The Illusion of the Minimum Wage
GroundReport | Author: Paul Sterne Posted: 11/25/2013 at 1:43AM
My daughter once lectured me at Thanksgiving dinner on the intellectual bankruptcy of the minimum wage. She had just returned from a semester at privileged Georgetown University where her neoclassic economics professor had convinced her that if supply and demand in the labor market were just allowed to find equilibrium through unregulated pricing, the economy would find its optimal level of output and all would benefit; abolish the minimum wage and the economy will achieve full employment and maximum production — a simple and compelling argument.
But like most economics professors – both real and those that are the butt of jokes – the professor had made an impossible assumption. He had assumed that the minimum wage was a proxy for what the wage earner consumed in terms of food, housing, healthcare, transportation, fuel and educational services, when, in fact, it is not. Remember in economics all things are dualities – in each transaction someone gives and someone gets. Just because you pay someone the minimum wage does not mean that that is what they consume.
Think about a minimum wage worker at a large corporation like McDonalds or Walmart or a small business like the corner dry cleaner or deli. Society will not tolerant that worker being hungry, sick, homeless, without transportation, cold or ignorant. These basic human rights are now built into the social compact. What the worker does not get paid by his or her employer is paid by others, sometimes directly from some level of government and other times through unfunded mandates
If the worker is hungry, they can get Food Stamps and subsidized lunch for their kids at school. If they are ill, they go to the emergency room for free or get Medicaid. If they are homeless, they can check into a shelter and eventually get subsidized housing. If they lack a ride, they take public transportation where the ticket price equals 1/3 of the cost. If it’s cold, some get a heating oil subsidy. And, of course, public education is free.
In the end, the difference between the minimum wage that is paid and the ‘living wage’ is received is paid by someone. The way the economy is organized today that payee is the middle class – living and to be born.
Mind you, I don’t begrudge the minimum wage worker these basic services. We live in a civilized country and everyone should have access to food, shelter, medicine, fuel, education and mobility. I am not so arrogant to think that I ‘earned’ the physical comforts that I enjoy, just lucky enough to be born at the right place at the right time to the right parents.
But what does make me mad is that the minimum wage benefits employers and their owners at the expense of the rest of society. It is a big part of the reason that the income gap is rising in America. The rich have figured out a very clever way of shifting more than 50% of ‘the unit cost of labor’ to the middle class. In the end, the minimum wage increases the profit margins of each employer who is not paying the full ‘living wage’ to its employees. By passing on the majority of the ‘living wage’ to society through legislated social safety nets and subsidiaries, the ownership class has maximized its return on investment. It is a big part of why corporate profits are booming, while median after-tax income is stagnant.
In the end, regardless of what the minimum wage is, the ‘living wage’ has to be paid by someone; society demands as much. Today, some of it is paid by the middle class in the form of disproportionate income, sales, bottle deposit and real estate taxes – Warren Buffet pays less tax on a percentage basis than his secretary. Tomorrow, the remainder is added to the deficit that the middle class will pay through inflation, higher taxes, economic collapse or the combination of the three.
This Thanksgiving, society would be much better off if the neoclassic professor at Georgetown University were to focus on a far simpler and fairer pricing mechanism. He should teach his students to bring supply and demand into equilibrium by making sure that the true cost of production is reflect in the price of each good or service, i.e., that the unsubsidized cost of flipping a hamburger is reflected in its price. That could be done by raising the wages of workers in minimum wage jobs like fast food up to the real ‘living wage’ – probably about $15.00 per hour. That might mean that the cost of a Big Mac would double from $4.20 to $8.40; a price that would shock the public, cause Big Mac demand to plunge and appear as hyperinflation, but at least the true cost of making a burger would be signaled by its price. Raising the price of a Big Mac to its real ‘living wage’ cost would sharply lower McDonalds’ corporate sales and profits, but after a ‘shock therapy’ adjustment period, when a true supply and demand equilibrium is reached, middle class taxes would decrease, after-tax median income would rise and aggregate demand would increase.
So the next time you buy fast food at Five Guys or KFC or Wendy’s ask yourself whether or not you are getting such a great deal. If you mentally add 100% to the price of every item you eat, they will not seem so cheap. A Big Mac for $8.40 – well I never.
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