We’ve recently been asked to advise a few of our clients on strategies for dealing with things like Federal Wage and Price Guidelines or changes to benefits and the Minimum Wage, etc. Most of our clients pay well above the minimum wage to their workers for their talents so didn’t fully understand that it would have no effect on them and they were wondering why. Or why our firm takes the position that meddling by state entities in setting wage guidelines is a bad thing. I’ll reprint verbatim the short excerpt of advice we’ve solicited from the renown economic advisor J. J. Isherwood on this particular topic (it’s not new) which he teaches to his students:
“If a minimum wage has ANY effect on ANY economy it is ALWAYS bad. Always. A first year economics student learns this fact in some of his or her beginning classes; it`s not debatable, it`s not a Republican or Democrat issue, it`s not a fairness or standard of living issue. Like the 2nd law of thermodynamics or energy decreasing with the inverse of distance it is a simple and unbeatable mathmatical law of economics. You never get something for nothing, and you can never make something out of nothing.
Here is how it works–a leglistated wage of any kind, if it has any effect on a labor market, will ALWAYS throw a disporportionate amount of people out of work compared to the statndard of living increase for those still working. Even IF you could ignore the moral hazard toward those now on the dole, and even IF you could transfer ALL of the money from the marginal increase of the standard of living of those still working (you can`t) to those thrown out of work you will still lose the work lost by introducing via law an inefficiency into a market.
Wanna see how ? Grab a sheet of paper and try this:
Draw a horizontal and vertical axis–just like you did in high school when you were drawing graphs and lines. Put wage rate ($) on the vertical axis, and labor quantity (units of work–Q) on the horizontal axis. Give youself some room to work.
Now draw a reatively large and flat “U” shaped curve near the middle of the graph. Make your `U` so it has a fairly shallow slope on both ends (decreasing and increasing) so you have some room to work with–kind of like a bowl would look like if you took a cross section.
Guess what–you just drew a supply and demand curve for most labor markets. You have decreasing costs on the left side (due to startup costs where fixed costs dominate) and increasing costs on the right (where the supply of your labor resources increases at an increasing rate). If you think about this it makes sense–you see costs drop as you get started, and as you have to work more and more each hour becomes more expensive as supply dries up. U shaped curves are pretty much standard for most operating markets (there are some exceptions in special cases but not this one).
Different labor markets have different variations of this (and they are at higher and lower costs in the vertical) but they all share the same characteristics. An experienced pilot, for example, might have this U-shaped curve at a higher vertical position than a beginning cashier and these curves are specific for each labor market, but they all have the same basic characteristics.
Now we get to the fun part. Note the bottom of the curve. Draw a horizontal line parallel to the horizontal axis which is tangent (touches) the bottom of the U-shaped curve. Take it over to the left to the $ — this is the point at which the labor market equilibrates and the point of maximum efficiency. If we do NOTHING this is the wage rate where the market operates and equilibrates–and NOTHING is exactly what we should do. But the regulator can`t live without meddling, so let`s meddle a bit and set a minimum wage. Just for reference, draw a vertical line (parallel to the vertical axis) running through the very bottom of the U-shaped curve and note where the Q is. We`ll use this later.
Draw a horizontal line BELOW and parallel to the horizontal one you just drew for the equilibrium line. This is what happens when we set, by law, a minimum wage below where the labor market naturally equilibrates. When our economy was functional 95% of our labor markets looked exactly like the one you just drew–the minimum wage has no effect whatsoever (which is the BEST thing that can happen) because the market naturally equilibrates higher. By our job destroying actions we have (due to labor oversupply) dropped this number probably closer to 75% to 85%–and maybe even lower. But you get the idea.
Now let`s see how a minimum wage hurts markets. Draw a line parallel to the horizontal axis but ABOVE the horizontal line you first drew–make this well above it and the bottom of the U-shaped curve so you can see what you have done. Note on the $ axis this is well above where the market naturally operates.
Look at where the line you just drew intersects the U-shaped curve on the way down on the left side–this is where your market is now operating (because your minimum wage rate is now above where the market would naturally equilibrate). Draw a vertical line straight down from where your horizontal line intersects the U-shaped curve (parallel to the vertical axis). Note where it now is on the horizontal axis (the Q axis which represents labor unit quantity–jobs). This Q will be much less than the Q represented by the first vertical line you drew (the vertical line going through the bottom of the U-shaped curve). Look at the difference between them on the horizontal axis. THESE ARE THE JOBS LOST (or the amount of people underemployed).
What happens to these people ? Well, they are thrown out on the dole. Being the “kindly” government meddler you are, you come up with the bright idea you can tax those now working and distribute this money to these people out of work (giving them some form of public assistance compensation). If you look at your curves you would notice you could tax those now working at the higher wage and give it to those Qs now out of work. But not only does this defeat the original purpose of those now working at the higher minimum wage (they make money only to have it taken away in taxes–in fact this is one of the reasons most of us working stiffs get screwed ANYTIME there is ANY tax hike of any kind) but also you lose money because, like friction, it is impossible to move money with 100% efficiency. So we have to give maybe 30% of this to bureaucrats to even get it over to those now out of work or underemployed–and everyone is worse off. Even the bureaucrats who are not doing anything productive–simply helping us deal wth a self-induced mess we just set up with our own law that shouldn`t be there.
We ALSO get the moral hazard of those now working and those not–why should those working continue to work to see their money taken away and given to those on the dole ? Black markets form where folks now work illegally (which actually are a positive effect economically), and we then devote resources to arrest, prosecute, jail, and defend them or their employers (which is even MORE money down the drain). This also encourages illegal immigration, etc–especially because we usually don`t deal with only the damage by our minimum wage but also the other federal mandates which needlessly hike labor costs.
We`re not done with our destruction, though. Look at the area under the curve bounded by your two vertical lines and the middle and upper horizontal lines. THIS IS THE NET WORK LOST–which is wholly unrecoverable in every way (the mathematical product of price times quantity of a labor market which is work). Like setting money afire our law has just burned up this work and it is gone forever and cannot be saved–all because of a stupid law. This also doesn`t include the non tangibles of HAVING a job–learning to work, show up on time, the pride of working, etc–which are the perfect characteristics for starting jobs for kids still living with their parents. Instead we so kill jobs that experienced adults and college grads are working at minimum wage jobs and kids are unemployed and not learning trade skills. People now effectively ‘fall’ from higher paying jobs into our minimum wage.
Other federal mandates do similar things by artificially hiking labor costs while decreasing efficiency — and this is what we have done to ourselves. THIS is why we have record numbers falling into the poverty level, and THIS is why we have record numbers unemployed/underemployed and on food stamps and/or seeking government assistance. By killing jobs and forcing labor oversupply — as well as adding burdensome non-value added collateral costs to everything–people fall into poverty. In fact, we have so overburdened our economy by punishing workers, punishing markets, and promising and distributing entitlements (which act like drugs and chains to a population) that our treasury is completely unable to meet even the short term cash obligations without borrowing great sums of money–over 50% of our cash flow–as well as destroying currency, work, and capital by printing money on top of this.
If we leave market forces alone not only do these markets function at the optimal efficiency, but begin to shift upward as labor supply starts becoming more scarce (the U-shaped curves are dynamic as well as specifc to markets). This results in a better standard of living for everyone WITHOUT any government help or mandates (it ALSO can result in a little inflation if productivity gains do not happen–fortunately the two are usually synergistic). So what we want is the market to NATURALLY equilibrate–without interference–and naturally increase our standard of living. By artifically meddling with it we ALWAYS cause this not to happen.
Current proposals are to INCREASE the minimum wage–which will INCREASE job losses, INCREASE economic inefficiency, and INCREASE the damage we are doing with our own laws–while at the same time throwing more people out of work and making them dependent on unemployment, food stamps, welfare, and other state entities. I would certainly have expected this, but it is important to know WHY what we are seeing is happening–I hope this little ditty in some way accomplishes this.
Intuitively, it’s something most folks can figure out. Why stop at $15 dollars an hour; let’s make it $5000 and we’ll all be rich !
NONE of this is new; Cicero codified it in 50 BC. Adam Smith put it into perspective (our Constitution being largely written based on this and John Locke`s — as well as others` — phlosophies). Milton Friedman and Art Laffer also put this much better than I ever could.
Point being if ANYONE in a position of public policy is advocating a minimum wage or INCREASING the minimum wage they should be no where near the public sector or charged with making laws (and they are the last person in the world you want to listen to). We don`t NEED OR WANT a minimum wage–it always causes harm.
The dirty little secret these would-be Wesley Mouches will not tell you is you don`t NEED their help or protection in the form of a minimum wage–or much else. Labor is a resource like any other and in a free market companies are forced to COMPETE for your talent. Statists would like to buffalo you into believing that without their help the evil corporations would screw you; nothing could be further from the truth. In an open market corporations HAVE TO pay you what you are worth–because they compete for your labor and productivity (and skill level). Labor in all its forms is a finite resource and a huge investment to a company–if they want to succeed they will have a well paid, well taken care of, and well skilled labor force (and developing and training this force as a long term investment is all part of the picture). A company which mistreats its employees in an open market fails because the employees vote with their feet and go elsewhere–and companies know this. The thing an `evil` corporation FEARS THE MOST is an open market. Unfortunately our corrupt corporations team up with crooked politicians and pass protectionist legislation which favors THEM–and this crony `capitalism` cuts out the competition and results in wages falling into the minimum wage. The best defense toward a decent wage is a free and open market.”
Not surprisingly, we are developing strategies with some of our clients which involve increased use of automation consistent with maintaining customer service quality for those who might be affected by feckless Federal action. We are also seeing an increase in trend to ‘cash out’ of otherwise profitable businesses who don’t want to deal with these hazards. We are firm believers in the concept that you never get something for nothing and one should scoff at advisors who tell you otherwise.
Diatomaceous-Johnson 