A Marxist Minimum Wage?

This morning I read a comment on social media about the minimum wage - specifically about the notion that some fast food workers are asserting they should be paid $15/hour.  This is a fascinating subject in economics. Not just because economics is fascinating - which it is to me, but not to most people - but because it's one of those issues in economics about which virtually everyone has an opinion.

Those who support a higher minimum wage note that it is not a "living wage."  Certainly someone earning minimum wage with no benefits would be challenged to support himself at today's price levels, never mind any dependents.  But of course life is not that simple, because a person with that level of income may be eligible for public assistance in various forms, including Medicaid, housing subsidies, SNAP (food stamps), etc.

Those opposed suggest that minimum wage is not really supposed to be a living wage, not when it is paid to people in entry-level jobs often held by teenagers or part-time workers adding to a family's income.  Trying to figure out just how many people there are who are really struggling to support themselves as independent adults at minimum wage jobs is a bit of a challenge.  But it seems to be enough that we can agree we are not just talking about burger-flipping high school kids making money to pay for their social lives and give their parents a break.

Karl Marx is famous for (among other things) having popularized the expression, "From each according to his ability; to each according to his need."  In the conception of many, this means we should all contribute to society in the manner of which we are capable, and our economic reward should be based on our need for sustenance.  Thus if I have the innate ability to master the knowledge and skills required to practice medicine and my neighbor's natural attributes are suitable for driving a bus, those are the things we should do.  But my needs in life are inherently no greater than his, and so my income should not be (as it is in the United States) substantially higher.

How does such an economic model work with human nature?  I've never driven a bus, but I have driven a truck (delivering newspapers), and I can tell you it's much less mentally demanding work than practicing medicine, and there are some days when I'd gladly switch to doing that if it paid the same as being a doctor.  It wouldn't be intellectually challenging or rewarding, and in some ways it is physically more strenuous, but overall I'd have to say it was a much easier job.

In our economy, with market forces, one of the things motivating people to enter professions that require high levels of intellectual ability and many years of education and training is money.  Those professions are financially rewarding. Are there plumbers who earn as much as pediatricians?  Sure.  But, by and large, the jobs that require a lot of smarts bring bigger bucks.

We want the best and brightest of our nation's youth to enter professions like medicine.  (We can argue about some other high-paying professions.  For example, there seems to be general agreement that we need more engineers and not so many lawyers, so maybe we should look at incomes for those professions.)  If physicians are paid no better than manual laborers, how will we create a society in which young people with the innate ability to become doctors choose that path?

Thus, the first - and arguably most important - question is whether the minimum wage should be adjusted so that it is a living wage.  That seems a no-brainer, unless there is a downside.  Surely there is a downside.  Let's look at the worker at the fast food restaurant who earns minimum wage.  If that wage is raised - without any increase in revenues to support it - where will the money come from? Will the restaurant simply lower its profit margin?  Unlikely, unless there is sufficient competition to make raising prices unwise, and profit margins are currently ample, making a reduction acceptable.  But if all fast food restaurants are affected the same way by an increase in the statutory minimum wage, then most likely all will raise prices.  (For those of you who are aware of how things are different in other countries, I'm staying away from that because it makes the analysis even more complicated than it already is.  For those of you interested in the comparison, see this essay from Denmark.)

This concern can be generalized.  If the minimum wage were raised for all, would that not put upward pressure on prices, meaning there would be inflation, with the corresponding reduction in purchasing power, so those earning minimum wage wouldn't really be better off after all?  The short answer is no.  You see, most of us earn more than minimum wage, so if we raise that wage, the upward pressure on prices is limited because most people's wages are not going up.  So there might be a little inflation, with a very modest effect on purchasing power, so those earning minimum wage still benefit substantially, while the negative effect on everyone else is quite small.

What about the burger?  If you tell Burger King it has to pay its minimum wage workers 40% more (the effect of raising the minimum wage from $7.25 to $10.10), won't the price of a burger go up 40%?  Again, the short answer is no, because the wage paid to employees, especially only those earning minimum wage, is a relatively small contributor to the price of a burger.  Would the price of a burger go up?  Probably - but probably only a little.

What about the possibility that workers would be dismissed?  There may be some sectors in which that is a real possibility.  Burger King is not in one of them. BK employs the number of people it takes to do the work.  No more, no less. They cannot really schedule fewer workers because they're paying them more, because that would mean worse service and loss of business, unless their workers suddenly became more productive, which is unlikely.

I think this analysis makes it pretty clear that raising the minimum wage for many workers at that level will do far more good than it would have any significant downside.

And that brings me back to the consideration of economic incentives.  As is evident from this essay - and more so to my regular readers - I have a special interest in health care.  Suppose a new high school grad can get a job flipping burgers for $15/hour.  Alternatively, she could enroll in the local community college and get an associate degree to become a paramedic.  The second option costs money and takes 15-18 months of serious study.  In many places in the US, paramedics don't get paid more than $15/hour.  You can say that being a paramedic is much more emotionally rewarding than flipping burgers, but it takes education and training to get the job, and it's hard work.  (Also, there are many websites devoted to the frustrations of work in EMS and the abuse of these folks by their patients, so I'm concerned about how many of them would chuck it all for a job at Micky Dee's if the money were no different.)

Notwithstanding our philosophical attraction to egalitarian principles, there is a lot of class warfare in this country.  Some of it is between the rich and the poor, and there is much angst about the growing gap between them.  The US has unequal distribution of wealth to a degree substantially greater than other First World nations.  Corporate CEOs are paid hundreds of times what their line workers earn.  But I am most intrigued by the class warfare between those who are much closer to each other - between the poor and the lower middle class, for example. So, the person who earns $15/hour and works hard for that money may find it truly irksome that the fellow flipping burgers should assert a right to the same pay.

But the most serious macroeconomic problem we currently face, in my view, is not that the minimum wage is too low, but that employment is too low.  Forget the unemployment rate, which is a meaningless number if ever there was one.  Look instead at the labor force participation rate, which has been on a slow but steady decline over the past decade, and which shows that for every five people currently working, there are three others who should be but aren't.

What's the connection?  This dismal statistic powerfully influences my view of the minimum wage debate.  We can talk about whether the high school kid flipping burgers deserves $15/hour, or even $10/hour, and I won't argue with much enthusiasm for either wage.  But should the person actually trying to support himself on minimum wage be paid something that makes that feasible?  I look at this person and think, hey, this is somebody who's working, who has an oar in the water.  This is a person who is actually trying to hold up his end of the Marxist aphorism: from each according to his ability.  If we, as a society, cannot find a way to hold up the other end, and see to it that he gets paid enough to support himself, we had better step back and re-think our economy.