps in that calculation. I’m talking about actual lazy people that aren’t willing to put in any effort.). This would allow a more effective way to figure out who’s lazy, and who’s working their ass off trying to improve their lives. At that point, it’s up to everyone to choose what to do with the lazy ones. They will eventually lose their jobs to robots, because they literally chose to stay at the bottom of the usefulness scale, so we have to make a choice. Do we actively remove their human right to freedom in order to force them to learn how to do something and earn their living expenses, or do we passively remove their human right to life by letting them starve? The last option is actively removing their human right to free will and brainwash them into stopping being lazy.

When you figure out that one of those 3 options is your future, I predict most people will stop being lazy by themselves anyway.

Just to make sure I’m not misunderstood. I don’t think that those three options are good, or even barely okay. I’m just saying that this is what it’s going to come to at that point. I also think that all this stuff only applies to genuinely lazy people. People who have plenty of physical and mental ability, and very well could become plenty useful to society, but just refuse to.

If anyone has a better alternative to solve the problem than raising minimum wage or my idea, feel free to share it. Both of those have huge problems, so I really think we should look for something better.

 

TL;DR – Money’s value is entirely relative, so the more money there is, the less it is valuable. If you give everyone more money, its value drops and you don’t achieve anything except inflation. If you only give some people more money, then you are being unfair and you are motivating more people to work low-end jobs since they are paid more in proportion to the effort and skill needed to do them.

“Everyone deserves a living wage” is not compatible with “equal pay for equal work”. I find it ironic that usually, those two ideas come from the same people. Actually, women were paid less than men for decades in 20th century exactly because of the “Everyone deserves a living wage” ideology. Since men were expected to earn all the money, they “needed” more money to live than women, who’s salaries were not expected and only seen as a small bonus to the household income. Some people literally need more money than others to live, depending on where they live, how many children they have, how many sick or old family members they have to support, etc. If everyone deserves a living wage, equal pay for equal work is impossible by definition.

  • RaquelSimone

    I just started reading your blog a couple of days ago, but this is the first time I’ve felt inclined to comment rather than just think to myself about the ideas presented. I think you’re a little bit off base with what is going on with minimum wage workers. The argument that they should be able to simply negotiate with their bosses for better pay or leave makes it seem like you haven’t been in this position before. You might not understand the dynamics of these work relationships.

    I’ll use the example that I am most familiar with, which is food service. I’ve worked several different places such as McDonald’s, Pizza Hut, Applebee’s, plus several other restaurants. Those first three have a reputation for being bottom of the barrel workers, and those employees get treated like crap. Employers and customers alike are often terrible to the people who work there. Now, if you work at one of these jobs you have very limited ability to negotiate because if you speak out you could lose your job, and when you already make such a small amount of money you cannot afford time in between jobs without sending yourself into a terrible situation. Quite a lot of these workers are supporting families with their limited pay and they aren’t going to take any risks of harming their children by speaking out or changing jobs.

    Then again, changing jobs doesn’t do any good when the skills you have still leave you replaceable. There are good workers who are skilled at what they do in food service that still cannot make a decent living because of where we as society have decided to place food service workers in our hierarchy. All of the big chains listed earlier that I worked at do not pay well, even though the companies could afford to pay their front-line employees much more but choose to put the money in the pockets of those at the top. It does not matter where you go, this is the industry standard. These employers also do not care if you are good or not, you are replaceable no matter what. High turnover rates are another way they make big money, because if you are constantly starting over with new employees you have to pay less wages overall.

    The assumption that minimum wage work requires no skill or deserves less pay is truly a harmful one as well. Many of these jobs are back breaking, arthritis causing, and not the type of work many “skilled” workers want to partake in. These jobs still need done. Contribution to society can be measured in many different ways. We need people innovating with new technologies, and we also need people cleaning up our messes, and creating our meals. There’s nothing wrong with a person who wants to work any of these particular jobs as a career. Someone isn’t lazy for being loyal to their job at McDonald’s or Applebee’s. These are mostly hard working good people, and less of them are lazy than the higher skilled workers I have worked with who get paid much more.

    To be clear, I also don’t think raising the minimum wage the way they do is helping. This is why I aim to start my own restaurant and change the industry that way. I have the will and the means to do so. Not many others do, nor do they have the types of goals in mind that I do for making the industry better. I think that we are doing a disservice to ourselves as a society by placing such little importance on the people who feed us on a daily basis. If I start a business and I pay people fairly and treat them well I should easily have a better work force than any competitor. This is the only way to change anything. Government policies and laws won’t change companies that are already corrupted and greedy, as you say.
    I generally like your ideas and agree, but I think you should reconsider how you’re classifying the minimum wage workers.

    • Interesting comments, Rachel, and good on you for joining in and commenting. Dunno where everyone’s gone from the heady days of Hypothetica a few months ago, but for myself: welcome, friend!

      I take your points about the powerlessness of minimum wage workers in the food service industry, but I think the point being made was that if they have skills that others in the marketplace judge as sufficient to get a higher wage, then leaving and going to some other better paid job is their best option; but conversely if noone in the local area judges them as worthy of a higher wage, then that’s the consensus estimate of their correct pay level for their skills, I’m afraid. Harsh but true: people are not “entitled” to a high wage, they have to earn it by learning and demonstrating higher skills. As you said – less easily replaceable skills.

  • Hmm, very long and complex argument, with many things to agree with – and an equal number to disagree with! Let’s assume we’re only talking about minimum wages in capitalist countries, so rule out communist/socialist ideas like “to each according to his needs”. Of course different workers can, and should be, paid different wages – as long as they’re all at or above the minimum wage, if there is one, at any given time.

    So, the question is surely: what are the likely effects of introducing a minimum wage (MW), at some particular level, into a broadly capitalist country, and perhaps changing that MW over time. Will jobs be lost? if so, how many jobs? Will outsourcing rise? Will other workers terms and conditions be made worse? (eg will “wage differentials” be preserved?) Will profits fall? will product prices go up? What about the welfare state?

    The first obvious point is that it’s ALL about the level: if you introduce an MW of (let’s say) one cent per hour, it will make no difference at all. None’s paid less than that, so noone’s wages will change, noone will lose their job etc.

    But if you introduce an MWe of $100/hour, that’s going to be hugely disruptive because lots of jobs [let’s say: the majority] are paid less than that, and all the businesses with such jobs will have to raise those workers’ pay up to $100/hour, or fire them. And yes, then as you said, there’s the knock on “wage differentials” problem too.

    Now, I have no opinion at all about US$15/hour, or any other specific number. But logically, in any given economy or region, there must be some level for the MW that will combine protection against extreme low pay with “less than J” jobs being lost. So a government can surely try to calibrate – to choose approximately the maximum MW level such that “less than J” jobs are lost as a result?

    But now: an interesting point that you barely touched on: what happens to the MW over time? of course, this depends on inflation, as you said. But suppose a government indulges in a tiny bit of “social planning”: they announce to the whole country that every year for the next 10 years, the MW will be raised by inflation+1% (so: by 1% in real terms). What happens now?

    This gives everybody – employees, company owners and the market – certainty. In particular, company owners have time to plan what this gradual rise will mean for their business., and (using Scott’s law of “slow moving crises” or whatnot) how to adapt to it. Employees have the certainty that their wages will rise modestly even if they stay doing exactly the same job. (Of course, higher wages for higher skills are still possible, so the incentives to increase your skills, or change jobs, are still there). Perhaps the key advantage for society is that successive governments can plan to gradually reduce “wage top up” benefits for those in work over time because their employers are compelled to pay them more over time. This reduces the ability of crap employers to deliberately underpay their people in the knowledge that the state will top their wages up to the amount needed to live.

    Of course, this doesn’t stop other countries being able to offer services relatively more cheaply over time as “your” country’s MW goes up, so a company can still decide to outsource an entire subset of their activities to save money, with very bad effects on their redundant employees – but nothing’s secure against industrial change over time, as numerous industries (eg coal mining and most recently the steel industry in the UK) have found out to their cost.

    • Kaito Kid

      The fixed and predictable minimum wage increase is actually a pretty good idea. I’m not sure how good it is, since most downsides to new ideas are unexpected, but I think you’ve got something there. Here in Canada, we barely ever got any heads up when minimum wage increased. Twice, in a minimum wage job, I found out I had received a 15¢/h raise a couple weeks after, because my bank account no longer matched up my budget estimates. It also seemed pretty random at the time, so there was barely any way to plan ahead with that.

      • Agreed, KK. Of course there may be downsides to the “planned MW increase” idea – most obviously if the “planned increases” went on too long, or were too large for the economy to easily adapt to. In the UK, our government is (sort of) experimenting with gentle MW increases over time, although they haven’t gone as far as committing themselves to future rises. But they have said specifically that they want the UK economy to focus less on minimum wage zero hours crap jobs, and more on high skilled jobs, and are deliberately giving employers time to plan for the change.

        Related to this is another similar “planned increase” that I think most Western countries have been quietly pursuing without announcing it as such: the historic increase of the 18-24 year old cohort who go to university/college. In the UK, it’s gone from 5% to 40% in about 40 years, at one point Tony Blair’s New Labour government (around 2006) had a policy of increasing that to 50% – but then 2008 crashed many plans:-). Of course, changing university education from 5% (elite) to 40% (mass) – let alone 50% or more – changes it significantly, traditionalists whine about university education being weakened, when actually it’s inevitably changing to fit it’s new circumstances.

        As to why make that increase, governments have looked hard at the way Western economies are changing, and realised that it is inevitable that developing countries such as China can manufacture many things more cheaply, and therefore that millions of traditional manufacturing “blue collar” jobs in the West are going away, and will be replaced (if we’re lucky) by much more hi-tech manufacturing (focussing on automation, design, innovation), services and entrepreneurial work. So they’ve made a hard edged decision that the economy will need a greater percentage of degree-qualified workers over time, and set out to make that happen.

    • Kingfisher12

      I like the planned increases, and there is another reason why it’s a good idea. Often policy on minimum wage increases is tied to inflation, but inflation is actually pretty hard to measure.

      Something a planned increase can do is actually drive the rate of inflation, rather than be driven by it. If you set your planned minimum wage increases at your target inflation rate (say 2%), it should help moderate the actual rate of inflation to that target. If inflation goes too high, the falling real wages should pull it back. If inflation drops too low (as it has for several years now), the rising real wages should help boost it up.

      Having a steady, low-but-positive inflation rate is critical for a healthy capitalist economy. That probably deserves its own topic, but the main point is that you need it to maintain liquidity. Minimum wage could be a tool for sustaining that rate. This might be especially important for Euro-zone countries that don’t control their own central banks.

      (I’m personally of the economic camp that nominal median wage is the truest measure of actual inflation, but I’m in the minority on that).

      • Hi KF, interesting thoughts about MW planned increases “driving” inflation. I like the idea – and I certainly hadn’t thought of it before now. I can certainly see that a planned MW increase would have some effect on inflation, my only doubt is: how strong is the link? I have two questions: what proportion of (overall) inflation in a typical Western economy is tied to (overall) wage inflation, and what proportion of overall wage inflation would MW inflation be? multiplying those factors together might give a very small “driver” effect, mightn’t it?

        • Kingfisher12

          Some economists think it would have a significant effect, others think it would make no difference at all. Even if median wages are the primary driver of inflation, factors other than minimum wage may have a much greater influence, such as employment rates and unionization.

          The strongest argument that minimum wage would be an important driver is that people at the bottom of the wage ladder will immediately spend whatever extra income they get. So if a bump in minimum wage raises income at the bottom by $100, that $100 will go directly into circulation (as opposed to savings accounts or securities, where they mostly just sit idle).

          In essence, injecting money at the bottom is a more effective way to goose the economy (and drive inflation) than any other method. It’s demand-side (revivalist) economics.

          • Fair enough, KF, I’ll summarise that as “I don’t know either”:-) I think I agree that injecting money at the bottom is a good way to “goose the economy” [nice image] – certainly we all tried “trickle down” a few decades ago, and that certainly DIDN’T work:-) Re: low paid workers spending the extra income, I’m sure some may, although it’s also possible that other low paid workers will simply get into slightly less debt, waste less money on pay day lenders and loan sharks – but as that’s all to the good, I’m all for it!

  • Kingfisher12

    Minimum wage is a political solution to an economic problem – that is, not a very good solution.

    The economic problem is wasted economic potential. The idea is that poverty saps people’s economic potential. Poor people get sick more often, they cannot afford proper training, they have limited transportation options, they are socially disconnected. All of these things drain the potential of a person, making them less productive for themselves and society. This is a vicious circle people cannot escape on their own, because they need to spend all of their energy just to stay alive, they have none to spare to improve their situations.

    The economic solution to this is to get resources to poor people through the welfare state so they can realize their full economic potential. It’s sound reasoning, but proper execution is very difficult. Perverse incentives abound when you try to help people through the dole.

    There is a second problem of unequal bargaining power. Unless a sector is at full employment, employers have greater bargaining power than potential employees. In some sectors this problem can be addressed through unions and collective bargaining, but this is only really an option when it comes to skilled labor and/or monolithic employers. For unskilled work in diverse economic landscapes, this doesn’t work.

    When there is no minimum wage, a rational employer will pay just enough wages to keep an unskilled laborer alive, because the alternative for the laborer is crime or starvation. But enough to keep a worker alive is actually just enough to kill the worker slowly, putting the burden of keeping that person alive on society, rather than on the employer.

    The idea of minimum wage is to prevent employers from taking advantage of the welfare state to feed workers, so they can be continually exploited. But in essence what this does is make the employer a formal part of the welfare state. Minimum wage is like an additional welfare tax on employers of low-skilled labor, remitted directly to the worker. It’s a solution, slightly better than the dole, but it has a lot of problems of its own, as you outline.

    There are several suggested solutions that I think would work better, and they all share the common theme of targeting full structural employment at all times. The idea is that working anywhere is better than working nowhere. Usually this involves government work programs where the state simply hires people to work on monument projects at a decent wage. This drives up demand for other things, and often leads to inflation, but inflation is considered a fair trade for full employment.

    There are solutions to counteract the inflationary effect of constant full employment, including raising taxes on rental incomes, lowering tariffs on imported goods (especially raw materials), or introducing novel monetary instruments that lose nominal value over time, but these are secondary. In all solutions that don’t involve a dole or a minimum wage, full employment is the key.