A Fresh Consideration of the Minimum Wage

For generations, our society has been having a discussion about what constitutes a "fair" wage.  In the current debate, I am able to discern to prominent sides.  The conservative position states that wages represent the market value of a worker's labor in a particular field, and so are naturally fair.  Furthermore, any attempt to raise those wages artificially will make workers cost more than they are worth, and therefore "kill" jobs.  The liberal side says that the market will naturally lead to exploitation of low-skilled workers, and so an arbitrarily determined minimum wage must be established to protect workers from accepting jobs that do not pay well enough.

First, let's examine what it means that wages represent "market value."  The conservative assumption is that a wage represents the value a worker contributes to their firm (their productivity).  This means, basically, that each worker is being paid the exact amount that they add in revenue to a firm, so that raising their wage would make them cost more than they produce, killing their job.  However, in reality, workers tend to produce more value for a firm than they cost, resulting in profit for the firm.  A worker's productivity is the upper limit to what they can be paid, but they would only be paid that much if an employer couldn't find somebody else willing to work for less.  This is the primary reason why jobs with specialized skills pay more than jobs that any bozo could do.  The fewer people could replace you, the more bargaining power you have, and the higher wage you can demand.

There is another aspect to productivity that bears further consideration.  It is literally impossible to determine the actual productivity of any individual worker in a firm.  One can measure the marginal productivity of adding a worker of a particular type, but that is almost meaningless in determining one's actual, individual productivity.  The reality of the modern business is that all of the workers contribute to a larger whole, and how much each contributes is hopelessly entangled with how much the others contribute, and what productive capital is available.

Think about it this way: the CEO at McDonald's appears to be producing several million dollars of value, because that is what he is paid.  And yet, if you removed all of the cooks, cashiers, and managers, the CEO would produce exactly $0 in revenue for the firm.  How, then, can it be said that he is producing several million dollars worth of value for the firm?  How can you separate his productivity from the rest of the employees' when the productivity of each relies on all the others?

The truth about our society is that we have developed such an extensive infrastructure of productive capital that each worker actually contributes very little; most of it is the machines, structures, procedures, systems, and culture that form the environment in which they work.  The wages workers receive are thus more representative of how replaceable they are, not how valuable they are.  The conservative belief that the market will produce wages that reflect a worker's productive value is based on deeply flawed assumptions.


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Now, let us examine the liberal proposition that the government should set a minimum wage to protect workers from taking jobs below a threshold pay level.  First, we must consider the primary objection: does the minimum wage increase unemployment? The answer, I believe, is "it depends."  As stated earlier, the productivity of any given worker is impossible to determine, but the average productivity of all workers can be.  What is certain is that if the minimum wage rises above the average productivity of workers, then some will have to be laid off.  Some will also probably be laid off at lower levels than that if their marginal productivity is found to be lower than the wage they are paid.  Thus, if the minimum wage is low enough, it will not significantly impact employment, but if it is set too high, it will kill jobs and increase the workload for those who remain.

This is intuitively obvious; if the government raises the minimum wage by $0.10 an hour, it will almost certainly not have an impact on employment.  However, if the minimum wage were suddenly raised to $400 per hour, the vast majority of jobs would be instantly terminated.  The trick, then, is finding the highest wage at which employers will not have to reduce employment.

Unfortunately, there is not one such level.  Each firm has its own average wage, and each type of worker within each firm has its own marginal productivity curve, so some firms will end up cutting positions at much lower wages than others, and some types of positions are much more vulnerable than others.  

Luckily, there are at least some patterns in the distribution of which firms would lay off workers at which level.  Basically, the more industrialized a region is, the higher a minimum wage it can support.  This is because productive capital increases the productivity of each worker.  This is why urban centers like Los Angeles, New York, and San Francisco have relatively high wages, whereas rural areas tend to have much lower wages.  The disparity in wages between these areas implies that minimum wages should not be uniform between them, or else they will either be insufficient for the cities or stifling for the rural ones.

Basically, that means state-by-state or, better yet, municipality-by-municipality laws would make it easier to target the minimum wage to the appropriate level for each area.  Even so, achieving the correct level would be quite a technocratic feat, and adjusting it with enough flexibility to match the constant flux of markets would be virtually impossible.  Perhaps it could be argued that we'd have it close enough to be worth the losses in the job market, but I think we should approach the problem from the other direction.

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The job market, like any market, determines prices through supply and demand.  In our case, there is a much greater supply of workers than demand for them -- that is, a lot more people want to work than companies want to hire.  Relatedly, there are huge legal, financial, and inertial barriers to self-employment, so most people must work for an existing firm in order to generate income (as opposed to going into business for themselves).

Additionally, we now live in a society where the majority of people have virtually no assets and a lot of debt.  This means that almost everyone must work in order to afford basic necessities like food, clothing, and shelter.

This is great news for employers, because it means they will be able to find lots of people who are desperate for jobs, and will therefore work for very low amounts.  And, because of the huge capital infrastructure, those workers will generate great profits for their employer.  The situation is not so great for workers, and even worse for the unemployed.

The solution to this problem is to shrink the work force.  Reduce the supply of laborers and their wages will rise.  No need to force employers not to hire below a certain wage; just reduce the number of workers so that each has more negotiating power and higher marginal productivity.  There are various ways we could achieve this, and I'll post about that another time.  Stay tuned for my solution to increasing income and wealth inequality!