A bad solution to the wrong problem

Ben D. Kritz

Ben D. Kritz

DESPITE the absolute lack of any evidence whatsoever that such demonstrations elicit any sort of public or institutional sympathy – not to mention the lack of common sense manifested in doing it during a potentially deadly heatwave – the usual coalition of left-leaning labor advocacy groups took to the streets on Thursday to demand the government raise the minimum wage. The amount the labor activists feel would be appropriate changes from one protest gathering to the next; this time, the demand was for an additional P154 per day, a 33 percent increase for workers in Metro Manila, where the minimum wage is now P466 per day after a P15 cost of living adjustment was implemented earlier this month.

The argument for a higher minimum wage is always fairly consistent: With prices of food and other basic necessities “skyrocketing,” a family simply cannot make ends meet at the current minimum wage, and unless government compels them to pay higher wages, employers are practically engaging in a form of modern slavery.

Minimum wage advocates have to rely on social arguments to justify calling for an increase to, or at least in the direction of, the poorly-defined but otherwise uncritically accepted concept of a “living wage.” Minimum wages are a social issue because objective economic arguments simply do not support the notion; basic logic is enough to debunk the claimed benefits of higher mandated wages, and real-world experience in places like Seattle—where a $15-per hour minimum was imposed about two years ago, but has had no significant impact on poverty levels or the relative distribution of consumer spending power—also tends to rebut assertions of the necessity and advantages of higher minimum wages.

One of the more easily explained and understood logical rejections of the minimum/living wage fallacy is the inevitability that increases in minimum wage nearly always cause price increases. Contrary to one of the common (and lazy) arguments against minimum wage increases, real-world experience has shown they do not cause significant job losses, reductions in hiring or business closures—there are always some that are attributable to minimum wage hikes, but not enough to make a noticeable dent on the overall economy. What businesses do instead is raise prices, for two reasons:

First, their costs are higher. This is obvious in real terms, but further aggravating it is an unavoidable productivity decline. A higher minimum wage (or wage at any level) for an employee doing the same job before and after the wage increase does not make that employee substantially more productive; he is still the same employee with the same abilities, and while his performance may improve to a degree through sheer enthusiasm, it is a reasonable assumption there is a physical limit to how much more output can be achieved with a good mood. Most employers would probably actually regard an employee whose performance improved by 33 percent as a result of a pay raise with some suspicion, if not find an excuse to fire him for being a sandbagger. Again, the increase in cost being significant enough to cause job losses or worse is apparently the extreme case; what businesses do instead to compensate is raise prices.

Even businesses that are not directly affected by higher costs due to higher wages tend to raise prices when minimum wages increase, according to several studies, which is evidence of one of our favorite concepts, the Cantillon Effect. Apart from competitive pressures, the mere fact that more money is in workers’ hands encourages an increase in prices as a matter of opportunity. The combination of higher costs for some employers and for others, taking advantage of the opportunity to charge higher prices simply because people have more to spend, mostly cancels the income gains; minimum wage workers are, therefore, still minimum wage workers, perhaps nominally better off than they were before a wage hike, but in relative terms still in the same place, and perhaps even worse off in some cases.

The fundamental reason minimum wage advocates are never satisfied is that real problem is not wages at all, but jobs. It is a simple question of supply and demand; wage levels, in the absence of government intervention through mandated minimums, are based on what the market will bear—raising demand for workers by increasing the supply of jobs makes wages largely self-correcting. Some sort of regulation is probably still necessary to prevent abuse by the few employers who would be inclined to do so, but if the supply of jobs reasonably matches the supply of workers, those regulations would rarely if ever need to be enforced.

If minimum wage advocates would approach the problem from an economic rather than a social point of view, perhaps their energy would be directed to the eminently more sustainable and productive goal of creating more jobs, rather than creating nothing but a few cases of heat stroke through futile street protests.



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1 Comment

  1. Amnata Pundit on

    And we complain that growth is not inclusive? When the uncontrollable price of oil goes up, prices rise across the board. What economy has collapsed because of an oil price hike? If rising prices due to a rise in oil do not bring on the apocalypse even if the rise in price benefits the foreign oil producer only, how apocalyptic can an small adjustment in minimum wage be when the worker himself will gain from it. If wages should be based on supply and demand, why not interest rates too since interest, capital and labor are self-evidently inextricably linked? Jobs are the responsibility of policy makers not the workers’, and wages are a social problem more than economic because they deal with real people, while an economist’s viewpoint is limited to statistics only. Economists only make the simple sound complicated without really solving anything.