Minimum Wage and the Market

People on the left (it’s always the left for this one) who claim that if you do away with minimum wage it means wages will plummet to nothing while the evil business owners gloat over their fat profits.

The fact that employers will need to compete for good workers seems to escape them. If that other company over there has good workers who are making them a bunchaton of money, you might like to hire a few away from them (unless there’s a glut of equally capable workers so that you have your pick–don’t worry; I’ll get to that soon). How are you going to get them to quit that job and come work for you (making a bunchaton of money for you)? In olden days you might launch a raid, steal their workers, and chain them in your factories, but that tends to be frowned upon these days.

These days you only have one option, you need to offer them a better deal, either in pay or in other benefits so that they can tell current employer, “I’m outta here” and come work for you instead.

Of course, other guy wants to keep the workers making them a bunchaton of money and not lose them to you. So what to they do? They see your offer and raise their own so the workers say “on second thought, I’ll stay here.”

You, of course, still want to make money so you have to increase your offer still further. Now, you eventually hit some point where it’s not worth increasing your offer because the bunchaton of money you’d be spending for the workers reduces the bunchaton of money they’d make for you to “not worth it”.

That’s called “market value” for the labor.

Maybe you can play with things a bit. The other guy offers more money but you offer better medical (for instance) and some folk will like your deal better and some folk will like their deal better. Both of you get people working for you, maybe not all you would like, but some.  Not an ideal situation for either you or your competitor but, hey, at least your still making money if not quite the same bunchaton of money you might if not for that pesky guy over their competing for the same workers.

Now suppose there is that glut of workers.  There are a lot of workers sitting idle.  They don’t have jobs.  They are earning nothing.  As a result, you can offer less to get them to work for you because something is better than nothing.  That, however, is what you find in mindless “unskilled labor” where any warm body will do the job.  Even there, however, not all unskilled labor is the same.  There are those who will throw themselves into the job giving it their all, and there are those who will do the bare minimum they can get away with, and there are those who you have to stand over every second to get them to work at all.  The third group, you want to get rid of as soon as possible.  If you have to constantly stand over them, you’re not doing the things you could otherwise be doing–finding customers, finding suppliers providing the best value, arranging for other workers.  You’re losing all that for the “gain” of a worker doing not just the absolute minimum, but requiring your constant attention to get even that much.  That worker is a net cost to you.  The worker in the middle, might be okay to keep, but only just.  The workers in the first group though, ah, they’re the ones that can be quite valuable to you.  You want to keep them.  And since you already have them and they’re already familiar with our operation, you want to keep them happy and maybe provide training so they can move up to jobs requiring more expertise where they can make more money for you.  But to do that, you have to increase their compensation because there’s always that competitor ready to hire them away once they show themselves as having more value than that “glut” of “interchangeable warm bodies” workers.

This is why as of 2017 only 2.3% of all hourly paid workers earn at or below the Federal Minimum Wage.  The belief that reducing or eliminating the minimum wage will lead to a precipitous drop in earnings is, to put it simply, ridiculous.  The market doesn’t work that way (when it’s allowed to work).

There is a flip side, however.  Note that the whole argument is about good workers who make money for their employers.  But what about the guy who doesn’t have the skills and expertise of those folk.  Is he forever locked out of getting a good paying job, of having employers compete for his labor?

While this worker might not be able to compete in skill and experience with those established workers, there’s one area he can compete on:  price.  An employer who would not be willing to chance this less experienced, less skilled worker at the same price as the established, skilled workers, the employer might be willing to give him a shot at a lesser level of compensation.  This provides an opportunity to gain the experience and skills, to demonstrate the work ethic, to show that, yes, the worker has value to contribute to an employer and, thus, get into the position where employers have to offer him more to avoid losing him to competition and taking that value with him.

Now this is where things like Minimum Wage and Union contracts and other things that limit how much the worker can compete on price come into play.  By requiring a certain level of compensation regardless of skill, experience, or work ethic, they limit the new, inexperienced, unskilled worker’s ability to compete against those who have more experience and skills.  And so it becomes harder for these folk to enter the work force in the first place.  You end up with an increase of “under the table” arrangements which is less useful for establishing value to employers (being illegal and therefore secret).

Thus, Minimum Wage ends up hurting the very people it is claimed to be intended to help–those on the bottom, having difficulty transitioning from unskilled “interchangeable warm bodies” jobs to jobs earning higher compensation.

Sure the “raise” from an increased Minimum Wage or a new above-market-value contract is great for those who have the jobs.  Not so much for those fired, or laid off, or never hired in the first place because of the enforced distortion of market forces.

The result of all this is that Minimum Wage is one of those things that sounds good if you look at it quickly and don’t think too much about it but just doesn’t work in practice.