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.
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