The Fundamental Economic Principles of Wages


There is a growing movement to create what is called a “living wage,” essentially a high minimum wage that would allow someone to raise a family of four while working 40 hours a week at a fast food counter.  This certainly sounds like a worthwhile goal and it would be great to lift everyone out of poverty simply by paying them more.  Those of you working those jobs might also be thinking, yeah, it would be great to get $15 per hour.  If you are an older adult raising a family on a minimum wage salary, you might be thinking you could quit your second job if you could make so much at your first job.

But don’t fall for the bait.  The people pushing for these changes aren’t single moms working 80 hours a week trying to make ends meet for their three kids.  They are professional union organizers who want to form minimum wage earners into unions and then collect dues from them.  After seeing the auto industry in Detroit implode and union member ship drop off significantly, they are eager to build a new base to pay to keep them in their posh positions and their posh offices.  Unions are terrible for young people, since theyare based on tenure where those who have been at a job longer get to choose their shift and get first dibs for everything.  Likewise, those who have been there the shortest amount of time are the first to get fired when lay-offs come and unions are perfectly willing to see big lay-offs before they are willing to give an inch in benefits.

The truth is, many of the positions that pay minimum wage couldn’t pay more because the economics just don’t work.  If you were growing six ears of corn, could you expect to be able to trade it to someone else for a year’s worth of food, shelter, and clothing just because you really needed it?   No, you couldn’t because the person on the other end of that deal would soon see his family starving to death because he made an unequal trade.  If you raise wages to $15 for fast food workers you’ll see those working at the registers replaced with kiosks and smart phone apps.  You’ll see drive-thru order takers moved overseas (we’re already seeing this).  You’ll see cooks replaced with automation as well.  As an alternative, you might see chefs from culinary institutes hired at fast food places and food quality increased to allow the restaurants to charge enough to cover the higher salaries.  Either way, you’ll see entry-level jobs all but disappear, making it impossible for people to get the experience they need to get better jobs, which is what everyone in the minimum wage jobs should be trying to do.

The reason you won’t see employers just go along and increase wages isn’t that they are greedy and want to sit on their pile of cash at home and not dole it out.  It is that having these wages violates the fundamental principles of economics, and just like you can’t defy gravity just because it would be helpful, you can’t take care of a family of four without producing enough just because you want to do so.    Read these fundamental principle and think about them a bit and I think you’ll agree that a living wage just won’t work.  I just hope you realize this now and not in a few years after a living wage is enacted and everyone is starving to death because there are no jobs

1.   Someone needs to produced whatever is consumed.

This is very obvious when you are growing your own food and hunting your own animals on the frontier, but gets lost when you have a large economy with a lot of government handouts.  You can hand out dollars all you want, but someone needs to produce that food you are eating, that shirt you are wearing, and that home you’re living in or the dollars printed are just pretty pieces of paper.  If everyone is sitting around getting “stuff for free,” you can keep receiving a check in the mail but there won’t be anywhere to spend it.

2.  You cannot be paid more than the value of what you produce.

People who get paid more, on average, produce more.  A person who makes food for 100 people a day makes less than a person who opens a chain of restaurants and feed a hundred thousand people a day.  If you are being paid $15 per hour but are only producing something worth $5 per hour, your employer would be losing $10 per hour by having you work there.  Realize also that there are costs beyond your pay, such as your benefits and insurance, personnel paperwork, rents, utilities, and materials costs.   If your boss paid you more than what you produce, eventually he would run out of money.  The only sensible thing to do if forced to pay more than employees are producing is to lay off employees until they are making enough to cover salaries and still make a profit.  (And if he doesn’t make a profit, what is the point of him putting in the hours doing it?  Would you make the effort to deal with you and your coworkers as a manager if you got paid the same thing for just pushign a broom when asked?)  If this is not possible, the only choice is to close down.

3.  Maximum prosperity comes when everyone produces all he/she can.

Prosperity if the amount of stuff people have.  The more stuff that is produced, the more there is to go around and the more prosperous everyone can be.  Certainly there will always be people who truly can’t work, but motivating everyone to do what they can makes everyone richer.  Note that one of the times of greatest economic prosperity in the United States was during the mid to late-nineties after the Republican Congress passed welfare reform, requiring many individuals who had lived on welfare to go back to work.  More people were working, so more was being produced and everyone was wealthier.

4.  Requiring work to gain basic needs motivates production.

There are a lot of people who will do nothing productive all day if their basic needs are met.  Give out food, shelter, and clothing and you’ll find a lot of people who choose to just stay home (see the housing projects).  While it may seem like the necessities of life should simply be given, someone needs to produce those necessities and you cannot expect a few people to produce enough for everyone.  If instead most people go out and do what is needed to provide for their necessities, it is much easier to meet everyone’s needs.

If you are in a minimum wage job, instead of protesting to get a living wage, do things to allow you to produce more.  Learn skills that enable you to operate machines and software that will let you do 100 times as much as you could without them.   Learn to produce things that are much more valuable (a tool is much more valuable than an end product so if you can learn to produce tools you can make a lot more than if you just use tools).  If you are able to manage people effectively, you will be able to get a lot more done than you can on your own, which will translate into higher pay.

A minimum wage job is a starter job that lets you gain the skills and experience that lead to better jobs.  Don’t be foolish enough to throw away your chance to work and provide for yourself.  Your life will be much better by doing so, plus your life will have meaning because you will have spent your time taking care of other people’s needs.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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