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Posted
17 August 2008 @ 9pm

The Folly of Minimum Wage

I just watched Minimum Wage on Hulu, linked from Mike Ziray on Twitter. If there’s one thing I learned in school, it’s to take your knowledge and apply it in the real world. We didn’t cover minimum wage in any depth, but we did cover price floors and ceilings, and it’s easy to make conclusions about the market’s behaviour from there. I’m assuming basic economic terminology, which isn’t the easiest if you don’t know it beforehand, but I’m lazy, so my apologies.

Briefly, when a price ceiling is enacted on something, and is priced below the equilibrium price, two things happen. First, suppliers aren’t being paid enough, so they produce less. Second, since the price is so low, consumers demand more. Think of rent control: landlords are only allowed to charge, say, 600 bucks for a flat in Mission. Well, for $600, everyone wants to live there! They might live in one room, and rent another, and 12 people want to live there. If the price were able to change, the landlord might suddenly decide he’s better off moving out of his apartment in the building, and renting two rooms at 900 bucks per. Less people will be willing to pay 900 bucks for the place, and so those who are willing and able to pay for it will be able to live there.

A price floor is equally odd. If a minimum price is set for something, and it’s above the equilibrium price, you get this:

Price floor - Wikipedia, the free encyclopedia

In short, there’s a lot of people who would love to work for 6 bucks an hour, but not so many companies willing to pay that much. This isn’t to say that this is the situation across the United States, but it is in some places.

Minimum wage isn’t a cut-and-dry issue, not by any stretch. But in some cases, it breaks things.

Now, I’ve never thought of a reason for a price floor, a compelling reason. If you can think of one, leave it in the comments. This is something best understood by bouncing ideas off someone.


9 Comments

Posted by
Simone Manganelli
17 August 2008 @ 10pm

As I mentioned briefly on Twitter, and as you mentioned yourself, nothing is as easy as Econ 101.

Capitalism, and economics, applied as a strict ideology can be very ruthless. When you apply supply and demand to a product, as you did with rent prices in SF, usually everything’s fine and dandy. But when you apply supply and demand to people, things can get pretty shitty pretty quickly.

In theory, according to Econ 101, when you implement a minimum wage (i.e. a price floor), employers should be less willing to hire workers at that wage, and there will be more workers willing to go to work at that price, leading to an excess of workers and a lack of jobs to be filled (i.e.: unemployment). But this naive application assumes that there aren’t any other factors at play.

Even though a company may not be willing to pay workers at a certain wage, that does not mean that it doesn’t have the financial resources to do so. A company could be paying executives millions of dollars in compensation (e.g.: practically every major U.S. corporation does this), a company could be using excessively overpriced materials in their operations (e.g.: WebVan, back in the day when it still operated, was using ridiculously good paper for the receipts that they delivered along with your groceries), or there might be gross inefficiencies in the product distribution system (e.g.: Dell pioneered the direct-to-customer distribution model which cuts out middlemen as well as the cuts that those middlemen take off the top).

The point is, even if a minimum wage is implemented, companies should be able to find money elsewhere in the system to offset the difference between the minimum wage and the wage the company is willing to pay. The minimum wage ensures that low-paid workers are not screwed over in favor of executive pay, exhorbitant operations costs, inefficiencies in the company, or other areas where money is wasted. It injects a bit of humanity into the system of capitalism.

Without minimum wages, Econ 101 supply and demand capitalism quickly devolves into corporations paying workers as little as possible in order to support rich fat cats at the top of the corporate pyramid. This has been demonstrated time and time again in the history of the United States; corporations will use young children as workers, they will skimp on sick leave, they will not give overtime pay, etc. etc. Corporations have demonstrated over and over that unless the government regulates how they treat their workers, workers will be treated simply as objects. Minimum wage is another form of this type of regulation. (It should be noted that this is just as applicable to the environment as it is to workers.)

One concrete example is in the restaurant industry: restaurants will often force waiters to live entirely off their tips. If their tips at the end of the week or month do not add up to the minimum wage, the employer fills the difference, but then records that they had to “fill up” the worker’s wages to the minimum wage. If during the next month, the waiter gets enough tips such that they add up to above the minimum wage, the employer recoups his losses from the last month by subtracting enough to get the waiters wages back down to minimum wage. The employer is doing as little as possible to meet government standards but as much as possible to screw over the worker. Imagine the effect on these workers’ wages if the minimum wage were repealed entirely!

It’s true that in a global economy, the side effect of outsourcing can occur as a result of minimum wage. But there are so many jobs in this country that cannot possibly be outsourcedservice jobs (such as restaurants and stores), jobs in the transportation sector (such as truck drivers), jobs in the agricultural industry, etc., etc.such that the effect of outsourcing is more than offset by the wage increases that the lowest-paid workers get as a result of minimum wage. And outsourcing often comes back to bite companies anyway, such as Dell, whose tech support centers in India had workers with accents that were so incomprehensible that Dell’s reputation for customer service tanked. The effect? Dell brought the jobs back to the U.S.

The entire point of the minimum wage is to protect workers from corporations. There are some that are highly distrustful of the government and any regulation whatsoever, but if I’ve learned something during my years of interest in politics, it’s that there’s one entity that is deserved of even more skepticism than the government, and that’s the corporation.


Posted by
Christopher Bowns
17 August 2008 @ 10pm

Simone, thanks for the reply. That’s a good list of things I hadn’t thought about. I think minimum wage obviously only protects those at the very edge of things; I can’t really say it was on my mind after I started college.

I think a lot of my discomfort comes from what I see as solving the wrong problem. For minimum wage, the real problems are being an unskilled worker, which doesn’t let you differentiate from others, contribute more to the company’s profits, and thereby earn a higher wage (with a big asterisk about monopolies), and an inability to move with higher wages, out of, say Columbus, Ohio, in the case of the show on Hulu. But as always, the ideal solution, in this case I think it’s in making changes to the education system, the ideal solution isn’t easy to relate back to stories about the working poor. So a stopgap solution is better than none at all.

And I think you’re wrong on that last one: I don’t trust either a damned bit :P. Incompetence and active malice are hard to tell apart sometimes.

No doubt, Econ 101 (or 2005 and 2006, as it was as Tech) assumes enough things to make the world a happy place all on its own: no externalities, identical goods, lots of small firms, a completely liquid market for everything from widgets to people, and the list goes on.

We went over a lot of government regulation this past spring in Antitrust and Regulation. My biggest take away was: it’s hard to tell if companies are doing something out of active malice, or just seeking profits, and running a few people over on the way. Regulation of anything is a tricky business, and regulation done wrong is worse than none at all sometimes. It’s all caveats and “yes, but”, it seems.

Bedtime.


Posted by
Simone Manganelli
17 August 2008 @ 11pm

I agree that a good way to help solve the problem is by encouraging worker mobility, so that as needed jobs shift away from one sector or to another (or start vanishing, as is the case with technology replacing workers), workers won’t remain unemployed and live off government handouts.

And I also overwhelmingly agree that overhauling the education system would be a great solution to the worker mobility problem (as well as to a host of other problems which are not the purview of this conversation, at least not yet). But I don’t think it will necessarily solve the problem of corporations being predatory in regard to workers or the environment. No amount of education will be able to teach every single person ethical behavior, and it will certainly not be able to eliminate unethical behavior in an entitythe corporationwhich has a framework which tolerates and sometimes encourages predatory practices.

Case in point: your juxtaposition of “active malice” or “just seeking profits”. I believe these are different sides of the same coin. The whole idea of corporations existing in order to make money is, in my opinion, completely misguided. Corporations should exist to enhance the quality of human life, first and foremost. Products that corporations make should increase happiness, promote good health, create new opportunities for people, etc., etc. If a company is “just seeking profits”, then it’s already 90% of the way towards “active malice”.

That’s not to say that corporations or executives or workers shouldn’t be allowed to make money. And I’m definitely in favor of those who create excellent products being rewarded more than those who come up with only mediocre products. But corporations shouldn’t sacrifice everything for short term profits, especially when it short-changes workers, consumers, or the environment. And regulation, such as a minimum wage, helps to ensure that corporations don’t do this.


Posted by
Mark Hughes
18 August 2008 @ 1pm

Simone, your assertion that “Corporations should exist to do the things Simone likes” is false.

If you want to start a non-profit organization to increase human happiness, you’re free to do so, and in fact we have a governmental system that encourages this with tax breaks.

A corporation, on the other hand, is created by people who want to combine their money and talents to make some product or service, and thereby make more money. Just as a coincidental, interesting side-effect, some also often organize and encourage the best and brightest to innovate and create things that improve the world. See: Apple, Google, Toyota, Boeing, Virgin America.

But they are under no obligation to anyone except their stockholders, and certainly not to armchair philosophers demanding obedience to rules they didn’t sign up for, and may find odious.

Some basic level of governmental oversight can keep corporations with unethical directors from engaging in harmful practices (pollution, abuse of workers, child labor), without eliminating the good they do in building our economy.

You’re free to do as you please with your own money and time, but creating the world order you want is far more actively evil: it requires killing or enslaving everyone who has different ideas. This system has been tried multiple times, and the result is always millions of dead people, a police state, and a demolished economy. No thanks.


Posted by
Simone Manganelli
18 August 2008 @ 2pm

What an enormous straw man, Mark. “[W]orld order”? Hahahahahahaha. Riiight. That’s exactly what I want to do. “Corporations should exist to do the things Simone likes”?! Hahahahaha, where’d you get that one? OMG CAPITALISM IS SO GREAT OMG OMG OMG RAH RAH RAH CAPITALISM! OMG ANYBODY WHO THINKS THAT CAPITALISM EVER GOES WRONG IS COMMUNIST AND BAD!!!!111eleventy!!

Give me a freakin’ break. My stated purpose “to enhance the quality of human life” is purposely broad that it encompasses almost all products that exist today. Computers allow people to do more stuff (i.e.: enhance the quality of human life). New foods allow people to enjoy new sensations (i.e.: enhance the quality of human life). Technologies like new medicines are new hospital innovations allow lives to be saved and less suffering to happen in the world (i.e.: enhance the quality of human life).

Obviously you can’t legislate corporations to make their purpose fit this definition in all cases. And I never suggested that it should be legislated. What I wanted to illustrate is the fact that capitalism places all its emphasis on making profits and being responsible to the shareholders, and it’s such complete bullshit it’s not even funny. It means that analysts think that a corporation is bad when it doesn’t give money back to its shareholders, and instead invests it to ensure the long-term viability of the company. It means that corporations are supposedly stupid when they invest in sustainable energy and sustainable products because it costs more up front, even though it has very tangible benefits down the road. Capitalism encourages a very short-sighted approach to the economy (i.e.: predatory lending practices that led to the current housing crisis), and tolerates corruption (i.e.: Enron).

There are so many numerous examples I can cite that illustrate that rampant, unchecked capitalism is such a bad idea.

And then you claim that there should only be “[s]ome basic level of governmental oversight”. Hahahahahahahaha. If you think that minimum wage, child labor laws, overtime laws, environmental protections, accounting laws, etc., etc. are all just “basic” regulations, then you’re a little more deluded about capitalism than you think. The existing regulation that we have, in the United States anyway, is so substantial that we’re so far from unchecked capitalism. And, by and large anyway (ignoring the past 8 years or so), we’ve not had “millions of dead people, a police state, and a demolished economy”.

In fact, the past 8 years has been dictated by the current administration’s “free market rah rah rah less regulation” stance, and guess what we have? Tens of thousands of dead people in Iraq (Iraqis are people too!), warrant-less wiretapping that has been left unchecked by Congress (and which is supposedly not a big deal at all to you, Mark, because it’s supposedly part of a “larger Obama agenda” that allows shit like this through), and, oh, that’s right, a tanking economy too.

So wait, let me get this straight. Capitalism rocks. Dead people, a police state, and a demolished economy don’t rock at all. But policies that push us more towards pure capitalism happen to cause more dead people, push us more towards a police state, and cause a demolished economy.

Why is unchecked capitalism so great again?


Posted by
Christopher Bowns
18 August 2008 @ 10pm

Behave, you two. Civil discourse, this is not. I don’t know what past disagreement you two have had over this or something similar, but frankly, I don’t fucking care for it.

My take on corporations and is simple. A company exists for one reason: to take people’s money and make more money out of it. Any responsibility to their employees, the environment, anything else, it all comes second after their responsibility to the shareholders. Regulation, in an ideal world, exists for one reason: to put the proper restraints on companies to protect outsiders that are subject to a company’s negative externalities during their profit-seeking behaviour.

Anything above and beyond either of those definitions is one of two things. For companies, it’s a fluffy bonus. The company happens to think that environmental protection is in their best interest? Fantastic bonus! But hardly required to justify their existence. For regulation, any unnecessary regulation is a burden on companies, and interferes unnecessarily with the course of daily business and their attempt to be profitable.

I think, on the surface of it, those definitions are hard to find fault with.

The real disagreement is which side of that, corporations or regulation, to give the benefit of the doubt to. I lean towards the companies, but not heavily: good regulation, done right (a focus on results required, not how to accomplish it) is fantastic. Bad regulation, specifying a specific approach and solution, and failing to keep up with technical improvements which often obsolete the regulation, those are worse than no regulation at all.

It’s pretty easy to see where each of you fall, and I can’t say I agree with either of you entirely, though you both have valid points.


Posted by
Simone Manganelli
18 August 2008 @ 11pm

While I disagree with you that the benefit of the doubt should be given to companies over governmentI would argue it should be the other way around, but also only lightlyI agree with you over your statements about regulation. Good forms of regulation are those that apply not only to today’s situation, but are forward-thinking enough that they can encompass future unforeseen circumstances, such as the proliferation of the internets.

The reason I trust the government over corporations is simple. The reason for being of government is to protect citizens in a society. We collectively decide to live by certain rules in society, in exchange for others doing the same, so that conflict is minimized between any group of citizens within that society. The whole purpose is to make our lives better, to take it farther away from anarchy.

In contrast, a corporation’s reason for being is entirely self-serving. I would like corporations to exist to better the quality of human life, but in capitalism that is almost never the case (even when most or all of the employees of that corporation do believe their cause is in the better interest of humanity). As you said, a corporation exists “to take peoples money and make more money out of it”. It’s selfish and self-serving. While I personally ascribe a (rather bad) moral value to this, the terms “selfish” and “self-serving” in this case are intended to be entirely descriptive.

When you have two competing entities, one whose fundamental reason for being is to protect citizens, and one whose fundamental reason for being is selfish, I tend to trust the former more. That is not to say that the former never oversteps its bounds, ever. On the contrary, there are numerous examples in the history of the U.S. (e.g.: the Watergate scandal during the Nixon administration, the DMCA and the Child Online Protection Act which was passed by a Republican Congress and signed by Democratic President Bill Clinton) where the government has overstepped its bounds. But I think there are more examples where corporations mistreat citizens, workers, and the environment more than examples where the government does the same.

My reason for treating Mark’s comments with such disdain is that we have had discussions about this over Twitter before, and Mark tends to view my opinions entirely in black and white terms, such that if I point out examples where capitalism fails, I am painted as being completely anti-capitalist. Also, Mark tends to believe that communism is inherently evil and inherently tends to create oppressive governments, even when I point out that communism is an economic system (not a form of government) and, as such, is not inherently authoritarian.

In fact, the United States is largely capitalistic, but does have communistic qualities (such as regulation, progressive redistribution of wealth in terms of the income tax, etc.). And I am largely in favor of the current system of the United States, and if forced to label myself as a capitalist or a communist, I’d probably be a capitalist first and foremost. But there are instances when capitalism completely fails citizens in the United States. And I don’t particularly care for Mark’s opinions when he asks why I’m not moving to North Korea since I believe that pure capitalism fails.

I admit that I probably paint Mark’s views as a bit too pro-capitalist than they actually are. Comparing our views, Mark’s are probably more capitalist, mine are more communist, and yours, Christopher, are somewhere in between. But even my views are on the capitalist side of the line. And I’d bet we agree on more things than we disagree.


Posted by
Simone Manganelli
18 August 2008 @ 11pm

I suppose, in the interest of furthering this discussion in a constructive manner, I should ask you, Christopher, the underlying logic for your larger distrust of government over corporations. Why do corporations, whose entire reason for being you admit is self-serving, deserve more trust than the government which was created to protect citizens?

I really don’t understand this line of thinking. I’d like to think it’s more than just a gut feeling of big government being bad, but I’m not sure I can come up with a reasonable line of thinking that rationalizes this belief.


Posted by
Allan
12 November 2008 @ 10pm

Corporations are self-serving, but they have a responsibility to their shareholders, and shareholders have power through their shares. If a corporation acts in a way that loses the trust of its shareholders, the governing structure of the corporation can be removed.

Whether governments exist to serve the common weal or not, they often do not. And the kinds of “services” they provide are often of the coercive nature. The same mechanisms (and more) by which governments regulate corporations may be used to oppress their respective citizenries, and to perpetuate those holding power.

A corporate worker, in contrast, is free (in theory) to leave the corporation. While the same is true (in theory) for an oppressed citizen of a nation, it is much harder and oppressive governments have historically had (coercive) mechanisms to prevent this. Corporations (in theory) can only use incentives to prevent workers from leaving. Given the fungible nature of many jobs, in many cases corporations have no incentive themselves to do so. (I recall reading a rebuttal to Ehrenreich that noted that there are extremely few minimum wage jobs to be had because people have incentive to train to get better jobs, so employers must raise the pay on jobs that would typically pay minimum to above-minimum rates.)

Specialized work, such as operational knowledge, executive decisions requiring knowledge (one presumes) of corporate goals, assets, and capabilities, are jobs that corporations are willing to pay millions to keep from moving. It’s not a matter of screwing the underclass as serving the corporate interests: the lowest-paid workers are not paid much because there’s always someone in the labor pool who is willing to work for that price. Not so with people who can make C*O decisions.

Minimum wages, however, mean that certain jobs will not be done, and reduces the number of overall jobs. Beyond stopping corporations from exploiting workers, it hurts laborers because they cannot sell their labor for lower than that cost; a worker must find a skill that they can sell for higher than the minimum wage.

Simone, I would not use “Communist” in labeling your views so much as socialist. Communism is a political ideology in which a government is set in place to implement (coerce) a socialist economy, society, and culture. The system of incentives in capitalist economies evolves, and in many cases has evolved more socialist tendencies, organically, without using coercion, and has distributed wealth in ways unimaginable to the socialist theorists of the 18th and 19th centuries. Nothing similar can be said about Communism.