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So the Minimum Wage debate continues on, and it's so chock full of the same misinformation
proponents dole out, that I thought I'd make a video explaining just how it is that employers
set wages and make hiring determinations.
The Minimum Wage proponents seem to come from two camps. The first camp is based on the
misapprehension that employers are sitting on tons of money, wearing a monocle and cackling
as they twirl their handlebar moustaches. Of course, these are the people who limit
their discussion of the economic aspects of a Minimum Wage increase to big corporations
like Walmart. Trying to get them to discuss the all-important consequences to SMALL businesses
just exposes them for the woos they are; they either ignore it outright, or come right out
and say that these small businesses SHOULD be put out of business. "If they can't afford
to pay people a living wage, then they shouldn't be in business at all!" They CLAIM to care
for people who work at jobs, but they don't care ONE THING for the small business owners
AND their employees who'll be put out of work as a result.
The second camp seems to be stuck in the mindset of Wage Fund Theory, which was pretty much
soundly debunked in the 19th century. Wage Fund Theory is based on a simple--TOO simple--equation:
wage equals capital divided by population.
In Wage Fund Theory, there is one big pie of capital that everyone gets a bit of. The
more people there are, the smaller the slices of pie they can get--and the bigger piece
of the pie one person gets, like the CEO, the less pie there is for everyone else.
The prediction of Wage Fund Theory is, therefore, if one worker earns more, another worker must
earn less. So by raising the minimum wage, you'd give a bigger piece of the pie to the
lowest-earning workers, at the expense of reduced wages of higher earners.
Needless to say, Wage Fund Theory has been thoroughly debunked by observation, since
it would predict that an increased population would starve more than a small one (and the
proponents of the theory suggested population controls for that reason, and some of them
still do). But increasing the population to over 300,000,000 didn't make the US more impoverished
than in the 1800s when the population was only about 4 or 5 million.
People debunk Wage Fund Theory by pointing out that capital isn't constant; instead of
everyone having to get smaller and smaller pieces of a pie, a growing economy makes the
pie bigger. But this doesn't really tell the whole story.
First of all, it's not really a distinct pie. It's really more of an amorphous blob that
ebbs and flows. And yes, it grows, it gets bigger, but not really in ways that can be
predicted or controlled from the top down.
Nowadays, economically-literate people know that wages are set by supply and demand, just
like every other price in the market. The employers represent the demand curve, which
is the number of employees they can hire at various wages, and which of course is downward-sloping:
they can afford to hire more people if the wage is lower.
So far, this sounds a bit like Wage Fund Theory, but Wage Fund Theory ignores the dynamics
of supply and demand. The supply curve is the pool of available workers at every wage
level. The higher the wage offered, the more people you'll have applying for the job.
So the market seeks an equilibrium wage and quantity, which is the wage at which the number
of people applying for jobs matches the number of jobs available at that wage. But even a
basic supply/demand graph isn't enough to cover all of the nuances.
When workers look for work, they look at how much they're going to get paid, as well as
what benefits they'll receive, like health insurance. But employers have to look at the
Total Cost of Employment, and that isn't just wages plus benefits. It also includes things
like, employment taxes they pay just because they've hired someone. It includes whatever
assets the employee will be using; if this is an office job, for example, then there's
rent on the cubicle space, a desk, a chair, various office supplies, a computer, internet
access, climate control, and the power to run it all. There's also the costs of running
the business itself, including the regulatory burden, that have to be factored in across
all employees; the employees as a whole need to provide enough productivity to cover not
only the costs of employing them, but the other costs of running the business as well.
When employers look to hire people, they look at these total costs, not just wages and benefits.
So when we look at the supply/demand graph, we need to keep this in mind: since those
extra costs are not reflected on the wage side of the graph, we have to consider their
effect on the demand curve. If the Total Cost of Employment goes up, and it doesn't go up
because of increased wages (say, the employment tax goes up or energy costs rise), then the
demand curve shifts to the left, and the equilibrium wage and quantity both go down: fewer people
are hired, and those who are hired are hired at lower wages.
On the other hand, if the costs of employment go down--if we eliminate employment taxes,
or we lower the regulatory burden, or new computer software makes their work more efficient--then
the demand curve shifts to the right, and now MORE people are hired at HIGHER wages.
If you want to increase the amount that people are being paid without destroying jobs--or
even while INcreasing employment--then the costs of running a business need to be reduced.
You could remove their requirement to pay payroll taxes or health benefits, or decrease
the regulatory burden. Eliminating these extra costs would allow businesses to raise wages
for everyone--while creating even more jobs to get unemployment DOWN.
Minimum Wage simply does not work this way. Minimum Wage is a price support. Like all
price supports, it has no effect at all if the job in question has an equilibrium wage
at or above the minimum. It's only when the Minimum Wage is above equilibrium that it
has any effect at all, and the ONLY effect it has is to destroy jobs. Despite the fact
that more people are applying for these jobs because of the higher wages, there are fewer
jobs available, because employers simply can't hire as many people at that price level. Absolutely
nothing the government does can change this economic reality.
Further, since the Total Cost of Employment has now risen, those costs have to be recouped
somehow. And since they DON'T have enormous vaults of gold galleons over at Gringott's,
they have to make it back by charging more for their product or service--which means
that fewer people will buy them (supply and demand again) and the business must downsize.
When we look at the actual economics of wages, and not long-debunked theories like Wage Fund
Theory or insane delusions like employers sitting on underground vaults full of money,
there's only one conclusion to draw, and it's the conclusion supported by 85% of studies
on the effects of minimum wage on unemployment:
Minimum Wage DESTROYS JOBS. And it ESPECIALLY harms the very low-income workers it purports
to help.