Wednesday, May 02, 2012

In Defense of Minimum Wage

The following was a video posted by a Craiglist dignitary whom we've nicknamed Slavery Boy (based on his admission that voluntary slavery was preferable to minimum wage).

My critique:

The premise is that minimum wage laws are in fact causing job destruction.  In the simple model employed by the narrator of the video, he does appear to mathematically demonstrate the subsequent reduction in the consumer and producer surplus with the establishment of a minimum floor. 

Of course with all simple models, invariably what happens is it leaves something out so it is not actually modeling reality at all, but rather it is modeling wishful thinking. 

Minimum wage laws are indeed a tool that redistributes the wage pie in a way that is advantageous for the worker.  The narrator would like us to think that to do so we must rob Peter to pay Paul, i.e. to prevent some from working so others can work for more money.   The model conveniently omits increases in productivity achieved by better business practice and innovations in technology, what I like to refer to as the "productivity dividend".

The natural consequence of increases productivity is one can produce more products for the same amount of input. Or conversely, generate the same amount of product, with less input. 

Input consists of raw materials, energy and labour.  Thus if productivity outstrips the business's capacity to sell it all, the logical conclusion to benefit from the productivity dividend is to downsize your workforce and redistribute the savings.   In the aggregate, employer's demand for labour over time is shrinking. 

Historically the redistributed savings would end up with upper management and the shareholders, with the workers receiving very little as their jobs are increasingly tenuous over time placing additional downward pressure on wages due to increasing productivity. 

In Summary:

1. The reduction of hours will proceed at pace, irrespective of minimum wage laws. 

2. Minimum wage laws are a way to force businesses to redistribute some of the productivity gains to the workers and fight the downward pressure on wages that is devaluing labour in absence of union protections.

1 comment:

Anonymous said...

Thanks for the informative article, it was a good read and I hope its ok that I share this with some facebook friends. Thanks.