August 9, 2013

The Return Of The ‘Living Wage’ Debate

By: Adam Millsap

Community activists, labor groups such as the Service Employees International Union (SEIU), and even clergy routinely organize protests against employers like Wal-Mart and McDonald’s to try to intimidate them into paying a “living wage”. Recently, workers from restaurants such as KFC, Wendy’s, Burger King, and McDonald’s in the cities of Chicago, St. Louis, New York, and Detroit among others participated in yet another of these walkouts. The economic arguments used by these groups to justify a “living wage” are flawed and draw attention away from the real problem facing the relatively poor in this country, which is a lack of 21st century skills.

The fight to institute a living wage has been going on since at least the Great Depression, when FDR imposed wage controls and policies to keep agricultural prices high in order to support a minimum income for farmers.

The perennial economic argument for a living wage runs like this: if companies put more money into the pockets of workers they will spend it, which boosts profits and the economy. This is the equivalent of the government fiscal multiplier argument. And like that argument if you follow this one to its logical conclusion you can see how nonsensical it is. If a living wage of $15 per hour will boost the economy why don’t we raise it to $20? Or $30? Then the economy will really take off!  This argument overlooks the fact that prices — and a wage is the price of labor — reflect value; they do not set value. Employers pay workers based on how much value they add to the business. Forcing an employer to pay an employee $15 per hour when they only add $8 per hour worth of value is a recipe for bankruptcy.

“Living wage” proponents might counter that “Wal-Mart and McDonalds make billions in profit, so they can surely use some of that to pay the worker’s and not go bankrupt.” Ignoring the issue of fairness for now, yes they could; but this certainly does not boost the economy. No more value is being created; no more goods and services are being produced just because a worker is paid more by government decree. The production of more goods and services is what makes people better off. That is what makes a country rich. A mandated increase in the minimum wage just transfers resources from the owners of the firms (if it comes from profits) or the customers of the firms (if prices are increased) or some combination of the two, to the worker. Transferring resources can boost an economy no more than moving money from your left pocket to your right pocket can make you wealthier. Wealth can only be created through more production.

Some “living wage” supporters have argued that wages have not kept up with the production of workers. That is, workers productivity has increased while wages have remained flat. If this is true then those companies owe some of their profits to their workers. Wages, however, are only a part of the cost of a worker. When the total cost of a worker is taken into account — including health insurance, paid time off, and other fringe benefits — total compensation has indeed tracked productivity very closely.

Suppose that compensation has not tracked productivity, though. Then this means that there are a bunch of resources, e.g. workers that are underutilized. If “living wage” supporters honestly believe that workers at McDonalds produce $15 worth of value per hour but are only paid $8 they should start a restaurant and pay their workers $14 per hour and make a profit. All of the best workers would want to work for them because of their high wage and McDonalds would be forced to pay up as well or face a labor shortage.

Even if paying workers a “living wage” does not boost the economy, we may decide that as a society we have a responsibility to make sure that everyone can afford a decent lifestyle (assuming we can agree on what decent means). But if we do have that responsibility, why should it fall primarily on an employer or customers of that employer? People complain that employers like Wal-Mart rely on the government to pick up the tab for their employee’s health insurance and to generally subsidize the low wage Wal-Mart pays them. But Wal-Mart as an entity did not unilaterally decide that everyone deserves some minimum standard of living. Politicians, supposedly at the request of their voters, decided this and they implemented Medicaid, food stamps, and other programs to help the poor. The fact that our society has created these programs at the federal level is evidence that many of us feel some responsibility to subsidize the standard of living for the relatively poor. Attempts by politicians, the SEIU, and the clergy to place this entire burden on companies like Wal-Mart and their customers, who are often poor themselves, are not benevolent or moral. Rather they are attempts to relieve themselves of a responsibility that they championed in the past. If living wage proponents as compassionate as they say they are, it is odd that they are so eager to relieve themselves as taxpayers from this responsibility that they claim we all have.

Common economic arguments in support of a “living wage” fail under scrutiny. In fact a “living wage” would do real harm to low skilled workers since it forces them out of the labor market.. There are better ways to help low-wage workers than artificially increasing their wage: better schools, affordable training programs, and private charity to name a few. As a society, we are better off focusing our attention on these solutions rather than continually rehashing the “living wage” debate.

Adam Millsap is a PhD student in economics and graduate instructor at Clemson University in South Carolina. FDR memorial image courtesy of Big Stock Photo.