Some Thoughts on Minimum Wage and How Economics Theory Doesn’t Reflect Reality (#BusinessyBrunette HBX Week 8)
Welcome to #BusinessyBrunette! I am currently studying Harvard Business School’s HBX CORe, their online pre-MBA program teaching the fundamentals of financial accounting, business analytics, and economics. Every week I‘ll write up what I’ve learned — making it meaningful & accessible for artists, activists, geeks, nerds, fans, and anyone else who doesn’t fit the MBA Mould. I’m learning as I go, so feel free to critique, comment, tell me if I’ve messed up or did well, mash up, and share! [See the rest of the series here]
Economics for Managers 4: Markets
I have a dirty secret — well, dirty amongst most of my peers, friends, and professional circles anyway: I’m not as anti-capitalist as they are. Mostly I’m cynical that any economic system would necessarily be any better than the other, given human nature for injustice and bigotry (including personal experience with racism and xenophobia from anarchist & radical socialist types), but I also come from a family and legacy of business people, so I cannot discount my capitalist ancestry that readily.
This week’s HBX module had a section on markets and fairness — the professor in charge of this module specifically told me to keep an eye out since he noticed I was pretty vocal about opportunity costs and gentrification on an earlier module. One of the sub-modules covered minimum wage and its effect on the economy — and it was through reading this that I jumped into the crowds shouting DOWN WITH CAPITALISM!
The irony is that if life actually worked the way capitalism or the markets had intended, or as economics theory goes, things might have actually been better. Right now though? Economics theory is broken — because it doesn’t reflect reality.
Let’s start with the demand and supply curves. The demand curve marks how much of an item can be sold at a particular price; the supply curve marks how much of an item can be made when given a particular price. Demand curves are always a downwards slope (the cheaper it is the more demand there’ll be) and supply curves are always an upward slope (the more you pay the more suppliers are willing to make).
Where they meet is called market equilibrium, and it’s an important point to consider when deciding how much to charge for or produce an item. If you price too low — meaning you’re below the equilibrium point — you have more demand than you have supply, also known as a shortage. If you price too high — as in above the equilibrium point — you have more supply than you have demand, also known as a surplus. The equilibrium is the sweet spot where the demand meets the supply — everyone is happy and you haven’t wasted a single item.
Now real life is not nearly that neat, but in usual cases the equilibrium point tends to find itself. For example, you might price a product at $10, for which you’re willing to make 100 copies, but people want 400 copies at that price. You then set a price of $40, so you can make 400 copies, but people are only willing to buy 20 copies at that rate. Eventually you find a happy medium — maybe $20 for 200 copies — and everyone who was willing to pay $20 or higher for your product goes home happy.
This is the same logic used by HBX, and some other economists, to deal with the minimum wage. According to them, minimum wage will lead to unemployment because there is a surplus. Let’s look at a basic supply & demand curve (taken from here):
Let’s say that the quantity here is people who would be willing to work and the prices are their hourly wages. From this chart, we can see that if you only pay $1 an hour, companies would hire 9 people, but only 1 person’s willing to work for that much. If you pay $8 an hour, 8 people will jump up to work, but only 2 people will get hired. Set it at $5, and 5 people will make themselves available for hire — and all five people will get hired.
So let’s add minimum wage to this — a controlled price. According to HBX and company, setting the minimum wage — let’s say $2 — to lower than equilibrium — in our case, $5 — is pointless because people are going to be paid more than that anyway:
Meanwhile, if you set the minimum wage at higher than equilibrium — let’s say at $8 — you have a surplus of workers because not many companies are willing to pay that much, so a few people are going to be out of work:
The assumption here is that workers are already being paid a “fair wage”, and that if they’re being paid less than that, they could always go to another company that pays closer to their fair wage, or the equilibrium. And it’s the markets — the collective energy of money changing hands and people, in general, deciding how much they’ll exchange money for something — that ultimately determine prices, not any sort of third authority.
How is a “fair wage” determined in this scenario? The supply line is meant to represent the marginal value of labor: how much a particular worker brings to the company in revenue. If a company was making $100 before they hired you and $110 after they hired you, your marginal value is $10.
Here’s where the problem is: companies are terrible at recognizing fair wages, and people are already not being paid based on the value they bring to a company!
Industries around the world are already under scrutiny for underpaying their employees — restaurant workers, civil servants, nail salon technicians, cleaners, even people in banking and tech. Women, people of color, and LGBTQ people are paid less than their male, White, straight, and/or cis counterparts for pretty much the same jobs (that’s if they can get the same jobs to start with) and for bringing in the same value. The rise of unpaid internships and the lack of recognition of emotional labor in the workplace now shows that employees can bring in a lot of revenue for their companies and be paid nothing in return.
And how would you even determine how much of that revenue came from specific employees? Are you only counting people who were directly involved with the creation and delivery of your product? What about your administrative or cleaning staff — do they not also contribute to your revenue? What is it about a CEO’s job that makes them earn disproportionately more than someone working on the ground? How do you account for emotional labor or other soft skills?
What would happen if you paid people more evenly based on their share of the revenue generated by the company? According to a report by marketing firm MVF Global, each employee from the top 100 companies by revenue is worth $1.3 million. Yet how many people are being paid anywhere near that by their jobs? Here’s an example breakdown from MVF Global and Huffington Post:
Each employee at Apple, for instance, generates US$1.9 million in revenue annually, MVF calculated. An Apple Store “genius” earns between $29,000 and $55,000 a year, or as little as 1/60th of the revenue they generate. And that doesn’t include all the people working for peanuts at Apple’s contractors in Asia.
Each employee at Walmart generates much less — US$220,750 — in revenue annually, but the average Walmart sales associate in the U.S. earns $15,576 annually. As sad as that salary is, it works out to about 1/14th of the revenue Walmart generates per employee.
So Walmart’s retail employees are actually taking a much bigger slice of the corporate pie than Apple’s retail employees. You heard it here first.
You might think, why don’t these employees just move somewhere else and get paid what they’re worth? As the links above demonstrate, this is a systemic problem. Employees aren’t changing jobs because there’s nowhere else to go that’s better. Indeed, while revenues are going up, worker compensation has been going down.
It’s already hard enough to find any job, let alone one that pays your worth — and woe betide you if you’re an ethnic or sexuality/gender minority, an immigrant, old, formerly incarcerated, or even a war veteran. Even starting your own business or going freelance is no remedy — you’re still vulnerable to not getting paid on time or at all, maybe even more so than being employed.
Yet your bills still have to be paid, your rent is still due, medical care still costs money, you still have to eat. And even while the economy is failing, the costs of living continue to rise.
The minimum wage, at least in the US, was originally created to end the exploitation of women and children through sweatshop labor by ensuring they had enough to eat and live. The point of minimum wage is to make sure that workers are able to afford living costs — yet it hasn’t even crossed the poverty line, let alone be sufficient to cover living expenses:
Given the circumstances above, it makes no sense to try and graph the minimum wage’s effects on market prices through conventional means — because nobody is in equilibrium anyway. Demand and supply are already out of whack because entire industries aren’t valuing their employees correctly and making commesurate payments.
The thing is, it doesn’t even make economic or capitalist sense for companies to underpay their workers! They may gripe about “lowering costs” or “capturing value”, but there’s nothing that mandates lowering wages and salaries to be more efficient. If anything, paying your workers well would actually be good for business, since you increase employee satisfaction & productivity while keeping turnover costs low.
HBX glossed over this towards the end of their sub-module, but economics research has now shown that an increase in minimum wage leads to higher pay with zero job loss, as well as other benefits to the economy. Over 600 economists from across the United States, including a number of Nobel laureates, signed an open letter in 2014 calling for the U.S. Government to raise the minimum wage, stating:
In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.
Economics theory is all well and good, but it’s useless when it does not reflect or is not rooted in the real world. This is the sort of education that eventually affects systemic policies — and if people are not given more accurate models to work from, they will end up making decisions that adversely affect society. There are a ton of sociological, financial, logistical, and even economic factors that go towards the value and earning power of something, and a two-dimensional demand and supply curve is not nearly enough to convey the reality of the situation.
Down with capitalism, or a call to be more accurately capitalist? Either way, there are plenty of real-life matters that need to be dealt with right now, whatever political or economic system is in place. Use economics theory as a start — then go and find out what people are really dealing with, and go from there.
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