Seeing as how it's Labor Day in the most anti-labor "developed" nation in the world, this topic seemed kind of fitting.
Someone e-mailed me a week or so ago talking about his family members' political views and asked me if I thought it was worth trying to even have a discussion with them. Part of my reply contained my view on what I think are basically three different kinds of "free-market" advocates. I presented this same case in a thread on minimum wages on the ultra-libertarian Mises.org website (under the name Jeff), and it basically goes like this:
There are three kinds of "free-market" advocates:
- Those who acknowledge that in a “free market” system, ownership of capital will become highly concentrated in the hands of a few, who will then by virtue of their concentration of capital, actuality come to control the market and also of course the government and everything else, i.e. that "free-markets" are only fleeting under natural conditions and that it is in fact capitalism that leads to the destruction of free markets and small businesses, etc. These "free-marketers" know all of this and support this because they believe in a system where the few rule the many and they openly acknowledge this and their disdain for their fellow man. They believe that life in inherently unfair and that its fine if a few super rich people unfairly dominate the rest.
- Those who think that "free-market capitalism" without "government interference" will give rise to a society in which every individual is an empowered capital owner and exploitation and poverty will go away for all those who are simply not to lazy to work. These people are basically delusional fools who have no idea what they are talking about.
- Those who actually hold the beliefs of type #1, but who advocate for laissez-faire capitalism using the arguments of type #2. These people make arguments in favor of "free-market capitalism" using euphemisms like "freedom" and "choice" and "liberty" and argue that all of this will bring about improvements for the poor, etc., but all the while they don’t really believe any of this. In reality they actually know that what they are arguing for will lead to greater economic inequality where the few rule the many, but they just pretend otherwise.
Instead of simply stating that, in this case for example, they are opposed to minimum wages because minimum wages can eat into the profit margins of business owners and share holders, they instead claim that they are against minimum wages because minimum wages hurt the poor.
Instead of simply defending policies designed to help the well-off at the expense of the poor on the grounds that they will help the well-off, they defend policies designed to help the well-off at the expense of the poor by claiming that the policies are designed to help the poor. This is essentially what "Trickle-Down" economics is all about.
A case in point is one of the linked papers in the minimum wage thread on mises.org. This was a so-called study done by the Employment Policies Institute. The EPI is a right-wing think tank, funded by the tobacco, restaurant, hotel, alcoholic beverages industries.
They published a paper in 2001 called Does the Minimum Wage Reduce Poverty?
They answer they provide, of course, is no.
One interesting passage within the paper struck me, because it is so fundamental to the issue of how wages are understood, and to the assumptions underlying the "study".
"Minimum wage laws, if meaningful, require employers to pay some workers more than they would have earned in an unhampered market economy. For example, whereas the federal minimum wage at this writing is $5.15 per hour, in the absence of this minimum some employers might pay their workers $4.50 per hour. Economic theory suggests that in competitive markets, workers will be paid their marginal revenue product—the amount of revenue that the worker contributes to the firm. That is a wage consistent with the profit-maximizing behavior of employers and the utility-maximizing behavior of employees.
Thus, if a firm in an unregulated market economy is paying its workers $4.50 an hour, it is probable that the marginal contribution of the worker to the firm is about $4.50 in revenue per hour. If, in fact, it were higher, say $5.00, it would be profitable for another firm to offer the worker in question a higher wage than the existing $4.50. If, however, the government requires the firm to pay a wage of $5.15 per hour, it might discharge the worker in question (or allow its labor force to decline by attrition until the point that the marginal product of workers equals or exceeds the minimum wage of $5.15). Thus, economic theory predicts that minimum wages cause some unemployment."
This is, in fact, all wrong.
As Adam Smith wrote in Wealth of Nation:
"Though the manufacturer [worker] has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed."
The very idea that an employee being paid $4.50 an hour is contributing exactly $4.50 worth of value an hour to his employer is not just total nonsense, it's not even within the realm of possibility.
Even if we exclude the additional costs of employing a worker, implying that the worker has to create more value than just what he/she is paid in order to cover not only his compensation, but also those additional costs, no employer would employ anyone if that worker were not creating more value than what they cost, in total, to employ.
If a worker is paid $4.50 an hour, then we also have to consider the additional Social Security contributions of the employer, the employer's compensation insurance to cover the employee, the unemployment insurance paid on behalf of the employee, the cost of the capital used by the employee, the costs of training the employee, the cost to supervise the employee, the cost of administration to process the employee's records and pay, etc., etc.
So, a worker being paid $4.50 is actually cost the employer probably more like $8.00 an hour to employ. So, we know that the value of the employee's labor must actually be at least $8.00 for is to be worth it to the employer to hire and retain him or her.
But, if the value of the contribution of the employee is only $8.00, then it still wouldn't be worth employing them at all either, because at a cost of $8, there would be no benefit to the employer from employing the employee. So, in reality we know that the value created by the employee has to be more than $8.
There is, or should be, some profit margin generated by every employee. If an employee is not creating as much or more value than they are being paid, then there is no reason to retain them at all (Note that over paid emplyees are still retained all the time for various reasons). And it is this profit margin that is in question. What minimum wages do, potentially, is that they can reduce the profit margins on low wage labor.
What minimum wages were designed to address were the scenarios where people were being paid $2.00 an hour to work at companies that were generating massive profits with highly paid executives. Clearly, those profits and executive pay were being generated by paying employees significantly less than the value of their labor.
Ahh... but now the "market economist" replies that in a market for labor, if the value created by those workers was actually so much higher, then those workers would have been able to find another employer who would have paid them more and accepted a slightly smaller profit margin on their labor.
But, basic economic theory also tells us why this doesn't hold out in the real world. There are, in fact, many, many reasons, such as:
- Employer collusion. In situations where industries are dominated by a few large players, for example a few major clothing or shoe manufacturers, it can be more beneficial for employers to not bid competitively on workers in order to keep wages down for all of them. This can occur either explicitly through intentional planning or indirectly via the shared understanding of the market by the employers, without employers needed to communicate their intentions to one another.
- Industry standard profit margins. Employers may not be willing toaccept lower profit margins than their peers, even if the profit margins in the indutry are high or have room to be reduced.
- Due to geography the employment market can be very limited, creating few or no alternatives for employment, in effect, there is no labor market at all under these conditions.
- Discrimination. Employers may all simply not agree to pay certain types of people (historically women, blacks, and Latinos in America) as much money for doing the same amount of work based on irrational biases and perceptions.
- More fundamentally, labor markets aren't dominated by the value produced by the workers, but rather by the lowest compensation other comparable workers are willing to take for doing the work. This is what leads to the "race to the bottom", with minimum wages meant to be a final stop gap in that race to the bottom. The value of what is produced by the worker isn't determined by the labor market, it is determined by the commodity market where the products of the worker's labor are sold. Almost always, the worker has no real understand of the relationships between their own labor contributions and the commodity market, and neither do the consumers. This relationship is typically held in a "black box" by the employers. So in this case, market is not reflective of real value due to asymmetric information, where employers hold all or most of the cards.
This is really only ever the case if #1 its possible to outsource the work to an even cheaper geographic region that doesn't have the same labor costs #2 it's possible to automate the work more cheaply than it is to pay the higher wages, or #3 if the profit margin is overtaken, and the good or service can no longer be sold profitably at costs that cover the cost of labor plus a profit margin, which typically means that the good or service isn't in high demand in the first place.
As much as people may think that the issue of minimum wages may be heavily effected by conditions #1 and #2, in fact they are not, because work that is off-shored or automated is not typically minimum wage work. This should be pretty obvious, since the return on investment from automating tasks for what is already the cheapest form of labor is not nearly as high as automating the tasks of more highly paid laborers.
In fact, the effect of automation and off-shoring is typically not the elimination of minimum wage positions, leading to fewer jobs for the poor, but rather it is the elimination of medium and high wage positions, leading to the creation of more low-wage positions in the geographic regions where jobs are automated or off-shored from.
This is quite clear with automation. What automation and industrialization did was it replaced the positions of highly paid artisans with low-wage assembly-line positions. The same goes with off-shoring. The positions in America eliminated by off-shoring were not minimum wage positions, they were medium wage in the manufacturing industry. These are positions that typically paid between $8 and $25 an hour.
So, the argument that minimum wages lead to increased unemployment for the poor is also not correct on those grounds either.
The reality is that minimum wages do lead to reduced poverty, as is very clear when looking at the data in America from 1940-1960, in which minimum wages increased rapidly, followed with sharp reductions in poverty.
Not only that, but the paper published EPI is especially ironic, since EPI is funded largely by hospitality industries, which can't reasonably be off-shored or automated away, which in reality is the reason that those industries are fighting the minimum wage. They are fighting the minimum wage, not because they are concerned for the poor, believing that minimum wages increase or do nothing to reduce poverty, as they claim, but rather because they are concerned for the profit margins of the business owners and minimum wages do have the potential to negatively impact, in a direct way, the the profit margins of employers. Although, in an indirect way, by ensuring that the lowest paid people have some bare minimum of compensation, minimum wages actually boost profit margins across the whole economic system by helping to reduce poverty.
So once again we return to the fact that there are three types of "free-market" advocates / libertarians, honest elitists, honest (though misguided) populists, and dishonest elitists posing as populists. The sad story of American politics and economic discourse is the story of a culture dominated by the later.