An economic view of minimum wage

So before anybody starts in on the emotional side of the coin, this is purely a set of thoughts around what minimum wage should mean to any of us, and why the economics of it may make sense. It is not an argument for one value or another, though I do believe it should be higher, for the reasons you'll see below. It is not a knock against millions of employers who pay that rate today. Many will not have consider the implications, nor should they have. Frankly, this is an argument that any free market economist will likely be familiar with and hopefully agree with. If not, I'm sure somebody at some point will enlighten me why it isn't quite as I put it.

At the heart of minimum wage is a singular concept that I think is incredibly important. Minimum wage is intended to be the wage necessary for the individual performing the work to live upon. Consider minimum wage to be the equivalent of the electricity you run a machine. It's a cost upon the business, because of the employment of humans, necessary for that human to be able to continue to perform the work in question. Laying aside both the morality and case where you would consider it alright for us to slowly over time work the individual to death, such as what we see in the most horrible of slave labor scenarios, let us assume that the individual is sustained not simply at a minimal sustenance level but at a level necessary to provide adequate food, shelter and other amenities that we as a society believe are necessary. Furthermore, let us assume that in order for the individual to be productive, the minimum wage need also cover the same costs for the dependents of the bread winner or winners. In this way we would add up all of the costs of the standard family and then divide by a standard that our society has determined to be 'appropriate' or 'fair' working hours for a years period.

Note that within all of these I haven't laid out a specific set of items that should be considered as minimum constraints but be assured that my assumptions include things such as clothing, adequate schooling, transportation costs, etc. In this way a persons wages reflect the true COST of the individual working at the task. This is then reflected into the price of the product or service being produced and we have, what most economists would consider to be a fair lower bound price for the product or service, reflected into the economic environment. Further more any such individuals would have neither need nor reason to seek out additional assistance, such as governmental assistance. Notice that point, in this methodology the need for governmental assistance is nearly non existent. Only those individuals incapable of working find that they need to have such benefits, or such benefits may offset individual families with a greater number of dependents.

But what if that minimum wage was not set at that level, as I believe is the case in the United States today? What does that imply? Frankly it implies that companies and employers are being subsidized by other factors. We have allowed companies to create hidden costs to products and allowed them to subsidize their products on a variety of means. The full costs of the individual are not ultimately being reflected into the cost of the product. Those costs are instead absorbed by society or the individual. One method is that the individual works hours in excess of what society assumes would be necessary. Now this is true even if the minimum wage is set correctly but the individual has a number of dependents in excess of the assumed average. But those are things that can be adjusted for in other ways as I mentioned above with regards to governmental benefits(probably the easiest being tax adjustments).

A classic example of this is the high school or even college worker. Many of them are dependents of and find their basic needs provided for by parents and guardians that are in effect subsidizing the business for which the student or child works. Imagine if that was the way employment worked for most of us, if our parents went to our employer and said, "It is so important that my child work for you in this job that I will pay part of his wages for you." Yet in effect that is what is happening in today's economy.

What does this ultimately mean? That the supply and demand curves, that classic element of economics, gets bent due to the fact that the supply costs are artificially lowered. Yet the costs of those products being produced hasn't gone away. The costs still exist, they are simply being added across many other products, bending those supply and demand curves in the opposite direction by increasing the cost of those products.

Now while the math might not be obvious or that simplistic in the real world it does work out. By depending upon labor priced below the actual minimal cost of living companies are creating products and services not in line with what would be created in a true free market because they have essentially managed to create hidden costs or benefit from the implicit hidden costs of the labor market created by false assumptions that the current minimum wage covers a minimum standard of living.

This is fundamentally my argument for why the way we do minimum wage today, basing it upon politicians desire to support one position or the other, is dangerous to the economy. By not basing the minimum wage upon a price calculation of a set of features, much like we do with the consumer price index, we instead create problems in the economic balance of our markets. This leads, much like we see in other sectors with an overabundance of investment, to over production in some areas and under production in others. The fact is that the minimum wage impacts a major portion of the economy, while the number of minimum wage works is only in the single digit millions, there are tens of millions earning near that value, and whose wages are influenced by the minimum wage.

This argument though runs into the issues of folks talking about small businesses that depend on those wage levels to be successful. The heartless truth though is that if the wage somebody is making isn't enough for them to sustain themselves and their family then that job frankly isn't one that we as society should want done unless we are willing to subsidize it, effectively making it a livable wage. But that is something that should be done explicitly for the job, rather than implicitly by allowing all employers to leverage something we have laid out.

Some of you may be looking at what I've said and saying that the free market would solve these problems if they truly existed. After all wouldn't workers simply not work if the wages were not sufficient for a living wage? To those people I would note that pure economics assumes rational individuals with perfect information and equal power. That is not the case for workers and employers. In most cases employers hold significantly more power than the employees do with regards to the opportunities for employment. But even that is truly trumped by one significantly important factor. We have a minimum wage. That psychological element creates a powerful belief that it encompasses all of the items already covered. It is the ultimate play of behavioral psychology. The anchoring effect of that minimum wage, though it has no basis in the actual cost of living, provides an informational bias that benefits employers.

By contrast if minimum wage was set exceptionally high it would bias standards in favor of employees. Unlikely as it is to happen we actually do see some degree of this effect in the engineering fields, particularly computer science. Here minimum wage is far from the assumption of standard for employees and instead black swans encompassing individual tech leaders who went from high school to billionaire set the standard creating instead a bias that is generally helped the engineers pull wages up, or at least to increase expectations of wages and help them overcome some of the natural informational gaps that exist between employer and employee.  But that is probably a topic for another time.

To close before I start trying to fit to many other thoughts and ideas into this, a true minimum wage would be based on actually creating an index of consumer costs associated with the current expectations of what we as a society believe is a minimum living condition. From that index it would be appropriate to set a minimum wage and rigorously enforce it across all businesses. It would ultimately result in major disruptions to the industries we have in the United States today but likely would bring us to a better balance in the workplace and should also ultimately allow us to reduce the cost of social programs to us. If you want to reduce government and social programs, ultimately you want to create a minimum wage based not on politics but on simple math.

I hope others will consider that to be the case and perhaps we can have a non-partisan conversation over why this approach will be better both morally but economically.