The battle over minimum wage is raging. Emotions are running hot. Some cities are setting the bar very high. For example, Seattle is mandating a $15/hour wage.
Economically, the issue is very simple. Minimum wage laws do not raise anyone’s wage. This is because it’s not sustainable to overpay.
Suppose you run a small tailor shop. Customers are willing to pay $20 to repair a pair of slacks. Why are they willing to pay that, and no more? It’s not just their budget, but also the relative value of fixing their old trousers compared to buying new. A higher wage for your employees will have no effect on customer willingness to pay.
You have rent, utilities, insurance, wear and tear on your sewing machines, etc. that add up to $10. Therefore your maximum gross profit is $10. You cannot pay someone $11, much less $15, to do this work. If the law attempts to force you to overpay, then you have to lay off workers or even close your doors. Going out of business is no fun, but it beats losing more money.
This is black and white. Minimum wage law can destroy jobs and businesses but it cannot raise wages. However, many people become very emotional on this issue. So let’s look at the issue from a different angle.
There is an endless outpouring of sympathy and support for the unskilled laborer. How is this poor downtrodden helpless victim supposed to feed a family, cover medical expenses, and save for retirement earning only $7.25 per hour?
I don’t know.
My lack of an answer to this question is no justification for minimum wage laws. This is not even the right question. It is an example of the logical fallacy known as begging the question—when you presume what you should be asking. We should ask if one man’s need creates a duty in anyone else. Then the answer is a lot clearer.
The last time I checked, we had not adopted the Communist Manifesto as our new constitution. There is no law saying that each is to be given according to his need.
In comparison to the general sympathy for unskilled laborers, there is none for doctors. Just look at the endless commentary about Obamacare. What are the most popular complaints today? In my admittedly non-scientific sampling, the most common are higher costs, reduced choices, or a broken website. Some people worry about lower quality or less access to care.
There is virtually no discussion of what Obamacare will do to doctors. Doctors make far more than the minimum wage. One presumes that their needs are covered by their incomes, and therefore of no worry to us.
Need is the wrong way to look at it.
Instead of asking what someone’s need is, you should ask what are these people doing for you? What do they create? What value do they add? This brings the issue into sharp focus.
The unskilled laborer can be put to work turning a crank. He needs lots of supervision, which is an additional cost. The crank is paid for by someone else’s saved and accumulated capital, and this investor must be paid a return on capital for placing it at risk in a business. The laborer can be held accountable for showing up every morning and turning the crank all day, but not for business profitability.
This, by definition and by nature, is what unskilled labor is. He brings no capital, no skills, no knowledge, no expertise, no prior learning. He may be a young and inexperienced worker. Or he may have years of prior experience, but he is the sort of person who learns nothing from experience. Either way, the employer is taking on real risks and expenses.
Finally, the unskilled laborer is virtually indistinguishable. Many towns have a street corner, where construction contractors go to pick up a few laborers for a day’s work. There is a standardized market wage for these workers, and the employer doesn’t care who jumps in the back of the truck on any given workday.
How much does one of these workers impact your life? What would happen to you, if one of them stopped working?
For the next part of the discussion, please bear with me. I am assuming a free market in healthcare. In a free market, patients pay doctors for their services, the same way that homeowners pay plumbers, and diners pay restaurants.
Suppose you notice a lump in your neck. You’re worried it may be cancer. Catching it early is the key to surviving with maximum quality of life. You really want to see the best doctor that you can afford. You get a recommendation, and you call his office. They tell you he just retired. You get a second recommendation. You call this doctor’s office, but her receptionist says she was hit by a car this morning and is in critical condition. You open the phone book and call the last specialist. He is on sabbatical, teaching head and neck surgery in Thailand.
Now what do you do? Three doctors are unavailable, and you already feel a bit desperate.
You widen your search, and keep calling more. Suppose for some reason, all the doctors you call are unavailable. One by one, you hear why they can’t see you and you become increasingly frantic.
The doctor contributes the most value to your life, including saving it. By contrast, the laborer contributes the least. If 10 doctors stopped practicing medicine, you could die. In comparison, if 100 laborers stopped working, you wouldn’t even notice it.
What would you be willing to pay someone who saved your life?
If you would like a doctor to be available, in case your life needs saving, you must change how you think about wages. Start thinking about the value someone produces, and stop thinking about need. Your willingness, indeed your happiness—no your eagerness—to pay the doctor big money has nothing to do with his need. It has everything to do with what he does for you. Your life is worth more to you than the money you spend.
In comparison you aren’t willing to pay the same to someone who washes your dishes or trims your front lawn. If you would like restaurants and landscaping to be available, you must approach it the same way as with doctors. Start thinking about the value they provide and stop thinking about the needs of their unskilled workers.