Should the Minimum Wage be Raised?

I have entangled myself in another one of those Facebook debates on the minimum wage. There are two perspectives and two philosophies that are offered to address the same problem.

It is in response to the following article written by Nick Hanauer, “The Capitalist’s Case for a $15 Minimum Wage.”

Sam Murray There’s a lot of problems with the article (such as the ‘citations’ that don’t actually back up his claims), but my main problem is that he subscribes to the weird idea that money that rich people don’t spend just disappears from the economy

L Larry Liu The money that the rich people do not spend is either used for investment for expanded production (mostly in non-Western countries), or to purchase stocks, purchase gold, purchase bonds- lend money to poor people, businesses and governments. Now, your argument is that all of this money is usefully employed because people are employed with that income. That is only provisionally true, because adding more to the balance sheet of the wealthy will lead to more speculation and more debt for more people. How should one interpret the $1 trillion in student loan debt for US students? How should one explain the billions of dollars in credit card and mortgage debt? This can only prevail in a society where inequality has taken on enormous proportions. A happy society can not be created with the huge levels of inequality, which you so much take for granted.

And here I found an illustration of the importance of income inequality: I would rather have a person earn $30 an hour to generate sufficient savings to make a 50% down payment on a house with 5% interest than have that person earn $2 an hour (which is what you would prefer to have them earn with free-floating, employer-determined wages) and receive a subprime mortgage with 8% interest and no down payment. The capitalist with his largesse and huge profits that he pocketed thanks to your no-minimum wage policy is willing to lend the money to the poor person. Now, you might respond that this situation is entirely exaggerated and not pertinent to the case of the minimum wage, but considering the recent past, I see these issues as very much alive and relevant.

Nicholas A. Zarra: L Larry Liu, quick point about the premise of the article: it assumes that the composition of the economy remains fully constant and ignores potential changes to both prices (of certain goods). For example, the article presumes that the pillow manufacturer would benefit from increased demand from the new minimum-wage worker force. Ignoring the oddity of choosing pillows (which most people own as it seems to be fairly inelastic), this presumes that the rise in labor costs does not reduce some of the increased equilibrium quantity due to a contraction of supply. Moreover, presuming that the pillows are produced in America, it is a bit hasty to presume that manufacturing practices would remain constant or that prices would remain constant.

Moreover, the sustainability of such a measure (or even its impact in the long-run) can be considered dubious. A famous liberal economist during the Great Depression (either Irvin, Hopkins, or it even may have been Keynes) once said that a change in wages for all has no impact, because it is passed on in inflation. If we accept such a notion of class-conflict (that a class may benefit only by taking from another, to which I object considering that changes on the supply-side and the international market-place), the question should be who loses from this change. Firstly, if the market adjusts with prices to the added demand, we would eventually see a rise of prices and, given Friedman’s natural rate of employment, eventual contraction of supply, we can tell that the temporary benefits will not last forever. In fact, I would almost argue that it may create a greater issue for sustainability: by placing more economic pressure on the entrepreneurial class (that is not due to the marketplace), we can not presume that the rate of innovation will remain the same. Nor can we be sure how the inevitable rise in prices will affect those who are not on minimum wage. (Do remember that less than those on minimum wage are full adults; almost a third are teenagers in school if I remember right) So, here, we must remember that the incidence of such a measure may not be what we want.

Of course, it can be fairly argued that all wages (for the “low-wage” earner class) are tied to the minimum wage, which is an idea that I can understand. (Although skilled-labor groups have, in the past, pushed minimum wage laws due to their status as substitute for low-skilled labor) Yet, accepting this in mind, we essentially would only see inflation: if wages for all rise, which will be transferred onto the prices, we do not see the real-benefit.

Finally, less on economics and more on political understanding, the idea of using Ford as an argument for government intervention is odd. Of course, he is famed for keeping the wages of his workers high, yet it was not because other groups forced him (whether the government, as in this case, or unions), but because he found it in his own self-interest. In fact, Ford opposed almost all attempts to force his hand (even violently to the unions), so we must not forget that the nature of imposing on liberty and the unattended consequences that must emerge: perhaps it would be best for those that can raise wages to raise wages and not to impose burdens, ideological or economics, otherwise.


L Larry Liu: Nicholas, thank you for your great comment. Your argument seems to be that if wages for all workers increase without a corresponding increase in productivity, then the capitalists will increase prices to a corresponding degree, and we would not be better off. This statement would naturally be true. However, when we discuss the minimum wage it is not about raising all wages to higher and more unsustainable levels. We are after all talking about a segment of the workforce here. If the minimum wage rate would track productivity, then it would reach $21.72 an hour. That would correspond to a sustainable wage increase, which for the capitalist class as a whole would be tolerable so as to operate their businesses. For individual capitalists (or entrepreneurs, if you prefer this term), a minimum wage rate that is that high would, of course, have adverse consequences to employment, but not for the capitalist class as a whole.

Now, your question would be why the minimum wage is not $21 if it would have been feasible technically. And here we have to step aside from Milton Friedman and neoclassical economics, and consider the institutional basis of our political economy. Strong wage demands could be made by the workers against capitalists between the 1940s and 1970s, because capital controls and government policies to maintain full employment in a growing economy (post WW II boom) were in place. Since we lifted capital controls, and since the government finds no more interest to “automatically stabilize” the employment situation (borrowing from Keynes), we have had a generally higher rate of unemployment, a lower rate of job security, a weaker rate of unionization, and a stagnation and loss of purchasing power of the minimum wage (consider graph The capitalist has been freed to invest his capital anywhere in the world, and was not bound to provide good jobs to his American workers. Unions weakened as union jobs were outsourced, while the new service-sector workforce has had little experience creating unions. The weakened organization of the workers subsequently made them a weaker representative on the political bargaining table, which ultimately determines the minimum wage. Organizing the working class on an international basis, and creating global governance structures to impose controls on capital to serve social and environmental purposes are, therefore, the larger solution. This does not imply, of course, that individual countries such as the US should not, in the mean time, raise the minimum wage. They should go ahead with the wage increase, and convince other countries to do the same.

Your clinical economic discussion makes it seem like there is a purely economic argument to the minimum wage. But we know that raising the minimum wage is much more so a political discussion, challenging the will of the community, rather than an economic one, involving the feasibility of its implementation. My anticipation of the economic resutls of the increase of the minimum wage is that some capitalists will surely lose out, especially the small businesses and companies with slim margins. But I think that many more companies will win by having the wage level of the poorest workers improved and the rate of consumption increased. Economically negative consequences with higher inflation are only to be feared if minimum wages are significantly above productivity increases.

And with regard to your Ford example: I understand that the economist in you rejects political decisions to raise the minimum wage, and in the most ideal conception, individual capitalists are inclined to raise their workers wages, and we would create “capitalism and freedom” (a title of one of Milton Friedman’s books) without coercion. Here is why I do not think that this will be successful. If the market power of the firm is very large, such as was the case with Ford in the 1910s and 1920s, then it can easily be the case that Ford raising wages will not depress sales. Another example would be if the relatively higher wages of the workers of the firm can be justified by highly specialized products, a market niche, such as is the case with many German companies, who are the world’s export champions. But that is about it. In most cases, if the individual capitalist raises his prices, and the other capitalists do not do so, then the other capitalists can undersell the capitalist that does raise wages. Either he specializes in a really good product, or he will declare bankruptcy or be bought up by a larger firm. It is a different case with the minimum wage. Here we impose on all firms a minimum in wage costs, which would cancel any competitive advantages that a single firm may gain. It is like prohibiting cigarette smoking in restaurants. If one restaurant goes the health-conscious route of prohibiting smoking, then the smokers would flee to other restaurants that still allow smoking. If the city, however, passes an ordinance, which prohibits all smoking in all restaurants, then no individual restaurant that is health-conscious will fear a loss of business (unless the smoking customers flee to another city, which is unlikely as it is a big hassle to move back and forth just to smoke cigarettes).

Nicholas A. Zarra I think that I understand your argument, and it seems well-reasoned. Of course, I disagree, but that is no surprise. Namely, I find the notion that 21.72 (which I believe is the adjusted inflation/productivity metric) to be almost a bit too arbitrary: any monetary value for a good (or labor in this case) is set by the labor market and we must understand that money is well money.

With the argument that most capitalists will win, I am not entirely sure. While the producer who uses minimum wage labor loses and the one that doesn’t does relatively better, I am not entirely that the overall outcome will be positive, namely because, in theory, all will see a rise in prices. For the consumer, it is likewise dubious: will the non-minimum wage laborer (which most adults are) suffer from the rise of costs and cut-back expenditures in these industries? Yet, on a non-economic level, I am curious about the mental result of this situation: will producers over-adjust their levels of production or will the newly-richer worker over-demand? I am unsure.

Moreover, I disagree with your assessment of the 1940s to 1970s to a large extent. (I am assuming that you are more favorable to the era of the Keynesian consensus, but, if not, accept my apology) I find that this era was the era of take for today and ignore for tomorrow: it is almost no surprise that, by the 1970s and especially the 1980s, that we saw the flight of American industry away from this country and to others. One can blame globalization and business-failures; others blame the tax burden of government. I blame both: both firms and government failed to realize that the post-war boom came from American geopolitical superiority and the destruction of former competitors, which we rebuilt. Yet, we became complacent. (Neverthless, I digress.)

On the point of how to ensure that the worker receives his share, I understand your hesitations and I do have the same hesitations. While I agree, like Hayek, that the freest of markets may not always allow for that (usually due to monopolist control of labor demand), I am even more hesitant to believe that a universal and arbitrary price-floor is the solution: the market adjusts and we must understand the firm is far more flexible government.

So, how do we fix this issue? My friend, there is no easy solution, yet price floors are most likely not the solution. First off, we must remember that there is competition that raises the price of labor, especially in markets with some skill (which many lower-wage jobs do have) due to the competition of firms. I work in a pizzeria in my home-town and there is a reason why they have raised the wages of the “pizza guys”: Other firms tried to demand them and prices rise. So, to many extents, we have two opposing forces in play, although probably of unequal magnitudes.

Nevertheless, I understand that there is a fair hesitation to the market, especially considering the disgusting behemoths like Walmart. In the perfect world, I would argue that we would deconstruct the welfarist-corporatist mentality that can exist; however, we are now beyond that nevertheless. I would then argue that we need to make more-productive (in the idea that it is differentiable productivity) labor that allows for the second force to counter-balance the first.

What I would say is this: we need a more flexible approach where perhaps the government could act as a mediator, yet I am not sure how we ensure perfect impartiality of the government. (The National Labor Relations Board of the US shows how political partisanship decimate such an organization). We need to allow for a more visible market-place bargaining without undue advantage given to either side.



L Larry Liu You are suggesting that the monetary value either does not matter or plays no great role. We still live in an economy, where prices matter, and again we are presuming that the $21.72 hold with the current price level. If inflation eats up the purchasing power of the dollar and make $21 equivalent in value to what is $7 today, then we have changed the numbers without changing the purchasing power of the minimum-wage workers, which is precisely what a wage raise is aiming for.

I think that your practical concerns about the minimum-wage raise are insignificant. No one would suggest that when the minimum-wage had a higher purchasing power back in the late-1960s that this induced more unemployment and a lower rate of capital investments. Some businesses will lose out, but the standard of living of the poorest workers will improve. Any reductions in hiring as a result of a greater minimum wage will be completely offset by an increase in demand thanks to the greater purchasing power of minimum wage workers.

The era between the 1940s and 1970s was not the best of all worlds, but it was the best deal for the vast majority of the working population, whose income had been going up along with rises in productivity ( You have to be more specific with the “take for today and ignore for tomorrow” critique. The flight of American industry happened, because the capitalists found a way to circumvent the capital controls that held the power of capitalists in check. As soon as the capital controls were lifted, and the corporate leaders were allowed to replace their expensive American workers with cheaper foreign workers, the deal that was struck with the American working class was blown apart. Taxes factor into it, in the sense that by allowing capital to be mobile globally, it allowed capitalists to blackmail governments to lower their tax burden or else face capital flight. But allowing more profits to flow in the way of corporations does nothing to improve the economy, unless that profit trickles back to the communities. With regard to America’s superiorirty after WW II, that is certainly true. But what are the alternatives? Continue to bomb Japan and Germany, so we can maintain the highest standard in the US? There are no easy alternatives in the global political economy, but the way I understand it, they require global solutions anyway rather than timid attempts by national governments to re-assert their sovereignty.

The market should adjust to where? You are concocting a market solution to cure the chronic problem of lower wages even though overall rising wages are nowhere to be found. There are only two conclusions to this: either, you could argue that the market works and it has just been improperly implemented due to excessive government interference, which is usually the most common argument in economics. Or the market has been implemented thus far, and it produces the predictably terrible results. If you support the first conclusion, then I must ask how bad these labor regulations really have been. Walmart workers that work close to the minimum wage can actually earn $3,000 more than they currently do without harming the profit margins of Walmart. The minimum wage poses no impediment to that corporation, but a price floor would actually uplift the living standards of most Walmart workers. My problem with the first type of conclusion is also that the free-market utopia that has such a high threshold for achievement is nothing else but a utopia. There is no such thing as a free market. Every successful country has interfered in the market to some extent to produce the results that are socially most desirable without bringing into effect a gross inefficiency that would be unbearable for society, i.e. the prohibition of child labor.

If you are in favor of the second conclusion, that markets are currently in place, then you have to justify the currently terrible social results of low wages and insecure employment relationships. I think one can make the case that we have introduced more market influence for workers, essentially by eviscerating the ranks of labor unions while weakening labor laws enforced by the government. Workers have to increasingly spend money on education or borrow money to attend a college just to get the skills, which used to be paid for by the company that hired trainees and trained them internally. And then workers should sell their labor on the open market and become easily disposable according to market demand, rather than be shielded by it through tenure protections and strict labor laws. Has the marketization of labor been a success? It depends who you are. For the capitalist, the bottom line has improved by increased worker productivity, as workers face more intense pressure to perform well especially during a bad economic environment or else face unemployment and financial hardship. For workers, this marketization has been an absolute disaster: wages are lower and jobs are more insecure. The best critique of the market was formulated by Karl Polanyi (here the link to his book “The Great Transformation”

And this is where my disagreement with another point you brought up comes into: you argue that we have to make labor more productive “that allows for the second force to counter-balance the first.” The second force is labor and the first force is the corporation like Walmart. This sounds very Galbraithian. (John Kenneth Galbraith made the argument about the countervailing power of labor and government against business.) My problem with that perspective is that greater labor productivity has been an essential part of neoliberal policy, i.e. we have consistently been observing an increase in the rate of productivity of workers, especially in the goods-producing industries. (Service-sector workers tend to have stagnant productivity developments, but how much more efficient should a hair-cutter or trash-collector be?) On the other hand, the wages of the workers just do not keep pace with that rise in productivity, so how is more productivity going to help us out? What we have to challenge is the class power of the capitalists, who are allowed to use the generated surpluses to speculate on it rather than provide all people with the goods and services they need to live a decent life. America has the honor to be the country with the second highest rate of childhood poverty in the developed world ( What an honor. (Admittedly, the measurement takes into account relative and not absolute poverty, but the question hereby is whether the US should be the worst performer relative to other developed countries.)

“We need to allow for a more visible market-place bargaining without undue advantage given to either side.” This is quite plainly a contradiction. Because the premise of markets is to create inequality, and give undue advantage to one side. You can’t have the one without the other. In the market system with profit, I will win if I undersell you, and you are out. Dreaming up a market system that works is entirely utopian. I have a simpler position to argue from, because I don’t believe in free markets to begin with. There should be some market-exchange, but the created inequalities should be removed by taxation. The basic social goods (i.e. food, housing, health care, education, pensions etc.) should be provided outside the market system through governments.

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One Response to Should the Minimum Wage be Raised?

  1. Pingback: Flawed economics (via to boondoggle is human.) | Pilant's Business Ethics

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