Can The Minimum Wage Counter America’s Massive Income Disparity?

By David Grace (Amazon PageDavid Grace Website)

One of my readers, Rogue4Gay, made a thoughtful and interesting comment to my column

When I started to write a reply I realized that the issues he raised couldn’t be dealt with in a simple reply to his comment but rather needed to set out in their own two columns.

So, here’s Part 2 of that reply.

Rogue4Gay, thanks for your thoughtful comment. You raise two fundamental issues that require a rather long reply:

  • Low-wage jobs in high-cost cities, (Part 1 with link below) and
  • Whether the minimum wage is a useful policy to deal with massive income disparity (Part 2 here)

The Problem Of Low-Wage Jobs In High Housing-Cost Cities

I’ve written a new column on the issue of strategies to deal with low-wage jobs in high-cost cities HERE:

Can The Minimum Wage Fix A Huge Income Disparity?

I understand your point that in urban locations like SF and NYC it’s very difficult to set a minimum wage that will ever be high enough to deal with the huge housing and commute costs, and if it were high enough, such a wage would drive out most business that sell low-cost and price sensitive products and services — in economic terms products whose prices are inelastic — whose prices could never be raised high enough to generate enough revenue to keep those businesses in operation.

But most of the country is not like SF and NYC.

A Drastically Low Minimum Wage Drives Urban Poverty

The current minimum wage is a major driver of urban poverty in much of the country that does not have a huge housing shortage. The federal minimum wage is $7.25. In Alabama the minimum wage for workers who get tips is $2.15!

A minimum wage that is under $9/hour is common across the United States. That’s too low to live on even given lower housing costs in places like Pittsburgh or Cleveland, both of whose minimum wages are under $9/hour.

Today, this sub-living-wage minimum wage results in the taxpayers in most of the country being forced to subsidize the employers’ labor costs in the form of food stamps, Medicaid, Sec. 8 Housing, etc.

Walmart can well afford to pay a living wage, but it prefers to pay a wage too low to live on and it lets the government (taxpayers) pick up many of their employees’ costs of living.

People say, “Well, the market sets wages so the market wage is always the ‘right” wage,” but that’s wrong. In any discussion of the minimum wage we need to understand how a market economy sets prices including the price for labor.

Wages Are Set By Bargaining Power

First and foremost, the market price for anything, including low-skilled labor, is not the fair price, the right price, or a price that reflects some idea of a product or service having some inherent value or “real” value.

There is really no inherent value, just the value, high or low, that the market puts on something. That market price for anything, including labor, is based on the bargaining power of the buyer vs. that of the seller.

Yes, bargaining power does include supply and demand as one important component, but it also includes many other factors: perishability of the product (time is perishable); the financial resources of the buyer vs. those of the seller; how united each side is; and many more.

For detail discussions of how bargaining power factors beyond mere supply and demand set prices, including the price for labor, see these columns:

In short, the bargaining power for buyers of low-skilled labor (employers) is massively greater than the bargaining power of the sellers of low skilled labor (workers) which is primarily why the price for low-skilled labor is less than a living wage even for those businesses (e.g. Walmart) that can afford to pay a living wage but don’t.

Yes, of course consumers always want lower prices, but because a minimum wage requires all employers to adjust their prices to take into account that same minimum wage, none of the employers of low-wage workers are under economic pressure from their competitors to pay their employees less than the minimum wage.

The Minimum Wage Alone Can’t Fix Poverty In High Cost-Of-Living Cities

So, yes, the minimum wage is an issue if the industry’s products are

  • so low margin and are
  • so price sensitive and
  • there are so many alternative products and
  • the minimum wage will require such a large price increase

that the businesses’ sales will fall so low in response to that increase in price that they will be unable to stay in business.

This is a rare situation confined to warped markets like SF and Manhattan.

In Most Cases An Increase In The Minimum Wage Only Results In A Small Increase In The Cost Of The Product Being Sold

I ran the numbers for a McDonalds and a 50% increase in wages from $10/hour to $15/hour would be offset by about a 10% increase in the retail price of a food item so that a $2.99 burger would have to go to about $3.30 to offset the additional cost, which is something fast food customers can well afford.

Strategies To Deal With The Poverty Of The Working Poor

You are right that there are several different strategies to deal with the massive income inequality in the U.S.:

  • (1) Allow wages to be driven down to below a living wage and have the taxpayers subsidize those wages with gov’t provided food, housing and medical care.
  • (2) Tax the rich and use that money to subsidize the poor. I think that taxing the rich to subsidize the income of the poor is a terribly bad strategy for many reasons:

— — It tells poor people that their work has little or no value

— — If the subsidy takes the form of free food, discounted housing, etc. it becomes very difficult for the poor to accumulate any additional capital to use to start of business, invest, buy a house, send their children to college, all of which are pathways out of poverty.

— — It subsidizes businesses that can afford to pay a living wage, e.g. Walmart, large hotels, etc. by allowing them to pay a low wage and earn higher profits at the expense of the taxpayers who are forced to cover their workers’ cost of living.

— — It deters people from taking those jobs because of the low pay. One of the reasons that people sell drugs on urban street corners is that’s the highest paying job available. Telling them that they can get a $9/hr job flipping burgers and then they can live on food stamps in Section 8 housing isn’t going to compete with drug dealing, especially if people will get the welfare benefits whether they are employed or unemployed.

Why would anyone work a crap job for crap wages if they can do almost as well if they don’t work a real job at all but rather pursue petty crime and off-the-books jobs for cash while still getting public assistance?

— — Taking money from Mr. A to give to Mr. B will always make Mr. A feel as if he’s being robbed and it guarantee that Mr. A will hate Mr. B and further divide the society into two groups that hate each other because the poor feel that the rich are greedy bastards and the rich will feel that the poor are lazy thieves.

— — It makes the poor prisoners of the government, subject to potential gov’t control e.g. “If you participate in a demonstration/get arrested/criticize a gov’t official we’re going to cut off your benefits.” Given some of the things Trump did, don’t tell me that this couldn’t happen.

— — On top of that, the transfer of wealth comes with a heavy administration cost and an increase in gov’t bureaucracy and red tape.

See my column:

I think that a Universal Basic Income is one of the worst possible tactics to fight income disparity.

Here’s why:

  • (3) Raise the basic wage for 40 hours of work high enough so that workers don’t need nor qualify for food stamps, etc. and simultaneously provide a practical strategy for training qualified individuals to get higher-paying jobs.

Most Low-Skilled Workers WANT To Be Trained For A Better Job

BTW, a large percentage of people performing low-skilled, hourly labor very much do want to be trained for a better job, but they can’t afford it.

Many have tried to borrow their way into paying for that training with horrendous results.

Student Loans Are Not The Way To Get Trained For A Better Job

The student-loan debt is over $1.5 Trillion dollars, has provided very little value for that huge cost, and has left millions of people with a debt that they will never pay off in their entire lifetime.

There are medical doctors who have been paying on their student loans for twenty years and still haven’t been able to pay them off and probably never will.

The problem is not getting people motivated to get trained for a higher skilled job. The problem is how to get them trained and who is going to pay for it.

A Strategy For Getting Low-Wage Workers Trained For Better Jobs

This column suggests one way that training might be handled:

Thanks again for raising these complex and important issues.

– David Grace (Amazon PageDavid Grace Website)

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David Grace

David Grace

Graduate of Stanford University & U.C. Berkeley Law School. Author of 16 novels and over 400 Medium columns on Economics, Politics, Law, Humor & Satire.

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