Letter writer: The economics of a living wage

It’s like magic. Mention starvation wages, and a troll will appear wielding his shibboleth — “If wages go up, employment goes down. QED.”

In 1994, Card and Krueger demonstrated that employment rose after the minimum wage was raised in New Jersey. In the quarter-century since, a variety of follow-up studies have come to a variety of conclusions. The important point, though, is that it’s not an open-and-shut case.

The open-and-shut wording seems to be an I-heard-it-in-a-bar simplification of something like “At the margin, ceteris paribus, the incremental cost of labor will equal its incremental value.” The two qualifications — invariably lost in translation — are important.

First, “at the margin.” What happens at the margin — in this case, whether one extra person is hired or not — need bear no relation to what happens overall — how many people are hired in total. High-income folk — like recent Republican candidates for president — face the federal marginal income tax rate of 39.6 percent, and yet neither paid anything like that as their average rate. Indeed one boasted of having paid an overall income tax rate of 0 percent.

Second, “ceteris paribus” — other things being equal. But are they? Consider a thought experiment. Two $10 bills are lying on the sidewalk in Pack Square. One is picked up by someone who works less than 20 hours a week at a starvation wage. She rushes off and spends the money on food for her kids. Spending that $10 generates — because of the multiplier — extra economic activity in the city of (let’s use the International Monetary Fund’s [median] estimate) $6 over three years.

The other is picked up by a member of the downtown gentry who doesn’t really need the extra, puts it in a bank savings account and after three years has accumulated 3 cents in interest. (Once upon a time the bank would have loaned the money out to a business creating new wealth, but nowadays it would go to a property speculator and create only inflation).

So the effect of giving extra money to the poorer person can be 200 times the effect of giving it to the richer one. Things are not equal.

If a business pays living rather than starvation wages, it raises the level of economic activity — which would tend to increase hiring — and reduces the tax levied on us all for subsidized housing and transport, food banks and the like — which would tend to increase economic activity and hence hiring.

Econ 101 describes a free market in terms that make it clear that lasting profits are impossible. And yet all around, we see businesses declaring obscene profits year after year. Clearly, those businesses are not operating in textbook free markets and have found a way to evade competition — perhaps through what Warren Buffet calls a “moat” around their business, perhaps through collusion with their “competitors,” perhaps by the judicious purchase of a politician or two.

A business that buys and sells in nonfree markets, but spouts free market propaganda when dealing with its workers is dealing in hypocrisy. A business that declares a profit while paying its workers so little that they remain a charge on local taxpayers is a fraud. A business that declares a profit and ships it off to Head Office while leaving us to house and feed its workers is worse.

A manager who will not pay her workers enough to feed and house themselves, let alone their families, deserves to be tarred, feathered and drummed out of town.

— Geoff Kemmish
Asheville