Living Wage
President Elect Joe Biden has reportedly hinted at an early increase in minimum wage, with the goal being to provide a living wage. This seems like a good time to publish this post that I have been sitting on for a while.
Everybody is in favor of a living wage. This should be an easy one, right. Just raise the minimum wage to the point where a person can live off that wage working 40 hours a week and you are done. But hold it right there. This is what I like to refer to as the easy solution problem. The easy solution sounds good when you look at just one factor and forget about the other factors that also affect something. So what other factors would affect this solution.
The first and foremost is the law of supply and demand. If I push the income level up for a group of people, they have more money to spend. They will spend that money for items that they need or want. That means an increase in demand that probably will not be countered by an increase in supply. That brings the cost of those goods up. In short, we have inflation. One of my favorite Presidents, Jimmy Carter is all too aware of that problem. His Presidency is marked with double digit inflation. While not really his fault, he is blamed for it. At least one of the reasons behind the high inflation was increased buying power caused by the move of wives from home-makers to careers increasing household income, and corresponding household demand for products.
A second problem is that if the base pay moves up, then the expectation will be that all pay will move up. If I have to have more skills or take on more risk for a job, I will expect better compensation to justify that extra effort. As pay goes up for everyone, again we press the inflation button. Not just because of increased demand, but also because the cost of goods and services have gone up.
A third problem is that as we make human labor more costly, we shrink return on investment time for technology and robotics to replace workers. If the return on investment for new technology is short enough, management will move in that direction. We are already seeing that with self-checkout, self order at fast food restaurants, online ordering and now they have robots that can flip the burgers for fast food chains. A worker most definitely does not have a living wage if they do not have a job, and therefore a wage.
One other issue is that smaller companies may be unable to afford labor costs with these new rules. This is especially true after 9 months of COVID based shutdowns of many of these businesses. A significant increase in minimum wage would hurt a lot of smaller companies, causing some to close, and others to rely less on hired workers. Small local companies are critical to the overall success of our economy, and we need to encourage and increase those businesses, rather than shutting the doors on more and more of these enterprises.
The other seemingly easy solution is to make things cheaper. If supply could be increased enough, then costs would go down. But how do you get companies to build extra supplies knowing that the prices, and along with it their profits, will fall. And at what point do we run low of resources to build those supplies, making costs for the supplies go up, decreasing profits even more.
There really is no easy solution. This is a really complicated problem. In fact it is one that has been afflicting mankind for thousands of years. The solutions are hard, but hopefully not impossible. They will not come quickly, however. First, we have to work on supply. In general over the last 50 years, we have trended toward bigger residences on more land. We will need to reverse that trend and move toward smaller, more affordable residences. We have trended to heavily processed, expensive foods. We need to reverse that and trend back towards simpler, more sustainable foods. We have trended to more expensive commercial goods, often with lower quality that need to be replaced more often. We have trended toward a disposable society, and we need to trend back to durable goods. Over time, with changed trends, we can slowly bring the cost of a living wage down to a reasonable level.
In general, the government cannot fix this. For that matter, there is not a lot the government really can fix. But together we can help. If we make a market for smaller houses, cars, etc. then we can create less expensive options. If we help those near the poverty line buy a simple house rather than rent at exorbitant markup because they can’t get a loan, we can make a difference. If we support small businesses in our area rather than increasing the wealth of the big businesses, we can help fix equity distribution. If we vote with our wallets for better options for everyone, we can make that happen in a way that will benefit everyone.
But there is one thing that I would recommend the government do to encourage large companies to increase salaries for lower income positions. That would be to place a tax on the highest 1% of earners for a company, that is directly related to the gap between average overall salary and average salary for the top 1% of earners for that company. The income from that tax would be used to provide benefits for workers who are under the poverty level. This would not hurt small businesses whose income gap is much smaller. Instead, it would only affect the large companies that are making large enough profits off of cheap labor to afford to pay exorbitant wages to the leaders of the company.