How Our Leftist Government Gets Its Minimum Wage Hike without Legislation

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The Biden administration has discovered a back door into raising the effective minimum wage.  Paying lucrative supplemental unemployment benefits, which is effectively subsidizing leisure, increases the opportunity cost of working and thereby places upward pressure on wages as employers seek to incentivize would-be employees to move off the couch and into the workforce.  No minimum-wage legislation and political combat with the Republicans is required to implement this policy.  The federal government need only keep the spigot open on supplemental unemployment benefits, and employers seeking to attract workers will have no choice but to increase the wages offered to compete.  The long-run effects of this policy are deeply concerning precisely because they are so harmful to workers.  

Firms in competitive markets are profit-maximizers and therefore cost-minimizers.  Workers compete not only with one another for jobs, but also with technology (capital).  When a cost-minimizing business employs its inputs optimally, the last (marginal) worker hired contributes to revenue an amount that is just equal to its wages and benefits.  Hence, when government policies force an increase in the effective minimum wage, businesses naturally seek to insulate themselves from the wage hike.  This “insulation” manifests itself in two different forms — a reduction in the amount of labor hired and an increase in the amount of capital employed.  Robotics, for example, represent long-term capital investments, so market-wage corrections would not be expected to instantaneously restore labor demand to previous levels.  Once these (sunk cost) investments are made, employers will continue to utilize robotics (machine labor) rather than human labor even if market wages should fall.  Microsoft co-founder Bill Gates knows something about automation, and he admonishes that increasing the minimum wage can destroy jobs.  

Well, jobs are a great thing.  You have to be a bit careful: If you raise the minimum wage, you’re encouraging labor substitution and you’re going to go buy machines and automate things — or cause jobs to appear outside of that jurisdiction.  And so within certain limits, you know, it does cause job destruction.  If you really start pushing it, then you’re just making a huge trade-off.  

An increase in the effective minimum wage cannot force employers to hire a stipulated number of workers or guarantee a certain number of hours worked.  Nor does the effective minimum wage hike impose any constraints on capital-labor substitution.  This explains why labor unions, at least the savvy ones, bargain for employment guarantees in addition to wage and benefit packages.  They know all too well that employers will protect themselves against wage increases.

To wit, Ford Motor Company led the Big Three domestic automakers in terms of investment in large-scale robotics.  This was done in part to insulate the company from the adverse effects of the lucrative wage and benefits package being pushed by the United Auto Workers.  The package that was ultimately agreed upon had some adverse effects on Ford but a much larger adverse financial impact on its rivals that trailed Ford in the use of robotics on the assembly line.  The adverse effect of wage increases on the bottom line is diminished when a company uses less labor and more capital in the production process than its rivals.  This is the hard lesson that Ford taught its domestic rivals.  

Low-wage jobs serve as a training ground for young, unskilled workers that enable them through job tenure and skills acquisition to augment their human capital and improve their prospects for higher-paying jobs in the future.  These low-skilled jobs are de facto apprenticeships, and low wages are to be expected.  Ask any commuter pilot about that.  The government should not be driving above-market wages; it should be providing workers with strong incentives to acquire the skills and experience that, along with strong economic growth, will naturally command higher wages in the marketplace.  Increasing the minimum wage, directly or indirectly, will force some of these workers out of the labor force and rob them of the opportunity to acquire those skills that are essential to moving up the socio-economic ladder.

Raising the effective minimum wage, whether done directly or indirectly, will increase the prices of goods and services across the economy as businesses pass along wage increases through higher prices.  Inflation is now running at a 5-percent annualized rate, an increase in the prices of goods and services that has not been seen in this country in more than a decade.  Policymakers now believe that this temporary inflation, first triggered by the economy’s awakening from the pandemic, is not likely to be as “temporary” as was previously thought.  Consequently, the hike in the minimum wage does not equate to a corresponding increase in real purchasing power because the real (inflation-adjusted) wage increase is less than the nominal wage increase.  This reduces the effective increase in the minimum wage for those who retain employment and imposes even greater hardship on those displaced from their jobs.  Higher prices also reduce demand for goods and services produced by low-wage workers, which further reduces demand for those workers.  

The Democrats may wish to spin these lucrative supplemental unemployment benefits as simply heartfelt concern for those on the lower rungs of the economic ladder who have suffered disproportionate financial harm from the pandemic.  It is far too easy to make the baseless claim in this politically charged environment that Republicans are heartless souls because they seek to end these benefits.  The reality is that businesses are not passive participants in this process; they will actively look for opportunities to economize on the use of labor.  When the dust settles in the post-pandemic economy, these workers may be left with higher wages but also fewer jobs and fewer hours worked.

The focus should be not on the wage rate, but on labor income — the product of the wage rate and the number of hours worked.  Workers who take their eye off the ball may even be duped into believing that the wage should be a million dollars an hour, even though their labor income will be zero at this wage because no one will be hired.  Economists refer to this as the wage elasticity — the inverse relationship between the number of workers hired and the wage rate.

Beware of Democrat politicians who, through either economic illiteracy or unabashed opportunism, make promises they cannot keep.  “If you like your job, you can keep your job.”  Maybe not.

Dr. Weisman is professor of economics emeritus at Kansas State University and a former director of strategic marketing at SBC (now AT&T).  He has published more than 150 articles, books, and book chapters, principally in the fields of economic regulation, antitrust, and public policy.  He serves as an economic consultant to a number of Fortune 500 corporations.  His research has been cited by the U.S. Supreme Court and the U.S. Court of Appeals for the D.C. Circuit.

Image: Gage Skidmore via Flickr, CC BY-SA 2.0.

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