Time to Not Raise the Minimum Wage

From Nick Hanauer, guest contributor of Politico: The Pitchforks Are Coming… For Us Plutocrats

Its like he’s telling the elite to reform or else face the improbable consequences. Not too convincing, with no actual data of how a concentration of wealth at the top is bad for the economy. Just leftist idealism, historical anecdotes, and hunches that inequality is bad, but again, no specifics or rigor. But this is not because of laziness by the author; there’s simply scant empirical evidence that shows wealth inequality is bad for the economy.

The lower classes aren’t going to revolt. They have to get to work or they are watching TV.

Furthermore, raising the minimum wage effects employees all the way up chain of command. If you pay the lowest ranking employee more, you probably have to give raises to the other employees as well, or else they may quit. This vastly compounds the expense.

Raising the minimum wage can cause inflation. If wages go up without any increase in productivity, then there are no more goods supplied. How do supply and demand get back in equilibrium? As workers with more wages compete for the same number of goods, they compete by paying more. So prices go up until supply and demand are in equilibrium again. And chances are demand for # of goods is the same as before the wage increase, just at a higher price.

Hanauer alludes to the Marxist fallacy that capitalism is self-limiting, because if too much wealth is concentrated at the top, who is going to buy the stuff, “The most ironic thing about rising inequality is how completely unnecessary and self-defeating it is”

But is it really self-defeating? In a free market, if employers or the elite believe this is true, they would adjust accordingly, because their models would show that paying employees more would lead to more profits. The economy progresses through stochastic evolution, not because someone is whining that wages are not high enough.

As discussed earlier:

The push towards lower wages isn’t motivated by greed. It’s looking after the best interest of shareholders and consumers to keep costs as low as possible. The benefits of cheap labor outweigh the potential externalities. Apple can hire overseas labor because those people will never have enough money to buy an iPhone anyway. The Americans that could have hypothetically been hired by Apple will look elsewhere for work. The savings from outsourcing far exceeds what Apple could earn from the increased purchasing power from US apple employees if some of those employees had slightly more money in their pocket to buy apple products. Boeing, for example, knows that average Americans won’t be buying its planes, so they can outsource with impunity knowing that it won’t hurt demand for their planes. The added profit means Boeing can sell its planes for less money, and this eventually translates into cheaper airline tickets for everyone else or lower freight shipping cots, etc.

Again, the the Marxist fallacy is debunkedin response to an earlier article by Business Insider about how rising consumer spending cannot coexist with falling real income. We show that it can coexist due to globalization and the Pareto principle.

A commenter concurs with Nick Hanauer, writing:

It is still astonishing to me that those on the top of the wealth pyramid don’t see that they are killing their golden goose that generates wealth. If they squeeze their employees until they are dead, they also have no customers. It is in the best interests of the wealthy to keep the working class stable.

Maybe he should email Apple and Microsoft his findings because apparently – despite spending untold sums on accountants, statisticians, and economists – they are leaving billions of dollars of profits on the table. Maybe paying employees $10,000 an hour would boost sales. Cost/benefit analysis be damned!

We discuss in further detail here of why the the ‘increased consumption’ argument doesn’t sway companies to raise wages:

Does raising wages make everyone better off? It could make individuals better off in terms of more purchasing power (assuming they don’t get fired), but from a game theory standpoint, no individual company stands to benefit. Since consumption is spread out, the odds that a specific company will reap the consumption benefits of a wage hike is very small, depending on the business. Mass consumer companies like McDonalds, Starbucks, and Walmart may benefit a little, but others like Boeing won’t. Let’s assume the Burger King employee is paid $10 instead of $8. Even if he takes that $2 and buys a Burger King menu item, it will still cost Burger King more money than if they didn’t give a raise. The only way Burger King can recoup the costs of higher wages without raising prices or cutting back is to hope the purchasing power from other people is enough to offset the costs. Unless other companies give a wage hike this is impossible, but even if others increase wages it may not be enough, because the odds are low due to spending being spread out. This is why the argument that increasing wages benefits consumption is unconvincing to corporations or anyone with common sense. Maybe boosting wages will increase total consumption, but not enough on the firm level to justify the wage hike.

Any student of history knows that’s not the way it happens. Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning

The left seeks crisis to punish the successful and bring the world down to their level. Rather than revolution, the most likely event is that the economy enters a recession and the business cycle ends, but with the fed committed to never raising rates again and economic data such as consumer spending, exports, and profits & earnings keep being blowout, a recession is a remote possibility.

If I had a dollar for every time a doom & gloomer draws an analogy between Nero fiddling as Rome burns and America being in decline…Or every time the left invokes the French Revolution, in an ineffectual act of wishful thinking of how the masses will overtake the political and economic elite, but otherwise are too lazy to change the TV without a remote. But complacency is a feature of America and not a bug.