Some thoughts on the minimum wage

Barack Obama’s call for a 24% increase in the minimum wage to $9 an hour along with its future indexing to inflation is, all and all, a positive step but its grossly insufficient if we seek a more just economy.

The usual suspects, of course, are against the very concept of a minimum wage, arguing that it will hurt business and therefore eventually employment.  I think they probably have a minor point in regards to corporate profits since a certain amount of the increased wages will “leak out” to imports from non American corporations.  But, beyond that, the overall effect on corporate profits should be a net wash as some industries benefit and others get hurt depending on the relative extent of the minimum wage workforce and where exactly the exploited neo-slaves spend their increased incomes.

In our concentrated oligopoly, though, a highly likely result of it all will be that the additional cost is simply passed on in higher prices.  The burden then would fall on those making above the minimum wage but not on the owners, while the total real wage would remain constant.  This would explain why the politics of the minimum wage is so nebulous.  Majorities don’t like to see widespread poverty but they recognize they could bear the burden of an increased minimum wage and don’t feel they’re prepared to pay more for a cup of coffee or whatever.

The likelihood the minimum wage issue boils down to a zero sum battle between higher and lower income workers illustrates an important point about the dichotomy between a common sense view of reality and the actual financial system in which we live, a regular theme of this blog.  In the common sense world of extremely high productivity, one worker’s increased consumption should have absolutely no bearing on another’s ability to consume.  If the struggling person who serves me a cup of coffee can suddenly afford to buy better clothes, say, and we have virtually unlimited capacity to produce the clothes, why should my consumption of coffee or of anything else have to decline in return?  The realm of the common sense recognizes we don’t live in a necessarily zero sum world and that there’s no “real” cost of someone living better.  But the fact we actually do live in a world subject to zero sum logic illustrates that we operate not under the laws of common sense but under something we might call the iron laws of finance.

I argued here that money is power in capitalism, the power to command production.  Production, in fact, will never occur regardless of the extent of unused resources or available workers, unless someone commands it through the transfer of money.  A middle class worker has a limited sum passed down from above and naturally seeks to maximize it.  Everything has a cost to this person and it’s a tidy zero sum world.  He or she must pay a cost for the coffee server to live better.  This is the manner in which the hierarchy enforces inequality – it limits the amount of money / power flowing downward and enforces a zero sum cost on everyone.  Power is maintained and production is repressed unless it’s duly authorized from above.

The moral desire to see living standards improved for those at the bottom of the hierarchy is widespread but it’s extremely difficult to achieve given this zero sum battle coupled with the ability of the owners to negate increased wages by simply increasing prices.

The fundamental issue, then, is the worker share of the economy, in other words, the extent the economy is devoted to satisfying the needs of the majority versus the luxury consumption and investment desires of the owners.  The higher the worker share, the higher is both the real wage and total employment.  We know that the worker share has been in a nose dive since the 1970’s as we can clearly see in this dramatic graph:

(Data sources: US Census Bureau and St. Louis Fed)

We see that median income has declined drastically as a percent of the economy and is at just 60% of its 1975 level.  And it’s even worse for the minimum wage which has stagnated below the median wage.  The fact of the matter is that the real wage can’t be increased very easily without collective action which limits both the extent prices can be increased as wages rise and assures sufficient investment spending.  To move toward a more just economy, we need to drop the idea that the minimum wage and wages in general should be indexed merely to inflation – i.e. prices.  They have been more or less so indexed for a long time but the worker isn’t benefiting.  The economy is simply not serving the interests of the workers.  Wages (and so called “entitlements” as well) should be indexed to the growth of the economy itself and this requires a dramatic re-alignment to correct the gross exploitation that’s occurred over the past decades as is so well illustrated above.

So, an increase in the minimum wage and its indexation to inflation will help the most exploited of workers and that is good but it will also likely entail a needless cost which will be borne by higher income workers and not the owners.  That is completely unacceptable and we need to demand a far more comprehensive plan.

Update: I can’t help but note the perversity of so much of the liberal economic commentary on this issue.  The standard theme is to ignore the essential reality of power inequality and give at least partial credibility to opinions fully in line with the status quo.  Here’s Yglesias providing an argument against the minimum wage on the grounds of freedom no less.  The noble freedom apparently to exploit the weak.

“the clearest case against a minimum wage hike has (in my view) more to do with freedom than with research. You’ve got a guy who wants to give someone $8 to do something that’ll take an hour and another guy who wants $8 and is happy to do the thing in exchange for the money. Now Barack Obama’s going to fine them for agreeing to trade $8 for the work? Seems perverse.”

Perverse indeed.