Paying Unskilled Workers Less Actually Makes Everyone Poorer
The market is fundamentally incapable of factoring into a product’s price the costs and benefits to third parties that flow from a high or low cost for certain products and services.
By David Grace (www.DavidGraceAuthor.com)
Prices Are Not Always Just The Concern Of The Buyer & Seller
People assume that the price of a product, high or low, has no material effect on anyone beyond the buyer and the seller, and therefore the price is of no real concern to anyone other than the buyer and the seller.
That’s not always true.
A Market Price Is Based On Cost & Bargaining Power
The market price is based on the cost to create the product together with the bargaining power of the buyer versus that of the seller.
The market is fundamentally incapable of factoring into the product’s price the costs and benefits to third parties that flow from the availability or unavailability of the product or service.
A market price simply cannot see, leastwise take into account, the effect of a product’s price on anyone beyond the buyer and the seller.
Most of the time that’s OK. Whether a tuxedo costs $100 or $5,000 has little to no effect on most people beyond the buyer and the seller.
When Prices Impose Costs & Benefits On People Other Than The Buyer & Seller
But there are products and services whose price and availability have material costs and benefits to people other than the buyer and the seller.
Consider the effect on third parties of a market price of $500/dose for a flu or measles vaccine. At that price a large number of people would not be vaccinated. At some percentage of immunization a population will reach a tipping point and you will have an epidemic. That epidemic will impose huge costs not only on the unvaccinated individuals, but also on their employers, hospitals, government and the economy as a whole.
Conversely, massively reducing the number people who get polio, measles or the flu will be highly beneficial, not only for the individuals who don’t get sick, but also for businesses, hospitals, the government and the economy.
The market is totally, fundamentally, unable to lower the price for a vaccine to take into account the third party costs of an epidemic and the third party benefits from not having an epidemic. It just can’t do it. That’s why the country as a whole, the government, subsidizes the cost of vaccines.
This same market-blind pricing problem applies to other products and services — fire protection, police protection, primary education, clean air and water, and waste disposal to name only a few.
Direct Products/Services Vs. Indirect Products/Services
Let’s call products and services whose price and availability materially affect only the buyers and sellers “Direct Products” and those products and services whose price and availability materially affect people beyond the buyers and sellers “Indirect Products.”
All products and services fall somewhere on the continuum between the two extremes.
(Tuxedos, Ballet Lessons) ………………(Measles Vaccine, Cancer Research)
Direct Products/Services ……………..……………Indirect Products/Services
| — — — — — — — — — — — -<|> — — — — — — — — — — — —|
The number of Indirect Products and services whose prices impose material costs and/or provide material benefits to people beyond the directly involved buyer and seller is not static. It is dependent on the population density and the complexity of the society.
The Number Of Indirect Products Increases As A Society Become More Complex
Consider an agrarian society mostly populated by isolated farmers versus an industrial one with tens of millions of people mostly living close together in large cities.
Consider how the condition, actions, skills, and defects of 10% of the population in a rural, agrarian society will affect the lives of the remaining 90% versus how the condition, actions, skills, and defects of 10% of the population in a densely-populated, high-tech society will affect the lives of the remaining 90%.
The number of Indirect Products/Services increases
- as population density increases (the limited availability of the product/service affects more people)
- as people’s interaction with each other increases (one person not having it affects more people)
- as society becomes more complicated (lack of a product has more collateral effects)
- as an individual’s ability to harm/affect others increases (one unserved person can do more harm)
These Principles Apply To Services As Well As Products
Workers are sellers. They sell a service and the price for their service is governed by their bargaining power. Like other sellers, the higher the worker’s bargaining power, the higher the price they can charge for their labor.
Like other products and services, a worker’s labor will fall someplace on the continuum between Direct Products/Services and Indirect Products/Services.
Market Prices Of Indirect Products/Services May Be Too Low
We’ve seen how the market price for an Indirect Product like a vaccine can be too high because the market cannot factor into the price the benefits third parties receive from vaccines being cheap.
The same principle also applies to the prices for indirect products/services being too low.
For example, in countries where medical care is paid for by the government, the government has sufficient bargaining power to set a relatively low market price for medical services.
When the government’s bargaining power sets that low price, fewer people become doctors and fewer doctors become specialists.
Of course, a few doctors will choose to practice outside the system, charging very high prices and catering to wealthy individuals, but most people cannot afford them and thus most people will suffer long waits for medical care due to the reduced number of doctors.
In economics, “demand” means both the desire for a product/service AND the ability to pay for it.
While the ordinary citizens may want more medical services, they don’t have the ability to pay for them so, in economic terms, demand for them is low, and the market price paid for those medical services is thus also low.
This low price results in fewer doctors, delays in treatment and a sicker population. Moreover, delays in treatment turn minor conditions that would be relatively cheap to treat into major problems that are expensive to treat.
What we’re seeing in this example is how a low market price for medical services results in additional costs to third parties, namely currently healthy people, employers, and the economy as a whole.
In this example, medical services are an Indirect Product/Service whose market price is too low because it fails to reflect the third party costs that are incurred as a result of there being too few doctors.
Medical Services Aren’t The Only Ones Where The Market Price May Be Too Low
As we transition from an industrial society to a technological society, we have to increasingly deal with the inability of the market to price Indirect Unskilled-Labor Services to take into account the third party costs incurred as a result of low unskilled wages.
Why Unskilled Labor Is An Indirect Product/Service In A Technological Economy
What is different about a technological economy versus an industrial economy that makes unskilled labor services an Indirect Product/Service?
Two things:
- The increasing decline in the number of living-wage jobs for unskilled and semi-skilled workers holds down unskilled wages, and
- The increase in the lower-middle class cost of living makes unskilled wages increasingly inadequate.
The Drastic Decline In Unskilled Jobs Reduces The Market Price For Unskilled Labor
In an agrarian economy and an industrial economy there were always plenty of jobs that paid unskilled workers enough to maintain a basic, lower-middle-class standard of living.
In both an agrarian and an industrial economy there were millions of jobs that only required average intelligence and good health and which paid enough for a full-time worker’s family to live a decent, lower-middle-class life.
This was the case in the United States in the 1950s and 1960s.
As we moved from an industrial economy into a technological economy, unskilled jobs that paid a living wage began to disappear. They will continue to disappear at an increasing rate.
The new jobs that a technological economy creates require substantially more training, talent and intelligence, leaving ever greater numbers of “ordinary people” unable to find a job that will pay them enough to remain in the lower middle class.
It Costs More Money To Live In A Technological Society
Fifty years ago there weren’t cell phones, the internet, subscriber-based media, sophisticated and expensive medical and dental care, high transportation costs, high-cost personal care products, a predominance of processed foods, etc.
- You can’t live and work in a technological economy without a cell phone and without access to the internet.
- Outside of a few big cities with highly developed mass transit systems, you can’t get by without a car and auto insurance.
- Pretty much everyone has some kind of cable or subscription TV service.
- Just the cost of toothpaste, deodorant, allergy medication, vitamins, shampoo and the like becomes significant.
- Add in the cost of utilities, basic health care, day care, and processed food
The cost of living in the lower-middle class is significantly higher in today’s technological economy than it was in yesterday’s industrial economy, leastwise than it was in an earlier time’s agrarian economy.
These two changes in a technological economy — the great reduction in unskilled jobs that pay a living wage plus the increase in the cost of living in the lower middle class — have combined to greatly impoverish a large segment of the population.
This will only get worse.
Costs To Third-Parties From Low Unskilled Wages
Consider the costs to third-parties from unskilled wages that are insufficient to keep the worker’s family in the lower middle class:
- Taxes assessed to fund a welfare system that makes up the wage shortfall for the unskilled worker’s family’s food, housing, transportation and medical care;
- Crime
- Alcohol & drug abuse
- Broken families
- Political instability
- Social unrest
- Lower-class cultural values instead of middle-class cultural values
- Unemployed people with time on their hands getting into trouble and fathering children they cannot support and which children, in turn, themselves increase the pool of unskilled workers.
Unskilled Labor Has Become An Indirect Product/Service
These increased costs to third-parties from the impoverishment of low-skilled workers have moved unskilled labor services from the category of Direct Products/Services much farther into the category of Indirect Products/Services.
While the market rate for unskilled labor may be $X/hour, the benefits to third parties from having unskilled workers employed and earning enough to maintain a basic, lower-middle-class standard of living without welfare adds another $X/hour to the value of that labor.
Even though the products unskilled labor creates might only be able to be sold for enough money to pay the unskilled workers an $X/hour market price, the value to third parties of having those workers earning enough to support themselves without welfare means that the country as a whole is better off if they are paid $1.5X to $2X/hour.
In other words, because of the benefits to third parties of those services being compensated at a higher price and because of the costs to third parties of unskilled workers not being employed at all or not earning enough to support their families without welfare, the country as a whole is wealthier when unskilled labor is compensated at higher than the market price in the same way that the country as a whole is wealthier when the charge for vaccines is lower than the market price.
If you don’t understand that, let me put it in a different way — just because something isn’t your fault doesn’t mean it’s not your problem.
Let me quote from a Medium column by Ryan Holiday (21 Quotes That (If Applied) Change You Into a Better Person):
“It is not your responsibility to fill up a stranger’s gas tank, but when their car dies in front of you, blocking the road, it’s still your problem isn’t it?
“It is not your responsibility to negotiate peace treaties on behalf of your country, but when war breaks out and you’re drafted to fight in it, guess whose problem it is? Yours.
“Life is like this. It has a way of dropping things into our lap — the consequences of an employee’s negligence, a spouse’s momentary lapse of judgement, a freak weather event — that were in no way our fault but by nature of being in our lap are our . . . problem.”
Lots of unskilled workers who aren’t paid enough to support themselves aren’t your fault but they are your problem, and one way or another you’re going to have to pay for it.
It’s far smarter to have them earn more money for their work than get extra money from a government welfare check, or by selling drugs, or stealing extra money from you and your neighbors.
— David Grace (www.DavidGraceAuthor.com)
