Financial Inequality, the Minimum Wage, and the Cost of Living

Allegedly, and possibly correctly, there is a growing gap between the financial means — loosely called “the wealth” — of “the rich” and of “the rest of us,” or, in OWS- or Occupy-Speak, “the 99%.” And there’s no question that we’re all seeing the cost of living going up, so that our money doesn’t go as far as it used to.

Further, there is a common misunderstanding that this can be partially “corrected” by raising the minimum wage. Although I’m strictly in the novitiate of the Lay Order of Students of Economy, I note that while issues of such “inequality” and of the rise in prices of food and other necessities are conceptually separable, in the real world the “minimum wage” attempt to “correct” such inequality is one — there are others — of the direct causes of the rise in retail prices, including the rise in the cost of living. This rise in prices is what most people understand by “inflation.”

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There are at least three ways in which the minimum wage itself results in prices higher than they would be in a free market. Note that these arguments apply to any dictated minimum wage, including the very first one instituted.

1. The very existence of “the minimum wage” affects prices first, and most obviously, because wages (and salaries, if one cares to distinguish) are part of what it costs the producer of a “good” to produce it, so the price he gets for the good has to cover that cost as well as his other costs. Thus to set any floor on wages is to set a floor on a part of his costs, which is therefore to set a floor on his sale price, which means, ultimately, that a floor is set on the final price the consumer must pay. This means a floor on the cost of the item in any given shop, although for various reasons that floor may differ from shop to shop and even from time to time in any one particular shop.

So when we institute, or raise, this minimum wage, we raise the floor on costs and prices all along the chain of production right through the final price of a good in the shops; to the extent, of course, that minimum-wage workers are employed in any link of that chain. This much is completely obvious, and minimum-wage proponents seem completely oblivious to it.

But wait.

Let us bear in mind that the minimum-wage worker himself is, god and government permitting, also a consumer. So his cost of living — the price he must pay in the shop for the same thing — also increases, and he is no better off than before. He may have more dollars (pounds, euros) to take to the store, but those dollars don’t go any farther once he gets there. He could afford a doughnut and a chicken drumstick before, and (all else being equal, which it never is) he still can — but he can’t suddenly afford to buy a steak instead of the chicken, nor mocha torte instead of the doughnut.

But this doesn’t only apply to the minimum-wage worker; it applies to all of us. By driving up the cost of production in this first and most obvious way, prices are also forced to rise.

And note that the “cost of production” goes up even for a business whose owner is its only employee. If he produces anything — be it so minimal as an answering service — requiring equipment, he pays for that equipment and its upkeep or replacement and for the electricity to run it, so somewhere among his suppliers there are almost certainly minimum-wage workers. But what if he is, say, a writer? Well, he still has his computer equipment (or typewriter) to be kept up, but he also has to keep up his most important “capital asset,” which is himself, his own body. His cost of living goes up like everybody else’s, and therefore so does his cost of production. The trouble arises when his publishers, faced with their own rising costs and wish to maintain a non-negative profit margin (or even, heaven forfend, to make money) don’t raise the fees or royalty rates they pay him.

So even the cost of books and articles goes up.

2. Another result of the minimum wage is in the area of “barriers to entry,” where it is difficult for a new business to start up, or for an established one to develop and market a new or improved product, because of the amounts that one must by law pay to even the least-skilled or least-productive labor. Overall, one would expect that prices in a free market would go down gradually, but instead they’re going up. This is part of the reason why.

3. Also, the minimum wage increases the so-called “inequality gap,” since it throws out of work those whose work won’t fetch said minimum. As a matter of statistics, this lowers the “average wage” of the 99% (so to speak), thus increasing the perceived gap between the means (or the income, depending on who’s beating the drum) of the 99% and of the 1%. I.e., it increases the degree of “inequality” as measured statistically. (Resulting in cries of “Raise the minimum wage!”) Of course, as Simon mentioned in his posting on this subject, that doesn’t mostly cause libertarians and true free-market types to break out in hives.

But wait.

It also means that those now-unemployable (or less-employable, if they are still able to find part-time jobs, which, if all else were equal, they might be able to do — and at one time, many people lived by piecing together various part-time jobs, an endeavour which at least the U.S. government seems at great pains to make impossible) former workers no longer have the means to buy such stuff as doughnuts and chicken. So the jobless guy has to make do with cornflakes and cabbage. This helps him how, exactly?

Beyond that, of course, it results in additions to the welfare rolls, which means more productive capacity (in the form of human intellectual and physical effort) diverted from the production of economically valuable goods and services to the servicing of welfare departments…and to the design and production of forms … and to the devising and revising of regulations … and to the writing of memos … etc., etc., ad nauseum. This drives down the overall availability to productive enterprises of such economically valuable goods as food and fire, thereby driving up their cost. Even the welfare recipient pays more for his cabbage than he would if he’d been able to buy it with money he earned himself at his poorly-paying job, because even cabbage now costs all of its purchasers more. (Other things being equal, including the fact that nobody else would be on welfare either.)

Then there’s the fact that the lowest-paying jobs are often a form of apprenticeship, where the worker learns first how to conduct himself in the workplace generally (“don’t be a jerk on the job!”), and second, some useful skills … how to flip a burger … how to time starting a batch of burgers … how to run the register … how to close … how to figure out what to order, and to make up the orders … how to run the local store … how to own and manage several franchises … how to manage MickeyD’s finances. How to become the next Ray Kroc or Sam Walton or Messrs. Sears and Roebuck, all of whom invented better ways of doing things that made our lives far more comfortable and pleasant. And provided thousands and thousands of jobs at a result, most of them paying well enough for their employees to participate in the enjoyment of the fruits of their labors.

To this extent, then, the marketplace loses another valuable worker, which means prices do not fall as they ought to in a healthy economic environment.

So the rise in the minimum wage results in a decreased supply of low- or un-skilled labor, which results in a decreased supply of skilled labor, both of which result in decreased production of desired (and necessary) goods, which results in an increase in the cost of goods to everybody, including those who visit the Libertarian Home.

In sum, the minimum wage itself is one of the reasons why we do not see prices falling in our un-free markets.

8 Comments

  1. The price increasing impact of minimum wage laws is something I have not really considered – so many thanks Julie. I have normally just thought of a minimum wage law as a way of increasing the price of labour and thus increasing unemployment over what it otherwise would be (those who deny this with “studies” – are claiming that “studies” can repeal the logical laws of supply and demand, which they can not).

    As for inequality – people who wish to reduce inequality should (first and foremost) campaign against credit-money expansion (artificially “low interest rates” – lending that is not from REAL SAVINGS), as this mainly goes to the wealthy at the expense of the poor. Not a point discovered by Paul Marks – a point discovered by Richard Cantillon back in the 1700s.

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    1. I couldn’t agree more. This neo-Keynsian pact between banks and governments causes malinvestment, poverty, social unrest and gives undeserved weight to those who would advocate policies such as the minimum wage.
      Free banking and a return of Moral Hazard would sort this out, with some pain now but less in the future.

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  2. Excellent piece but the logic has failed to convince either the Swiss or the Germans who are following us down thiß crazy route. I am also aware of a well reasoned argument that says that lower skilled workers are paid less because everyone now knows the Government set price!

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  3. Credit expansion: Absolutely, Paul. Do you think the bytes constituting “printing money,” a.k.a. “QE,” have the worse effect, or is it the artificial credit? It seems to me arguable that they’re the same thing, literally.

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    1. Whether the government prints the money or plays computer games, it is all much the same mess Julie. Although the (unofficial) government defence “if we do not expand the monetary base then the broad money bubble of the banks will collapse” should be noted. And the statement is true – without the government monetary expansion the credit bubble banks would collapse. But eventually this rotten system will collapse anyway.

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  4. Paul,

    What I was thinking is that the fiat money is used to support the credit bubble. (Which is exactly what you say above.) It seems to me that QE and the credit bubble are just the two sides of the same coin. Yet without the credit bubble — with healthy (economically sensible) lending standards and a culture where not being in debt was a worthy thing — it would be much harder to argue for increasing the money supply. Beyond that, the very fact of increased credit IS an increased money supply. That is, credit is used as money. I think; I haven’t quite gotten it into full focus in my head.

    By the way, many thanks to you for bringing up the “credit bubble” in the first place (quite a few years ago, now). I’m almost sure I first heard of it from you.

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    1. I am a cave man (not a macho one – more a Fred Flintstone type) Julie. I believe that money lent out should actually exist (should not be just book keeping tricks), Lending should be from REAL SAVINGS (the sacrifice of consumption) – not the book keeping tricks of the “clever” which always end with screams for bailouts. No more money should be let out than what was really saved – and to call credit expansion “saving” (as bankers and establishment economists do) leads me to reach for my club (or to let the “dog” off the lead).

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