So minimum wages…

Minimum wage: the lowest amount that an employer can legally pay an employee. It is also the lowest amount that an employee can ask to be paid – but that generally tends to be less of an issue. Also, it doesn’t really apply to illegal immigrants.

Here’s the general supportive stance:

  • higher minimum wages mean higher standards of living for low-income workers.
  • better pay means better workers*.
    *Rubbish. It’s like arguing that being fat makes you eat bad food. Causality – you’re doing it wrong.
  • people are less likely to get involved in illegal activities (such as trading in drugs*).
    *Oh please. Do we really think that drug dealers have only a slight edge on the minimum wage – small enough that a higher minimum wage might entice them out of it? Anyone believing that must be high. And, given that, they should surely know how much they paid to get that way.
  • the empirical evidence around the impact of minimum wages can be criticised.

Here’s a video that makes a counter-argument (and here’s the link for those reading it in their inbox):

The Standard Viewpoint Against Increasing the Minimum Wage*
*Above the market-related wage – otherwise, it’s just lip service.

The main points from the above clip:

  1. Imposing a higher minimum wage does not mean that every worker will be paid a higher wage – it just means a higher wage for those workers that the employer chooses to keep.
  2. An employer will only hire someone whose cost (ie. wage) is less than the benefit of having that person on the staff. That is: the employer must profit off you – otherwise, what’s the point?
  3. The example is given of a burger flipper. Let’s say that you flip 90 burgers in an hour, and I can make 10 cents per burger before I take your wage into account (ie. $9 per hour). If I’m paying you $7 per hour, that means my profit is $2 per hour.
  4. If they increase the minimum wage to $10 per hour, then you’ve actually started to cost me $1 per hour in profit.
  5. So you’ll get fired.
  6. The only people that a minimum wage benefits are those that are good workers (ie. those flipping more than 100 burgers an hour).
  7. But those guys would probably get raises anyway. Not just because they’re good – the problem is that if you don’t offer them a raise, your competitors will poach them away with a higher wage.
  8. So all that ends up happening is that the unskilled workers get fired, and the more-skilled workers get the pay increases that were already coming.
  9. Everyone that had something to lose therefore loses.

Which does sound quite logical – except for that fact that it isn’t. At least, not entirely.

Some observations:

  • Some of the increased minimum wage will be passed on to customers. When there is something like an industry-wide cost increase, customers will be expecting a price increase, and the employer will take advantage of it.
  • Identifying who should be fired in the cost-benefit analysis of slightly higher wages is extraordinarily difficult in practice. Sure – some companies may try to track it. But many will just use the opportunity to fire some people that they were going to fire anyway; and the rest will grumble and moan and let the inertia roll. Personally – I think that’s why some of the empirical evidence for the libertarian argument is a bit weak – people are too lazy to be ruthlessly economical in their decision-making. My guesstimate of the biggest impact: employers will stop hiring people rather than actually doing much firing.
  • More productive workers don’t necessarily get rewarded with appropriately higher wages. At all. Competitors are hardly going to spend their time keeping track of good burger flippers. That task will probably be delegated to branch managers, who are more likely to be concerned with keeping everyone in line than with finding the best burger flipper. The competitive-bidding principle may apply to high wage earners, where there’s a very clear incentive to find the best person for your buck. But when you’re talking about minimum wage earners, the scale is just too large… So a higher minimum wage might reward more productive workers (ie. it’s not a complete lose-no gain situation).

That said – I don’t think that the argument is wrong. I just don’t think that it’s completely universal.

It’s very much dependent on the type of minimum wage worker under consideration.

How Replaceable Is The Person?

In my mind, there are two kinds of minimum wage worker:

  • the replaceable; and
  • the irreplaceable (or, at least, the replaceable only after a large amount of money, time and effort).

Some replacement options:

  • outsourcing; and
  • machinery

So, for example, you can’t really outsource a janitor (other than by hiring an illegal immigrant – which is illegal, either way you look at it). It’s a bit of a commute for a foreigner – and you can hardly arrange for the toilets to be cleaned via a call centre in India.

Another example: realistically, you can’t just replace a farm labourer – it takes time and investment to find, and to raise money to buy, machinery.

And as for my post about bus-drivers – they too are not so easy to replace.

The Real Risk: Outsourcing

But while you can’t replace everyone, many Asian economies have gone out of their way to make moving one’s manufacturing plant as swift and as initially-painless as possible. The Chinese, those skilled imitators, will promise you a prototype of absolutely anything by next Tuesday. For the price of a trifle. A poorly made trifle, to be sure – but they’ll iterate toward your finished product within weeks.

Of course – it’s never as cheap as it first appears. But it’s cheap enough to entice one to give it a bit of a gamble. And you know what they say in the Sun Tzu’s “Art of War”…? Actually, I don’t either. But I’m sure that it’s something like:

“Sucker the bastard in with a really cheap rate, work for that rate until he has become utterly reliant on your production process, use that time to understand his product and his market, increase the price in small but constant increments, go into competition when he tries to take the business away, win.”

This, to me, is the real trouble with minimum wages. Your factory worker in Detroit is now in direct competition with the factory worker in Cambodia. And here’s a comparison of minimum wages:

Unfortunately, the above graph puts those minimum wages into purchasing power parity terms (ie. equating it to what the workers can buy with their wage). Only, when it comes to outsourcing decisions, purchasing power parity is irrelevant. All that matters is absolute numbers: a dollar wage in one country versus a dollar wage in another.

So let me put that into numbers (all US dollars). Some of the highest minimum wage countries:

  • Australia – $16.88
  • France – $12.09
  • UK – $9.83
  • USA – $7.25

And the lowest:

  • Sierra Leone – $0.03
  • Bangladesh – $0.11
  • Vietnam – $0.23
  • India – $0.28
  • China – $0.80

Is it any surprise that labour-intensive manufacturing firms are dying out in the developed world, while South-East Asia is experiencing an industrial revolution?

This type of minimum wage decision is an easy one. So businesses will make it. And have made it.

The Key Point

International competitiveness is no longer a question of world trade positioning.¬†International competitiveness today is a question of domestic stability, when you’re talking about jobs that can be outsourced.

It’s the price the world pays for globalisation. And it might just mean that some people need to start working for less.

Except for burger flippers. And janitors.