The Fallacy of “Living Wage”

An Article from CapitalismMagazine.com

http://capitalismmagazine.com/2013/03/the-fallacy-of-living-wage-2/

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by Brian Phillips (2013/03/06) PRICE CONTROLS

If the advocates of the “living wage” are truly convinced that arbitrary government dictates have no detrimental consequences on jobs, why don’t they advocate a “prosperity wage”? Instead of legislating a wage that allows families to “get by,” why don’t they legislate a wage that allows families to prosper? In other words, instead of a “living wage” of $10 an hour (or whatever the figure may be), why don’t legislators force businesses to pay $100 an hour?

One would think that the answer is obvious, but apparently it isn’t. Few, if any, businesses could afford to pay $100 an hour. They would not create new jobs, and they would likely cut most of the jobs that they currently have. The results would be catastrophic.

The difference between a “living wage” and a “prosperity wage” is only one of degree. The principle is the same. A “prosperity wage” would be devastating to jobs. So is a “living wage,” a minimum wage, or any other government mandated wage. The only difference is the number of jobs and lives destroyed.

The real issue is not the nominal wage—what a worker is paid. The real issue is real wages—what that pay will purchase. If a worker’s pay increases 10% but prices increase 20%, he is not better off. His money does not purchase as much. However, if his wages decrease by 10% while prices fall 20%, he can purchase more even though he makes less money.

To most Americans, the idea of falling prices probably seems like a fantasy. Prices for energy, health care, and food seem to increase almost daily. But consider computers, cell phones, and flat screen televisions—their prices have fallen significantly. And in the late 19th century, wages fell while prices fell even more.

Between 1870 and 1889, wages for non-farm labor decreased from $1.57 per day to $1.39 per day, a decrease of 10.2 percent. During the same period, the Consumer Price Index decreased 28.9 percent. Even though wages for unskilled labor fell by more than ten percent over twenty years, prices fell by nearly three times as much, that is, a dollar bought a lot more. Further, there was much more available: Canned goods became widely available in the 1880s, which provided a much more varied diet, such as fruits and vegetables that were not in season; refrigerated railroad cars made it possible for urban residents to eat fresh meat, grapes, and strawberries more frequently; improvements in the sewing machine enabled manufacturers to mass produce clothing at low prices; department stores offered consumers wide selections in clothing, household goods, and more. In short, the unskilled worker’s life was immensely better in 1889 than it had been in 1870. In a free market, this will always be the case.

The items that are rapidly increasing in price today are, in general, heavily regulated industries. Government intervention stifles innovation and makes production more expensive. The items that are falling in price are in industries that are less regulated, which means more innovation and greater ease of producing those values.

The fundamental issue is not wage rates, but productivity. When production increases, prices fall. This was true of kerosene, which the price of kerosene steadily decreased from fifty-eight cents a gallon in 1865 to ten cents a gallon in 1874. It was true of the Model-T, which decreased from $850 in 1908 to $290 in 1924. When prices fall, a consumer can purchase more of the given item, even if his own wages decrease. But why would a worker’s wage decrease. Again, the issue is productivity.

If a worker desires a higher wage, he must produce more in a given period of time. A farmer who uses only manual labor can only grow, for example, 100 bushels of corn a year. A farmer who uses animal labor can grow 1,000 bushels of corn a year. A farmer who uses machinery can grow 100,000 bushels of corn a year. As the farmer produces more his income increases.

The focus on wages reverses cause and effect. The focus on wages is a focus on consumption—what a worker can buy from his wages. But an individual cannot consume until he produces, unless…(read more)

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About RightFromYaad

A view from "the Right", as a source of ideas to create a new vision of freedom and what it promises for Jamaicans, to counter the tyranny of the status quo of Jamaica's reality since 1962. Website: RightFromYaad.wordpress.com Email: rightfromyaad@gmail.com Twitter : @rightfromyaad Facebook: https://www.facebook.com/pages/Right-From-Yaad/244886608978438?ref=ts&fref=ts
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4 Responses to The Fallacy of “Living Wage”

  1. Taking the example of living wage to an extreme is ridiculous. All policies fail in the extreme, everything needs moderation. Saying a $10 wage is the same as $100 wage is completely missing the point and a parody of an argument. Of course increasing the minimum wage ten fold wouldn’t work, but that doesn’t mean that the same applies to a 10% increase.

    The problem with the deflation you discuss is that it occurred during the Industrial Revolution, a time of enormous technological change that isn’t likely to be repeated again. There were also frequent recessions that also contributed to the deflation. Could you provide some evidence for your regulation=inflation claim?

    Its ironic that you mention productivity because the minimum wage has been stagnant for decades despite the enormous rises in productivity. If the minimum wage had kept up with rises in productivity since 1968 it would be about $20 an hour.
    http://www.huffingtonpost.com/2013/02/13/minimum-wage-productivity_n_2680639.html

    • Robert,

      Thanks again for your excellent comments. I will counter you thus…

      My answer to you will being with a series of questions….Why don’t all of us earn the minimum wage? What determines if you earn a low wage? Who determines what is a living wage?

      Productivity has increased according to that Huffington Post article, and that’s excellent! But has that productivity come out of minimum wage earners? What about improvements in mechanization, computing, efficiency, high wage earners, etc?

      I put it to you that had the minimum wage kept pace with increased productivity, the US would be worse off today and productivity would not have been as great. Can you imagine if the Federal Govt upped the wage to $20/hour what that would do to the prices of everything we purchased?

      I will give a counter example of the irrational need for a minimum wage…in Singapore in 1965, they started out with about US$500 per year per person as an average income. Their leader abolished the notion of a minimum wage….now Singapore is a beacon of prosperity. The average Singaporean is projected to earn $135,000 per year in 2050 (http://edition.cnn.com/2012/08/17/business/world-rich-list-singapore). They are currently in the top 5 countries in the world with most millionaires per capita. How is that possible? I think you want everyone propelled instantaneously through arbitrary laws…. Prosperity takes time, the market does that. Laws hinder it. Political expediency kicks the consequences down the road of economic decisions made today for political gains and populism.

      For further inquiries, please check with the author of the piece Mr. Brian Phillips (Email: brian@individualrightsgovernmentwrongs.com)..I shared his column with my readers.

      • tiffany267 says:

        Chiming in, in your defense, about the “It was the Industrial Revolution” bit.

        Yup. It was the Industrial Revolution, powered by individual innovation and fewer restrictions by government. It was a glorious time, precisely as Right From Yaad talked about! The reason it hasn’t happened to the same extent since then? Think – Alphabet soup of the FDR period – government intervention and regulation. And it’s only gotten harder and harder to do business in this U.S. since then. Meanwhile the government itself is monopolizing what were once private services – leaving no room for the beautiful creativity and productivity of the late 1800s.

        The areas where individual innovation are strong nowadays are precisely the ones where the government hasn’t caught up with the pace of things – the digital age! Apps, software, social networking, programming, and more!. It’s the fascinating world of cyberspace, networks, etc. that is the new Post-Industrial Revolution, the economic revolution of the Information Age. Of course, the federal government does have its filthy fingers in the pie, but mostly just the Pentagon and the “Intelligence” folks, who are using other people’s innovation to murder children and families halfway around the world.

        So, if you like the Industrial Revolution, how about less government and more capitalism? 🙂

        Also, Right From Yaad is spot-on with regard to the minimum wage!

      • Thanks for your “chiming in” comments Tiffany267.

        I think people find it difficult to comprehend that someone who earns a low wage does not produce more than what he earns. Similarly, a worker who earns $15/hr or $50/hr is paid according to his value to a company.

        Paying a worker more than what they produce, regardless of their income ($$/hr) is called charity, and any business that does would be shuttering its doors, as it cannot survive in a competitive environment.

        In order for a worker to receive $10/hr or $20/hr, in actual fact, he/she must produce MORE THAN that $10 or $20/hr in value to a business. Because for such a worker there are insurance, health care, social security and pension costs to be paid by a business owner. Then there are the business related costs of rent, insurance, utilities, accounting for losses (business is not always profitable), theft, loan repayments and renovation/maintenance of plants which has to be paid out of the productivity of each worker.

        I suspect Robert was playing “Devil’s Advocate” with his comments.

        Thanks again Tiffany267.

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