Drivels by Kurt Theobald

I received a comment on my article about minimum wage standards from "Steven" who clearly misunderstands the nature of supply and demand and its ever-present balancing effect on our lives.  Seeing as I expect many other people think in these same poorly-founded terms, I thought it would make sense to publish his comments and my responses. 


Objection #1:


"Supply and Demand can't be applied to a complex labor market--if such was the case, Wal-Mart and McDonald's would be the highest paying jobs on the market. They're always hiring; therefore, to them labor would be worth more. In fact, I think you've got the entire idea of supply and demand backwards, because the less there is of something, the more it's worth. The very fact that illegal immigrants have flooded the food industry is proof of that."

My Response:  

I think I understand why you mention the two largest US employers and wonder why they're not the highest paying employers because they are the highest "demanders" of labor.  This is simply a fundamental misunderstanding of the nature of supply and demand.  Let's consider it from the opposite perspective.  Who are the highest paid employees?  Great salespeople and great business leaders.  Why?  Because there aren't very many people who can do either really well.  Hence, the supply is scarce, the demand is high, and the price of that labor is consequently very high as well (so we are on the same page regarding scarcity having a positive influence on the market value of labor, and nothing in my original article contradicts that position to my knowledge).  Now consider the requirements for a McDonald's employee.  Of the entire labor market, who is capable of completing the tasks required?  Most.  Hence, while the demand is very high, the available supply is much, much higher, which is why these are some of the lowest paying jobs out there.  Supply and demand applies in a complex labor market just as much as it does in a simple one; it simply grows in complexity as the labor market grows in complexity.


Objection #2:
"If the market was free--as you've proposed-- than the corporations that choose not to compensate for skilled labor and hard work will shoot ahead of the corporations that choose otherwise. Such a system is based on good faith and when it comes to money, corporate avarice must be factored into the equation. Also, when it comes to business, money is all that matters. If you think otherwise, you're not doing business in America."

My Response:

Again, this is a fundamental misunderstanding of supply and demand, especially as it applies to the US labor market.  Let's use a real life example to illustrate the misunderstanding.  I am a partner at an eCommerce development firm.  We hire web programmers, which is a form of skilled labor.  If there were no minimum wage standard, would I be able to pay them less?  No, I wouldn't.  Skilled labor would be protected in the event the minimum wage standard was removed.  The only group of the labor market that would be affected, albeit a large group, would be unskilled laborers.  The supply of unskilled laborers is so high that, without a minimum wage standard artificially inflating wages, the price of unskilled labor would drop significantly.  It cannot drop below subsistence levels, though, unless the economy simply cannot support high enough wages to meet subsistence levels, at which point, people would find new, leaner ways to subsist, or starvation and other forms of scarcity-related deaths would ensue.  However, in a robust economy like present-day United States, this would not happen.  Despite the recent downturn in the economy, people are living well beyond subsistence levels.  We have more trouble throwing too much away and eating too much than we do starvation and exposure-related deaths.  Far more.

Said another way, corporations cannot just pay as little as they want to.  The labor market would not support that.  If minimum wage standards were removed, and I came to you and said, "I want to you build me a mansion for 25 cents."  Would you do it?  Of course not.  That's an absurd, totally unsustainable wage for such a huge job.  Both parties have to agree to the wage, so even in a perfectly Darwinistic economic environment, corporations are held accountable by employees to set marketable wages.  Corporations that choose to make a skimpy investments in wages will attract lower quality employees whereas those that invest more in their employees (e.g. higher wages, profit sharing, benefits, perks, etc.) will attract higher quality employees; this will have a dramatic effective on total productivity, and I would put my long-term money on the company with higher-quality employees.  However, if the strategy to give better benefits to employees isn't sustainable in a given market, that company will fail or have to change it's compensation strategy.  If Wal-Mart started paying all of its employees $1,000 per hour, it would fail, and everyone would lose their jobs.  On the other hand, if Wal-Mart decided to pay everyone 25 cents per day (provided there were no minimum wage standards), nobody would work for Wal-Mart (at least in the US), and they would not have the staff to operate their business, which would also result in their failure.  There is a happy medium or "equilibrium," as it is called in academic circles, at which employees are willing to work for a given wage and employers are willing and able to sustain that wage level.  Again, this is the Market doing its part to ensure balance is maintained through the principles of supply and demand.


Objection #3: 


"The minimum wage is realistically much less than it was many years ago. In the 1950s, a family could live comfortably on one income of an everyday job. Today it's impossible to support a family on the minimum wage."

My Response:

You know, that's a very loaded statement that requires a great deal of history to explain.  First of all, you're absolutely right.  There is something terribly wrong with our current labor market as it compares to 60 years ago.  Instead of regurgitating other very good literature on the matter, I'll refer you to economist F.A. Hayek's "The Road to Serfdom," in which he articulates how societal "planning" like minimum wage standards leads to unpleasant outcomes.  


Here's a link to the condensed version.


Or buy the full version on Amazon.


This theory certainly doesn't factor in corporate policy--which in even the friendliest corporations would not allow raises for simply being skilled or productive. The evaluation system is "mark down" not "mark up". Management is trained to find things workers are doing wrong--not what they do well. 


I believe I already answered this above in describing the Market's natural ability to maintain equilibrium.  If an employee demands a raise, and the corporation cannot justify the cost of replacing the employee and needs the employee to sustain their business and the requested raise is sustainable, the employee will get their raise or the corporation will make a mistake and refuse the raise, thus damaging their business materially.  If however, the demand for a raise is not marketable for any of the above reasons, the corporation is more advantaged to deny the request.  One way or another, the Market maintains equilibrium.


I have offered to send Steven a complementary copy of Hayek's book in hopes that it helps him understand the problem with governmental "planning" and it's artificial and negative impact on our lives.  Hopefully he accepts my offer.

Nobody except the rich seems to have any problem with raising the minimum wage.  A few years back, the minimum wage increased from $5.15 per hour to $6.50 per hour in the state of Missouri by a 72% majority vote!  More recently, it increased again to $7.25 per hour.  It seems that very few understand the negative repercussions of artificially inflating wages.  It is truly no surprise that it is easy to get minimum wage increase passed because the benefits are very easy to understand and the damages are very complex and difficult to see.  It goes right back to our national tendency to look at the near-term effects of what we do and blissfully ignore the long-term effects.

            People vote to increase the minimum wage because the political realm tells of all the poor men and women that are unable to provide for their families because they are working at a fast food restaurant that doesn’t pay them enough.  They say it takes more money from the rich and gives it to the poor as if that is a good and noble thing to do.

            Before we get too deep into this issue of minimum wage standards, it is important to establish an understanding of wages to begin with.  Very simply, wages are the current price of labor.  And price is decided by the simple but profound economic principles of supply and demand.  In a free market, the higher the supply, the lower the price of the product or service, and vice versa; the higher the demand, the higher the price, and vice versa.  Ultimately, these two principles combined make up the economic law of Scarcity, which states that the less there is of a good relative to the demand for that good, the more it will cost; in other words, the more scarce something is, the more it costs, and the less scarce it is, the cheaper it is.  That means that if the market were allowed to set wages according to its current state, wages would be very high or very low depending solely on the supply and demand of labor at any given time.

            But the government is renowned for its practice of artificially making changes to the market, telling it what it ought to do, and therein lies the destructive flaw of minimum wage standards.  The consequences of strong-arming the market are always bad in the long run and difficult, if not impossible, to avoid.  The short-term consequences of minimum wage standards validate everyone’s decision to vote in favor of it.  Entry-level employees are now better able to feed and shelter themselves and their families and, theoretically at least, require less government welfare assistance.

            The long-term effects of artificially setting a minimum wage standard are numerous and self-defeating.  For one, businesses are less profitable, and therefore will be less able to expand their business; expansion of business increases labor demand, which would, in turn, increase the price of labor (aka wages).  That is the market’s natural way of increasing wages, but it doesn’t happen all at once; it is a slow process, and the politicians need voters now, so they artificially amend the market in order to present the appearance of care, but with the ultimate selfish goal of garnering more votes or because they are economically ignorant; either way, they are not fit to hold office.

            A corollary to this first negative long-term effect is that some businesses are unable to maintain a profit with the higher wages; this is particularly true during slow economic periods.  Those businesses will fail, and everyone in the company will lose their jobs, increasing unemployment, which increases the supply of labor, which decrease the price of labor (aka wages).  While I would characterize this as the least of all negative effects, it is still a problem.

            The second long-term effect of establishing a minimum wage standard is that the price of goods will simply react by increasing, and this is a bit complex of a concept, so you may have to re-read it multiple times to fully grasp it.  Every step of the production process of a good has a cost associated with it.  If one of those steps has an increased cost, the final good will also have an increased cost in the market.  The result is that minimum wage standards are purely inflationary; they increase the cost of a good or service without a corresponding increase in value, which is a core cause of inflation.  Another way to say it is that they decrease the quantity able to be purchased with a unit of money without a corresponding increase in the value of that lesser quantity.  In the end, minimum wage standards accomplish nothing positive because the absorptions of the increased cost of goods that is caused by minimum wage standards, whether it be through direct increases in the price of goods or through decreased profit by the producer, are proportionate to the increase in wages received by laborers; hence, the value of the money they receive is decreased exactly enough to balance the increase in money supply.  Mark these words very clearly:  The market will always balance itself back out; therefore, any attempt to artificially change her will come to naught.

            So, minimum wage standards slow the growth of businesses, increase unemployment rates, and create inflation, which ultimately renders it completely useless.  Could it possibly do any more harm?  You betcha.

            Possibly the greatest harm that minimum wage standards do to an economy is that they nullify all of the benefits of allowing the market to freely set the price of labor.  So, with that understanding, I will continue to list the consequences of allowing the market to freely set the price of labor, many of which are simply the contraries to the harms of artificially setting the minimum price of labor.  Remember, all of the following benefits are nullified by minimum wage standards.

            The first benefit of a free labor market is that the price of all labor would be directly proportionate to the productivity of that labor.  So, if you are adding a great deal of value to the goods and/or services of a company, you will be compensated well, and if you do not add a great deal of value to the goods of a company, you will not be compensated well.  There are a number of corollary benefits to this fact.

            First, unskilled labor would no longer be protected.  While that is construed as a bad thing by politicians because a large portion of constituents are unskilled, it is, in fact, a very positive thing.  This would heavily motivate unskilled, less productive laborers to become more skilled and more productive because they would only get higher compensation by being more productive, and the only way they could become more productive is by becoming more educated and/or more skilled.  So, a free labor market would heavily improve the quality of labor, thereby increasing the productivity of the market, thereby increasing the value of the economy’s money supply, which is reflective of an increase in real wealth in that economy.  It means your dollars will buy you more and/or better goods and services, or you'll have more dollars to spend; either way, you have access to more and/or better goods and services.

            Second, a free labor market would allow individuals to join the labor market earlier.  While I am not in favor of forced child labor, I am in favor of giving youth the choice to join the labor market and start becoming educated and skilled on the job, which is, in most cases, the best way to become educated and skilled.  In other words, I think we should protect children against the requirement to work at a young age, but I do not think we should make it impossible for the market to invite young aspiring laborers by setting a minimum wage standard above their productive value.  If laborers started working at a younger age, they would learn to be more productive earlier, and so would not struggle with the ability to feed and shelter themselves and their families.  I started working in my father’s auto mechanic shop when I was six, and I didn’t always like it, but I learned the discipline of work while there, and therein lies the benefit of allowing citizens to enter the labor market earlier.  They won’t get paid very much because they will start out being very unproductive, but they will learn and grow, and as they do so, they will be rewarded by increased income.  Naturally, some employers will choose not to reward increased productivity, but according to the balancing law of the market, employees of those employers will transfer to other employers that reward justly or become employers themselves by starting or buying a business.  Once again, the market maintains balance as it always does.

            A corollary of a younger workforce is that there will be greater productivity in this economy due to an increased number of laborers.  Also, because laborers will begin to learn how to be more productive earlier, the total labor market will increase in quality, which will further increase productivity, which will further increase the value of our money supply.

             And yet another corollary to this younger insertion of laborers is that the transition into the labor market would be incredibly simple because laborers would not be required to instantaneously contribute productivity at a level equivalent to the minimum wage standard.  As it is right now, it is very difficult and sometimes impossible for unskilled laborers to enter the labor market because they cannot instantaneously perform to the level that is required by the minimum wage standard of productivity, and so they end up living on welfare instead, which further de-incentivizes them from making themselves productive because they're making as much or more by doing nothing than they would working at minimum wage, but that's a can of works I don't care to open for the moment.

            The government has actually begun to medicate the symptoms or effects of minimum wage standards, which medicates the symptom of poverty, which is a symptom of a deeper disease.  Through a grant program, they are paying young “disadvantaged” individuals to work for businesses at no cost to the business!  One of my past companies was actually involved with such a program, and it was great for us, and great for the interns because they learned so much, but it was terrible for taxpayers and the labor market and the government and the economy in general.

            The greatest difficulty with this problem is that it is so well-developed at this point in time that removing it in one fell stroke would push us into a terrible depression.  That is why it must be done in phases.  Drop the minimum wage a dollar at a time or so.  It will still be painful, but it will feel like a long recession rather than a killer depression.  People will not have the money to buy a nice juicy steak every week, but they won’t be dying in the streets from hunger either.  Okay, that may be a bit hyperbolic, but you get the point.  Unfortunately, it takes a long time to unwind all of the tension that has been built up in our economy from political administration after political administration deferring the pain of curing the issues caused by previous administrations, thus exacerbating the problems by ignoring them or even playing to them, and, many times, exacerbating the problem by adding new issues to the already heavy load in order to deliver instant gratification to the willfully ignorant constituency, securing voting support for the next election.  It’s all a game to politicians, and in the game of politics driven by greed and power, the constituency always loses.

For more on Austrian economics, visit mises.org.