Several of our well heeled clients–operating multiple businesses–have come to us for financial consultation and it always surprises us when they reveal a basic lack of understanding regarding how labor markets work. We’d have thought that their contracting advisors would’ve pointed these things out to them and it casts a bit of doubt on where they’d gotten previous advice. Specifically, they often ask about the minimum wage. Which is a sort of first year economics student issue.
If a minimum wage has ANY effect on a society or economy it’s ALWAYS bad. Period. People who tout the minimum wage as a ‘boon’ or raising it ‘good’ are either manipulative or misinformed. This has the fundamental assumption that a person is FORCED to work for a particular entity and has no control over his or her destiny; a concept we wholeheartedly reject here at D-J. This philosophy creates a society of professional victims as well as detaching a person from the responsibility of making personal decisions in life–it enables horrid behavior and results in wasted sections of ones’ life.
To specifics–why do we claim a minimum wage bad ? It’s ECON 101. And you can rapidly prove it to yourself.
Draw yourself an X-Y graph just like you did in high school. On the left side (vertical axis) is wage rate, and on the horizontal axis is supply of units of labor. Now, draw a broad U-shaped curve on this graph giving yourself some room to work on all sides–this represents a labor cost curve typical of just about every labor market (and most competitive industries–as long as industries are allowed to continue relatively unbridled this is pretty universal. Fixed costs dominate on the left side and variable on the right with an equilibrium point at the bottom). This is a generic labor curve representing any particular labor market (and different markets would have differing slopes on the sides of the bottom of the “U” as well as equilibrate at different price points). The dirty secret most statists don’t tell people is that capital COMPETES for labor just like any OTHER resource; it has to pay market rates for talented people across ALL sectors for ALL people (whether that person is a fry cook, janitor, security guard, surgeon, pilot, nuclear reactor operator, gate agent or anyone else). THEY have to pay for a person’s talent and time just like anything else. So they have to offer competitive wages WITHIN that career field. And people are free to balance their leisure or ‘other life’ time with what time they want to work–and in what they want to do with their time (fr’ instance, an ‘off the grinder’ might prefer to devote close to 100% of his time to self-subsistence–building, hunting for food, seeking water, planting, cutting trees for energy, etc. Others determine what degree of time they wish to devote to personal survival or entertainment tasks and working in a particular career field).
Now draw a horizontal line from the vertical axis to the bottom of the curve. Draw one vertically from the horizontal axis to the bottom of the curve, and place a dot at the intersection of the bottom of the curve and the two lines you’ve just drawn. This is the point at which that labor market naturally equilibrates within a labor market totally devoid of government (or any other) interference. The horizontal line which intersects the vertical axis depicts the prevailing wage rate and the vertical line the natural quantity of work obtained at that rate. Anything operating on the left or right is an inefficiency in the market which detracts from everyone involved.
Up to now, we’ve dealt with an unencumbered free and open labor market. Now, let’s monkey with it a little bit. Let’s say the government mandates a minimum wage BELOW the bottom of the curve–perhaps your curve equilibrates at $10 dollars an hour and the government mandates a 5 dollar an hour minimum wage. Go ahead and draw the horizontal line at the 5-dollar point under the curve (below the bottom of the curve). What effect does this have on the price and quantity of labor ?
Answer ?
ABSOLUTELY NONE. No effect. People in that labor market are ALREADY being paid $10 an hour for their time. They might say ‘that’s nice’ to your legal ‘minimum wage’ of five bucks but in order for employers to get me to work in that particular sector they gotta already pay me $10.
THE SECRET most miscreants touting a ‘minimum wage’ DON’T want you to know is that historically (and to date) over NINETY PERCENT (the latest number is closer to 97%) of labor markets in the US are at this point. They naturally operate ABOVE the mandated minimum wage (or historically have). So this big ‘thing’ that statists tout historically has had NO EFFECT. NONE WHATSOEVER. NADA.
But communists are ever busy; the devil ain’t lazy. So let’s look at what effect raising the legal minimum wage ABOVE where the labor market naturally equilibrates has.
Draw a horizontal line well ABOVE the bottom of the curve intersecting the vertical axis (give yourself some room to work). Perhaps at $20 an hour. Now, draw a vertical line down to the horizontal axis at the point this horizontal line intersects the U-shaped curve on the left side. These respective quantities and wage rates are where the government has forced the labor market to operate due to law. You’ll notice that while those still working make $20 an hour, the quantity of supply has significantly dropped (putting people out of work–those employing would be willing to hire those individuals to work–just not at 20-bucks an hour). What happens to those people ?
Well, they don’t work at all. Perhaps being replaced by robotics, illegals (who work illegally for less money), overseas labor (outsourcing), or not at all.
Perhaps we decide that NO ONE should work for less than 20 bucks an hour and establish a ‘safety net’ for those now unemployed. Where does that money come from ? Well, from those working now at 20 bucks an hour. Who now pay more through either direct taxation OR through inflation to support public debt of paying those out of work (which we’re presently seeing). Their newfound ‘boom’ in salary increase is quickly eaten up by taxes and inflation (which is nothing more than a disguised tax) to the point that they’re losing more of their salary than they had gained. Disregarding the immorality of what we’ve done let’s say we just want this to be so. We’re not done with our destruction of the economy.
Can we move that money gotten from those working with 100% efficiency ? Nope. The employer and employee have to devote accounting time and method to PAY the additional taxes. Government offices to collect taxes and then redistribute them have to be created and staffed. People out of work and collecting this ‘free’ support need to devote their time to finding out how to GET it from these governmental entities. There are huge collateral costs in MOVING this money (just like it takes fuel to carry fuel it takes money to move money). So we perhaps can get only 60-70% over to where we want it, the rest being absorbed by non-value added collateral costs of a bureaucracy.
As they say on TV–‘But wait–there’s more !’ We’re not done yet destroying our economy. Not only do we introduce the previously mentioned inefficiencies, but we also lose more. Look at the area under the curve bounded by the vertical and horizontal axes between the original (natural) equilibration of the market and the one we’ve skewed through a minimum wage. THIS REPRESENTS LOST WORK — never to be recovered. Perhaps it might be outsourced through foreign sources, illegals, or automation–but for the time being we’ve introduced ANOTHER destructive inefficiency.
So, why hasn’t this completely destroyed OUR economy ? The answer is that MOST markets operate well above this as previously stated. So the destruction has been limited. But marxists are ever busy; they will attempt to raise a minimum wage SO high that it starts cutting into EVERY labor market–rather than affecting only 5 or 10 percent of labor markets more like 50-90. Which is what’s happening in some locations now. And the inevitable job loss, economic destruction, and inflation happens.
How about unions ?
First off, unions have NO role in creating inflation unless they are integrated with lawmaking forces such that they skew market forces through the force of law. They don’t have printing presses and can’t create money. We defer to the excellent opinion of Justice Oliver W. Holmes (in a case that went against him FWIW). To wit: If capital can organize and merge to create conglomerates and alliances so does labor have this right. There are ‘good’ unions, ‘bad’ unions, and everything in between. They must be divorced from endorsing particular political candidates OR parties (and legislation to do so would be wholly appropriate), but otherwise are free to form as the market bears. We would suggest an environment where unions compete to attract workers to avail themselves of THEIR representation skills and abilities. People can pick stocks and mutual funds in their IRAs/401Ks–why not be able to pick the BEST union to represent them individually with a company ? And there is no need for ONE exclusive union to be the sole bargaining entity between a particular worker and a particular company (a worker might choose a larger entity or specific entity for this purpose, or get together such that several workers choose the same union, but competing unions must not be disallowed to exist within a particular sector of labor or company. And it would be beneficial if a worker could choose a union of his choice in dealing with his employer–NOT requiring a sole or single designated entity to function as such).
So when you hear someone with propaganda or rhetoric spouting off about the ‘minimum wage’ being a ‘boon’ to workers, an economy, or anything, rest assured that person is either ignorant of the facts OR a malicious manipulator.
Diatomaceous-Johnson 