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The Fallacy of Minimum Wage Advocacy

Website recently released an article entitled Here's What's Happening 2 Years After This Restaurant Started Paying Workers $15 an Hour. The author of the article takes deliberate steps to create a hit piece which will generate controversy and attract views. He has effectively reduced to the absurd an example of individual, voluntary human action to suit his agenda for political reform. The author even unwittingly acknowledges the voluntary nature of this transaction, yet he will surely and conveniently ignore this facet of the narrative: "On the outskirts of Detroit, where the minimum wage is $8.15, one fast-food restaurant has been voluntarily [emphasis added] paying its workers $15 an hour for two years, and business is thriving."

In his article, the author recognizes that "The Detroit metropolitan area is still reeling from deindustrialization, with one of the worst unemployment rates in the country." He acknowledges that "slack in the labor market puts a downward pressure on wages." He claims that this is the consequence not of the reduced capacity of business but rather the position of desperate workers who are unable to bargain for higher pay. He concludes that "Employers tend to take advantage of this." Ultimately, who is not seeking advantage in this world? Are not the employee and employer alike seeking advantage? Is not the condition of savings and market sentiment a driving force of the capacity and propensity to spend? Nowhere in his claim against exploitative employers has the author offered even remote evidence of this tendency. He merely states this as a matter of fact. Oddly, this is simply the consequence of supply and demand. After all, I doubt that this author would condemn the consumer for searching out the lowest prices and the greatest discounts, coupons, and promotions at Walmart, Walgreens, CVS, Home Depot, Lowes, Kroger, Meijer, Best Buy, Trader Joe's, Costco, Planet Fitness, or through online vendors Amazon, eBay, Uber, or Craigslist. In each of these respective pursuits of lowest cost for the desired quality of good, the consumer performs the function of employer, yet he or she will seldom recognize this dynamic. The consumer here employs the cashier, the stock clerk, the grocer, the receptionist, the personal trainer, the custodian, the engineer, the buyer, the website designer, the driver, and the myriad of persons far removed from the immediate transaction: those involved inconspicuously in the design, investment, construction, transportation, and research and development stages and beyond. 

The author of this attention-grabbing piece has plainly editorialized and ennobled the advantage sought by a single business owner as a model for the universal, unfettered, and indiscreet application of a wage floor of $15.00 per hour. This author holistically ignores the figure’s real and relative significance in a region whose minimum wage is far below that figure and whose median wage is vastly more equivalent. He also ignores the distinctions between businesses which are better suited to incur the costs and others which would be forced to operate with reduced or extinguished profit, or at a cost inconsistent with or over their earnings, compelling them to reduce payroll, explore substitutes for labor, or surrender the business. 

Let's take a glimpse into the reality of this concept. Consider a business, Business B, which remains open 24 hours per day. Compare this business to its counterpart, Business A, which is open daily for half of this period of time. Imagine that these two businesses generate similar levels of annual revenue and that they operate with similar levels of hourly staffing and costs, inclusive of those of rents, utilities, marginal production, marketing, and infrastructural maintenance. Let’s even imagine that Business A and Business B are both restaurants which serve hamburgers, fries, and milkshakes. Here it is clearly mathematically infeasible for Business B to warrant wages which are identical to those of Business A, as the labor costs imposed upon Business B would double those of Business A. 

One might then question those forces which even warrant the existence of Business B. Well, the critic would seldom characterize his inquiry in this style, yet he would nonetheless embody this sentiment by insisting that Business B either discover a means by which the company could sustain a higher wage or otherwise altogether cease to exist, for his cursory observation has enabled him to cite “exploitation" at the restaurant. This is clearly inaccurate. The restaurant's staff is hired and kept on a voluntary basis, and the allure of this type of restaurant, much akin to the coney islands which populate Metro Detroit, is found in its consistent availability and uniqueness of after-hours food preparation and service. In the context of the aforementioned mathematical parameters, Business B could warrant wages equivalent to those of Business A only by suddenly doubling the daily revenue of the restaurant or by keeping revenues constant while reducing the restaurant's costs, by sacrificing quality ingredients, quantity of food, utilities, or infrastructure, or by reducing hours, eliminating staff, or syphoning from the salary of the employer, either through costs passed on to the consumers or through the savings of the restaurant which insulate the business from shocks and volatility, enable future expansion and investment, and collectively advance credit availability for commercial counterparts to do the same.   

Ultimately, a nominal minimum wage law achieves nothing in the way of a guaranteed effective minimum wage, in terms of the goods and services which will be available for purchase at that wage. Indeed, the consequence of such a nominal law, proving principally auspicious both in the sphere of political influence and to labor unions and special interest groups focused on insulating themselves from competition, is to displace the laborer from the workforce to the welfare dole, thereby systematically shrinking the size of the overall pie of production while entrancing the voter to aggrandize the regressive despotism, albeit democratically.

The Economics of the Minimum Wage Law 

Wages are a function of marginal productivity. 

The law of supply and demand dictates that as the real price of any good rises, there will follow a commensurate decline in real demand. 

Moreover, the minimum wage law directly intimates that a worker must produce at least said amount of marginal productivity to be employable. 

This means that individuals with the acumen or affinity for less productive work, perhaps in tandem with a host of relatively inconspicuous, idiosyncratic wants, will be legislated out of the workforce, only to be mitigated by the offsetting, still-damaging might of inflation which surreptitiously renders a lower real wage floor. 

The minimum wage law is inextricably rooted in traditions vastly distinct from the assumed warm intentions of today's political pundits. 

The fascinating history of the minimum wage law, or originally the prevailing wage law, illustrates a tale of skilled workers aspiring to insulate themselves from the competition of lower skilled, typically minority, workers who might otherwise compete for their jobs or lower the nominal value of their wages. 

The unintended consequence of any minimum wage law is to deprive the low-skilled worker of his or her most marketable comparative advantage: lower cost of labor. 

This in turn prevents many would-be laborers from ever entering the workforce, rather leaving them discouraged and inspired to seek alternative means through the dependency system instead of developing their skills and becoming self-sufficient and independent. 

This is traceable through the nation's labor force participation rate and its teen unemployment figures, especially black teen unemployment, which remains highly correlated with the trajectory of the minimum wage for the very reasons cited above.

Ultimately, the effects of the minimum wage law are observable beyond the jobs immediately lost and the costs immediately paid to the dimension of higher long-run costs and potential value never created.

As it turns out, where companies once offered jobs to human beings at a given wage rate, they will just as soon begin to offer no jobs at the new mandated minimum, instead favoring automation, downsizing or otherwise altogether shutting down the business in favor of leisure and retirement, activities rendered far less expensive by the artificial imposition of higher costs of business. 

In summary, the minimum wage affords artificial long-run advantage to automation, or non-creation, where human beings might otherwise perform better.

In this case, the marginal utility of marginal labor is rendered uncompetitive by the long-run costs of the required price (floor) of that labor. 

In a contemporary case, had pizza chain Little Caesars reserved the option to hire an additional worker at a nominal yet consensual price, there might surely exist willing bidders for the job.

Then again, the structure of the welfare state discourages labor force participation by artificially reducing the marginal (and opportunity) costs attending leisure and unemployment, effectively subsidizing non-work at the expense of unrealized production.

Author's Note

It is not the observable outcomes following the minimum wage law which are most pernicious, but rather the inconspicuous and immeasurable effects of those foregone skills, resource development and capital exposure that systematically undermine the potential of human capital.

An instituted price floor on wages requires the relatively unskilled individual to improve his or her skills to increase his or her productivity before officially qualifying for the labor force.

Of course, all the while he or she must complete this task without the benefit of pay, for the law forbids it unless the employer is willing to hire that individual at a loss.

What's more, a purely economic assessment of this price floor reveals a surplus of bidders against a diminishing quantity of hirers at the artificially-higher price, thereby enforcing a distortion between supply and demand which prohibits the achievement of equilibrium, causing allocative inefficiency or deadweight loss.

Historically this arrangement has systematically ostracized immigrant, low-skilled workers and minorities to the benefit of higher-paid, skilled union laborers, yielding results diametrically opposed to the purported intentions of the politically-palatable, campaign-serving agenda.

Now, automation and retention wages grew out of Fordism without the pressures of government, as illustrated through my article Communism: The Death of Detroit and a Nation.

Ultimately, the organic propensity of the free market is to reduce the costs of production.

The costs of labor, just as the costs of anything else, are not impervious to this trend, despite the psychological disposition that those costs may be stickier than others.

The most insidious aspect of the minimum wage law has indeed been the foregone development of the class who will instead continue to capitalize on the myriad dependency offerings made available to them through Social Security Supplemental Income, Social Security Disability, general assistance, electronic benefits transfers, and subsidized housing.

In the San Francisco Bay Area, for example, a so-called homeless person can easily qualify for the whole host of benefits, even SSDI, without much trouble, even despite lacking any disability which completely renders that individual unemployable.

This system, through well-intentioned social workers and outreach personnel, empowers its dependents to identify as intellectually disabled, or inhibited by post-traumatic stress, to qualify for as many benefits as possible.

In the San Francisco Bay Area, many so-called disabled persons and subsidized housing participants are collecting the equivalent of a $70,000 gross annual salary, leaning entirely upon those dependency programs which purport to finance the individuals' lives for perpetuity, all while these individuals deprive themselves of the dignity and the skills associated with the self-sufficient and independent lifestyle of personal responsibility.

Now, a simple thought exercise will illuminate the principal problem of the minimum wage: consider your present hourly wage rate. Let's assume that the minimum wage is raised to $500 per hour. What consequences might one suspect as a result of this shift?

Of course, the median wage for full-time workers in the United States is roughly $21 per hour, while that of millennials rests at approximately two-thirds of that value.

At this newly-minted minimum, virtually the entire workforce of the United States would be unemployable.

One would likely fail to find someone who would hire him at this rate, and this would mean much of the same for the rest of the country.

Again, this is only one side of this multi-faceted law of prohibition which produces deadweight loss at an albeit relatively low level, being that a mere 2 percent of the working population works at minimum wage.

Although the consequences may seem small, they are tremendous over the protracted term when considering the contorted cost-benefit analysis attending the diluted marginal benefits spawning from decoupling from the dependency system to pursue the perilous, toilsome task of personal sovereignty.

This not only impedes the progress of individuals, but it has demonstrably eroded their independent, survival-specific faculties and the integrity of the household unit, traceable through the emergence of single-parent households, while bidding up the prices of real estate, goods and services to support the non-value-added loop of politically-expedient cash transference, thereby perpetuating the counter-cycle of exchange.


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