Obama’s Minimum Wage Increase Is Not a Bad Idea
February 21, 2013
I suppose the true believers will be offended that I am not necessarily against minimum wage laws in principle, and specifically, the minimum wage increase to $9 recently mentioned in president Obama’s State of the Union address.
Yes, it is true that you can’t simply legislate yourself to wealth. Congress can’t solve poverty simply by mandating a $30 minimum wage, for example. I think everyone knows that.
However, it is also true that laissez-faire capitalism of the late 19th century developed many unfortunate characteristics, that became so acute that several generations of intellectuals and national leaders sought ways to deal with them. The minimum wage is one such measure.
If the minimum wage is kept to a reasonable level, it can be a good idea. A $9 minimum wage would be 54% of the median wage of $16.57 per hour as of May 2011. That was nearly two years ago, so call it 50% of the median wage. This level seems about right to me.
The dynamics of a minimum wage are not quite what many assume. If one company is mandated to pay its workers $15 an hour, it might face competition from another, similar company which can pay its workers $10 an hour, leading eventually to its decline and failure.
But, that is not the situation here. Instead, we have two companies who must both pay its workers a minimum of $9 an hour. There is no competitive issue of this sort. Companies would have competition from companies in foreign countries, which can pay less than the U.S. minimum wage, for example China. However, wages in places like China or Vietnam are so much lower than those in the U.S., that most anything that can be outsourced to low-wage foreign countries already has been. Thus, that too is a non-issue.
This leads then to the real issue: can a company which pays its workers the minimum wage pass the additional cost onto the end customer? To what degree would the price hike lead to a decline in sales? This depends on what portion of total expenses are represented by employees paid the minimum wage. For example, a 20% rise in the minimum wage might result in a 10% increase in total employee compensation at companies that hire a large number of workers at the minimum wage. Many employees are making more than the minimum wage and would thus be unaffected. Also, non-wage compensation like healthcare, pensions and so forth would also be unaffected.
If employee costs are 10% of expenses, a fairly common situation at places like retailers that hire many minimum wage workers, that means it would take a 1% increase in selling prices to pass along the increase in the minimum wage to the customer. Remember, all other domestic competitors would face a similar situation, so prices everywhere for similar services would rise by 1%. Which is not much, really. Would it affect things, in some way? Yes. Would it be some sort of catastrophe? I don’t think so.
On the other side, we have the minimum-wage workers, who are getting a 20% increase in income. Even though that is only a dollar and change more per hour, it can mean a lot to people at this income level. They work hard all day like everyone else, and our society is generally better off when the fruits of our collective labor are more evenly received.
The real solution to income disparities is a change in the capital/labor ratio. You should have lots and lots of capital, and, ideally, a stable amount of labor. That’s why Asian countries with high savings rates, like China, show dramatic increases in median incomes. Each worker is enjoying the use of more and more capital, making them more and more productive and thus generating a higher and higher income. As more capital chases a limited number of workers, unemployment falls and wages rise.
In the United States, we have very poor capital creation, an expanding population due primarily to immigration, and, due to various factors known as “globalization,” the effective competition from billions of new workers in places like China and India. There is not much to do about this except to make more capital available, through a much higher savings rate preferably in excess of 10%. Capital can flow internationally to some degree, but domestic investment is still closely related to domestic capital creation.
Also, the government should not be destroying what capital is created by deficit financing, which usually results in consumption at best, and, more often, total waste. Other forms of capital destruction, such as lending for consumption, are best discouraged. High taxes on capital, such as on capital gains, inheritance, corporate profits, interest and dividends, also consume available capital and discourage capital creation.
These are the proper capitalist approaches to income disparities, unemployment, and wage growth. However, within that context, a minimum wage can serve a useful and beneficial role.