2013-03-21

Some Scattered Thoughts On Wages

First Scattered Thought: How Wages Are Set
According to Ludwig von Mises, wages on the free market are basically a bidding process between the employer and the employee. Regarding the method for the setting of wage rates, Mises wrote as follows:
The upper limit of [the employer's] bidding is determined by anticipation of the price he can obtain for the increment in salable goods he expects from the employment of the worker concerned. The lower limit is determined by the bids of competing entrepreneurs who themselves are guided by analogous considerations. It is this that economists have in mind in asserting that the height of wage rates for each kind of labor is determined by its marginal productivity. Another way to express the same truth is to say that wage rates are determined by the supply of labor and of material factors of production on the one hand and by the anticipated future prices of the consumers' goods.* 
This is as concise an explanation as can possibly be provided, without weighing things down with economics jargon. Still, the wording of it reflects the clunkiness of a highly intellectual and academic author writing in a second language. So, allow me in my vanity to attempt a rephrasing of Mises' words:
A person's wage is a value between two extremes. The upper extreme is the maximum value your employer imagines you can contribute to your company in your current role. The lower extreme is the lowest possible wage your employer could conceivably get away with paying someone similar to you for that same role. The more people like you there are looking for jobs like yours, the more likely it is that one of them will be willing to work for less than your wage. The higher the price your company's product fetches on the retail market, the greater the maximum value of workers like you.
To some of us, it may seem pedantic or condescending to spell it out like this. Nonetheless, it is important to understand what exactly we are discussing when we have "national conversations" on wage rates generally, and mandatory minimum wage rates in particular.

Second Scattered Thought: Why Raising Workers' Pay Won't Work
The perspectives of many so-called "progressives" reflects a basic ignorance of business management when it comes to the wage issue. For example, faithful Stationary Waves reader CH (who may object to my calling him a progressive, despite the fact that this is what he is as a matter of revealed ideology) argues that one of the principle reasons the poor are poor is that "the rich" (here understood to mean employers) won't raise their wages.

This is a superficially convincing argument if we keep in mind that employers are more likely to coincide with demographics we may term "rich" and (non-employer) employees are more likely to coincide with demographics we would not term "rich.**" Therefore, the reasoning goes that the rich are rich because they dole out all the work; the poor are poor, on the other hand, because they are in no position to do so***.

Note that all such reasoning ignores the practical considerations of operating a business. Let's assume that you operate a fast food restaurant, and you decide to commit to paying your employees a livable salary of, say, $35,000 per year. Let us further assume that it requires approximately twenty such employees to operate the restaurant. The labor costs alone of operating such a restaurant are $700,000 per year. Now, according to chacha.com, the approximate price of a McDonald's Quarter-Pounder is $3 apiece. If we accept this as the market price for a fast food hamburger, then your restaurant must sell 233,334 hamburgers per year to cover labor costs alone. This corresponds to selling 640 hamburgers per day. (By comparison, the average US McDonald's franchise sells about 328 hamburgers per day.) If we assume that your restaurant operates from 10am to midnight, fourteen hours per day, then this number corresponds to selling 46 hamburgers per hour.

Please take the time to consider that this means if your restaurant goes for more than a sum total of fourteen minutes during any individual hour of operation (for every hour of the year, assuming you are open all 365 days of the year) without selling a hamburger, then you have lost money - and that takes into account only labor costs. This says nothing about the money you spend on the actual hamburger ingredients, nor the grill, nor the utensils, nor the building and its cost of utilities and maintenance. And it goes without saying that you still haven't collected a profit.

Of course, their is an easy solution to this problem. You can still compete with McDonald's by approximately doubling the price of your hamburgers, to $6 apiece. Now you only have to sell about the same number of hamburgers as they do, and your twenty employees can draw "livable" salaries. There remains only one problem...

Who on Earth is going to spend $6 for Quarter-Pounder? (That's $6 without fries, without a beverage, just the burger alone.) I have certainly spent $6 on a hamburger before. I've spent $15 on a hamburger before. But it wasn't at a fast food restaurant, it was at a nice, sit-down restaurant with a pretty waitress and micro-brews on tap, and romantic lighting. I had to wait a good 20-30 minutes before it was ready, and it was a drastically different experience. My hamburger was a prepared by a chef, not a teenager.

Interestingly, $35,000 per year is the approximate starting salary of a chef in America.

Third Scattered Thought: A Response To The Progressive's Anticipated Response
Naturally, progressives will have two things to say about what I've described above.

The first thing they'll say is that they don't expect McDonald's to start paying its employees $35,000 per year, they just expect McDonald's to pay them more than minimum wage. Well, on average, they do. The minimum wage is $7.25, and the average employee's hourly wage is about $7.80 for the burger-flippers. But if this still strikes you as being unreasonably low, then how does $17 per hour sound? Better? $17 per hour is more than $35,000 per year.

Of course, none of this has anything to do with the initial complaint I attributed to CH above, namely that the poor are poor because the rich won't pay them more. In other words, poor people aren't poor because they're flipping burgers, but rather because the rich should pay them as much as $16 per hour even if they are merely flipping burgers... which still corresponds to an annual income that is far from rich. So now we are paying McDonald's employees as though they are chefs, and they still have no hope of being rich.

That's important, but I'll get back to it in a moment. For now, let us simply keep in mind that most of us think drawing a sous chef's salary at McDonald's is definitely excessive for the fast food work.

The second thing progressives will have to say about my fast food example is that none of them mind paying extra for food if they know it's going to "support" a business model that includes livable employee wages. Neither do I mind if they pay extra for that food at those restaurants. But minimum wage discussions have nothing to do with where progressives choose to spend their disposable incomes and everything to do with forcing those who make different choices to align with the progressive choice.

That is also important, but I'll get back to it in a moment. For now, let us simply acknowledge that few progressives spend much of their money at McDonald's. Instead, they spend their money in trendy local restaurants that employ chefs are the market wage for chef work, and are enthusiastic and vocal supporters of socially responsible, local businesses.

From the above, we have learned three things about progressive attitudes on wages:

  1. Paying low-skill employees wages that correspond to high-skill employment is an objectionable concept even to progressives. When this is pointed out, they will quickly move to say that they "just" want low-skill employees to make "more." They will probably invoke some word like "balance" or "moderation."
  2. Raising wages to levels that strike progressives as being more reasonable (like $35,000) still fails to make any low-skill laborer rich.
  3. Progressives are not frequenting very many of the businesses that employ low-skill labor and sell goods and services for low-skill prices.

Fourth Scattered Thought: Getting Back To The Things I Said Were Important
Now let's return to the two points I made above: First, that raising low wages fails to make anyone rich; and second, that no one who believes in increasing wage rates for the poor shops at the relevant businesses anyway.

Take the time to understand the implication of these two points. The first suggests that progressives' goal is not really to enrich anyone, but rather to increase their salaries to a level that strikes them as adequate. The second suggests that none of the business models for which wage-increase discussions are had appeal to progressives in the first place.

The implication is clear. Progressives are less interested in enriching the poor than they are in preventing the rich from being rich. To them, it is the pursuit of wealth that is despicable, not the fact that low-skill employees aren't rich. The solution to the problem, in the progressive view, is not to increase society's wealth, but to decrease society's desire for it. Their chosen methodology is to devise punishments on the wealthy and regulatory regimes that discourage wealth-generation.

See, what progressives really want is for everyone to just stop craving Quarter-Pounders and instead go spend their money in the local fair trade, organic coffee shop. None of us will be rich, but that's not really the point, is it? The point is that the barista can afford to serve drinks all day and still pursue her folk music career. The point is that if we weren't producing so darn many hamburgers, none of us would be victims of the obesity epidemic. And while we're talking about it, why on Earth is anyone eating meat anyway? Meat is murder.

Final Scattered Thought: What It All Means
Considering all this, I am left with the impression that the progressive vision of the world is altogether different from everyone else's vision of the world, and this difference forms the basis of the political climate in which we find ourselves today.

Some of us want to make money for ourselves, to afford nice things and enjoy a better quality of life. Other people, meanwhile, believe that a certain kind of lifestyle is what provides us with a better quality of life. So, whereas I might work hard all day, pull a big paycheck, and go spend it on nice things around the house, comfortable and nice-looking clothing, a college education for my children, and maybe a nice estate for my progeny when I finally go - so that they, too can enjoy nice things and big houses and swimming pools - a progressive on the other hand might find a job that satisfies their social conscience, in a neighborhood that provides them with plenty of micro-brewed beer and organic coffee beans, where there are artisan shops and modern art museums nearby (within biking distance, of course!), and anything beyond that is simply excessive.

The crux of the matter here is that I honestly don't care if progressives want that kind of lifestyle. They are free to pursue it, and I don't look down on them for wanting it. After all, this is what makes them happy, and every human being deserves to be deeply and profoundly happy.

So, why do I get the impression that progressives don't feel the same way about the rich and their lifestyle?

___________________________
* Mises, Ludwig von, Human Actionhttp://mises.org/humanaction/chap21sec3.asp

** I must point out here that nobody really thinks that all employees are poor. Most of us are not. It goes without saying - and is a far less important point - that not all rich people are employers.

*** Yet, isn't it interesting that whenever a poor person finds himself in such a position, he awards himself the highest salary, strips the rich of their money and power, and condemns society at large to live in poverty? Cf. Hugo Chavez, Fidel Castro, Robert Mugabe, Imelda Marco, and so on...