CounterPoint: Minimum Wage
Published June 10, 2015
NOTE: This is the second article in a series of two. You can find the first post here.
OK… where to begin? When he wrote his post on the Minimum Wage, Matt assumed that I would disagree with him. Here’s the thing… I think he gets things half-right. But unfortunately, that means there are some things that he gets wrong. So this post is a response. It’s also an attempt to explain my own thinking on this, and why my conclusion on the issue of the minimum wage is… complicated. I’ll apologize right now for being a bit on the “mansplain-y” side of things. But I think if you stick with this, you’ll see why I’m writing this in the way below…
First things first. I think we need to better define our terms, so that we can in fact KNOW we’re talking about the same things. Matt’s post started off with an assertion, “Labor is a commodity, just like anything else and because it is a commodity, the more it costs the less demand there will be for it.”
In fact, labor is NOT a commodity, although I do agree that we often treat it as if it is. I have to admit, this jumped out at me right away. Because if you treat labor as a commodity, then Matt’s argument makes perfect sense. But if you don’t… it changes the parameters a lot.
Investopedia defines commodity as:
1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.
Merriam-Webster (the dictionary folks) defines commodity as:
1: an economic good: as
a : a product of agriculture or mining
b : an article of commerce especially when delivered for shipment <commodities futures>
c : a mass-produced unspecialized product <commodity chemicals> <commodity memory chips>
a : something useful or valued <that valuable commodity patience>; also : thing, entity
b : convenience, advantage
3 : obsolete : quantity, lot
4 : a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price
5 : one that is subject to ready exchange or exploitation within a market <stars as individuals and as commodities of the film industry — Film Quarterly>
I think that 5th entry under Merriam-Webster is actually closest to the way that Matt is using the term commodity. But my point in pulling these definitions and targeting this specifically is that I think this is a key point to understand about the economic system. A lot of people treat economics as if it is the same as physics, a science that has laws that are unchangeable or that are beyond human understanding somehow, and that we just follow along with them rationally. That’s actually a pretty common view, and one that I think is ultimately rather dangerous.
Confession: I’m a Systems Engineer, and I tend to think of things as systems. I’m also extremely interested in holistics, which is the study of whole things, particularly whole systems. I think part of the problem inherent in the kind of thinking that most people do about economics is that they look at the pieces of the economics system as if they were discrete and not connected to other pieces. And I think that leads to a lot of misunderstanding.
So, how does that apply to economics? Matt’s point that I referenced earlier, about commodities, implies that DEMAND is purely a function of price. As something costs more, you sell less. That seems simple enough. However, what economists have learned over the years is that the simplicity masks a TON of assumptions. I’d like to unpack those assumptions a bit.
I think the concept of DEMAND is actually built on two pieces. First, fundamentally you have DESIRE. That is, how much does someone want something? And second, you have the ABILITY TO PAY. Your DEMAND, the bit of it that you personally contribute to our economy is built from your desire for things and your ability to pay for them. You may DESIRE a Porsche, for example, but you can only AFFORD a Corolla. That’s in fact a very large contributor to the fact that you might sell more Corollas than Porsches.
So that’s the DEMAND side of things. But that’s only one side of our basic economic equation. There is another side. The SELL side. A business has a variety of costs that go into creating the thing that they’re selling. They have the cost of materials for example (which from the definition above are in fact commodities generally). There’s the cost of labor. There’s a ton of miscellaneous costs, from complying with regulations, to facilities, to the support infrastructure that makes up the company. But if you took the money that comes in from demand, subtracted those costs, what you have left is profit for the owners of the business.
Now, if the cost of labor goes up, that comes out of your profit. If it goes up too much, you might have to make changes to your business. Exactly as Matt’s example points out. Pass the cost on to the customer. My question here is, is that the best strategy? Because the thing is, what you pay to your employees for their labor is a key ingredient, perhaps the ONLY ingredient, in their ABILITY TO PAY. If you cut your # of employees, you are in fact decreasing the DEMAND in the entire economic system. On the flip side, if you pay your employees more, you’re increasing the DEMAND in the system. So the specific tactic that you choose to handle your business is really reliant on making the best strategic choice. If you’re making a good profit, and your labor costs go up, as long as you are still making profit, the CHOICE to pass costs on to customers or to cut employees is in fact a choice. It’s not in fact a rational law of costs go up, prices go up.
With me so far? Good… now as the owner, you might want the profit to be as big as possible. That seems rational. So you want to keep all of your costs, from materials to labor to infrastructure, as low as possible. So, I’m not surprised that owners have the attitude that labor is a commodity, that any one person can do just the same job as any other person. However, even on the “unskilled labor” level, there is in fact significant range in how people do a job. And the thing is… most people are not in fact owners. What most people bring to the economy, what they get their living from, is in fact their labor. So for most people, the perspective of the owner isn’t necessarily the best perspective.
Which brings me to the minimum wage. Finally. I have a simple question here. What is the minimum wage? What it is for? And most importantly, does it do a good job of performing the role/goal we have for it AS A SOCIETY?
Here’s where I actually agree the most with Matt. I honestly think the minimum wage is a crappy way of doing what it’s supposed to. My own take on it is that the minimum wage is meant to set a floor for labor, meaning this is the absolute lowest that wages can go. Again, I’m thinking of economics as a system. Without the floor, employers are free to treat workers however they wanted. If you read economic history, particularly towards the end of the 19th Century, you’ll see just how bad this can get. So I would agree with the basic point that there is value in the idea of a floor, that says you have to as an employer do at least this much for labor.
However, as I’m sure Matt will point out here, all that means is that employers hire less. I’d say that’s actually the core of his argument. Raise the minimum wage and employers will hire less. In some cases, that’ll be a totally valid decision. If an owner can’t make a profit, then of course, the cost has to go down. But in others, that’s a childish reaction to the wage increase, that actually causes a decrease to DEMAND in the entire system (and affects a company’s ability to make a profit in that system). When companies make as much in profit as a company like McDonald’s for instance, it’s beyond childish.
Which I think brings up the real question here that I have. Why do we not value labor? Particularly when that’s the very thing that makes most of us our living? Matt even says it explicitly, “do I think a part time fast food worker deserves $15 an hour to get my order wrong? No.”
Now, I’ve never done fast food work myself, but I have bussed tables. And been in a call center. These are also generally minimum wage jobs. And let’s be honest, they suck. They’re dehumanizing, you have to deal with people that don’t appreciate you, and at the end of the day, you don’t even get that big a share of what the company does. And yet… what the company does, the very existence of the company is in fact predicated on these jobs being done. These are the jobs that are being increasingly automated, because companies and society do not value having an actual human being in those roles.
HOWEVER… the problem that I have with that is back on the DEMAND side of things. This is the whole basic argument about workforce automation and robotics that has been a part of our Robot Overlordz conversation. By optimizing from the SELL side of things, we are actually de-optimizing the DEMAND side of things. That feedback loop is what is decreasing the size of the economy. Every human that no longer has the ability to pay reduces that demand, in effect reducing the size of the system. This is what economist Robert Reich calls the vicious cycle. The more we eliminate jobs, the more we have people fighting over the remaining ones. And as a byproduct of that, the more afraid and the angrier people get. Because we’re all scared of being irrelevant.
It’s this fear that is distorting our economy, creating what economists and sociologists call the Precariat. That’s the bit of the labor force that is most affected by the minimum wage. It used to be that people could actually make a living on the minimum wage. It used to be that the minimum wage was not as far behind the wages of other professionals as it is now. It hasn’t kept up, any more than our ridiculous retirement age of 65. These old tools don’t accurately reflect reality. In terms of systems, they don’t have the proper feedback loops to accommodate change in the system. And that’s directly affecting the health of the system.
What’s more, as the minimum wage has fallen behind the growth of the economy generally, more and more of the expenses of daily life for people falling into that pool have outstripped their “ability to pay”, it’s been up to the government to step in and “make up the difference”. That really means the vast majority of people have seen their taxes go up. But if you look at the data, that hasn’t been universally true. The richest 1%, actually more the 0.01%, in effect “the owners”, have paid less and less of that. Which means the rest of us are paying more, decreasing our own ability to pay. The owners are also the ones that capture all of the profit.
Here’s the thing. This is bad systems design. Our feedback loops aren’t working properly. Instead of being in a positive, growth cycle, we’re stuck in a vicious cycle which is shrinking the economy. We as a society are making bad choices. It’s time for a change, to realize the interconnectedness we all share. I’m not saying everyone has to be equal and redistribute the richest’s wealth to the poor exactly… I’m saying that we as a society need to get away from that owner perspective of only valuing profit. It’s actually more in the interest of the majority of us to side with the labor side of things, that says that minimum wage person is in fact worth paying $15/hour for getting your order RIGHT. Because otherwise, the economy will continue shrinking and the richest will continue their acceleration away from the rest of us. I for one don’t want to live in the future portrayed in Elysium, where the rich sit in their space stations while the rest of us rot on polluted Earth.
There is in fact a difference between self-interest and enlightened self-interest. Self-interest says that owners will continue to maximize profits above all else. Enlightened self-interest says I will take less now so that there will be more for everyone. I for one don’t quite understand why we all look at this from the perspective of the owner, especially when we’re not owners ourselves. I think that’s partly because capitalism to us is like the ocean is to the fish, it surrounds us and it’s become indistinguishable. It just is. But that’s not actually true. It’s packed with assumptions. It’s in fact a system, that is made up of human CHOICES. We can in fact choose differently. Just like in politics, where 3rd parties are continually mocked by our mainstream mass media… if we want different choices, we have to start changing the rules. We have to question our assumptions, and we have to think for ourselves.
I think the biggest question is what kind of society do we in fact want. Do we want Elysium, where only the wealthy and celebrities are valued? Or do we want a world where everyone has opportunities, where everyone is valued? Do we want the world of Star Trek?
As for the minimum wage, well… I have to say I do think it should be raised, just because it has fallen behind. It’s a crappy tool, but it is the only tool we have right now in this area. I’m more in favor of other tools… but doing nothing, or siding only with the owners, is the worse of the choices before us. So, yeah, I do have to disagree with Matt. I could say more on this, but I’m already at about 2500 words… this has gotten a bit rant-y. I’ll just close with, I think it’s connected to more than just this single issue and that we should really be thinking hard about the kind of world we want and what that ACTUALLY entails.
NOTE: For Matt's original post, click here.