by Locker Room contributor
(Hat tip: Craig Depken at DivisionofLabour.com)
Former NC State teacher of computer science Marshall Brain and founder of HowStuffWorks.com answers the question, “What if we doubled the minimum wage?” To those such as Depken and myself, Brain sounds very much the way one would imagine, if roles were reversed, an economist might sound propounding “knowledgeably” about computer science. For example:
Could the executives manage to survive on $2 million rather than $4 million? Yes, they could. They could also survive on $1 million a year, or $500,000. Their pay is completely arbitrary. It has risen by a factor on 10 in the last 20 years — In 1980, these same executives would have been making $400,000 instead of $4 million.
Completely arbitrary? If it were completely arbitrary, some would get paid in livestock. An economist would see this phenomenon, assume that business owners in general know their business, and then look for explanations for why this increase has happened. They would examine issues concerning supply and demand of executives, the effects of and changes in government regulation and taxation, the costs and benefits of effective management and how they might have changed, etc., etc. Basically, the economist would approach the question of rising executive pay as a phenomenon to be examined ? the polemicist, as something to be denounced.
But what, pray tell, does this discussion of executive pay have to do with the question about minimum wage? Brain gets closer to his point:
Wal-Mart is the largest employer in the United States and provides a real-world example of the situation. Wal-Mart has 1.3 million “associates”. A large portion of these associates are paid hourly, at close to minimum wage. … For the sake of this discussion, assume that Wal-Mart pays one million of its rank and file associates $7.50 an hour right now. … [But] by doubling the amount of money paid per hour to employees, Wal-Mart can give its associates jobs that pay $12/hour, provide health benefits and offer 2 weeks of vacation time every year. Would this cripple the company?
That’s a question Brain assumes Wal-Mart executives have never asked. Apparently, to assume that executive pay is arbitrary, one also has to assume that consent to employment by Wal-Mart is forced. An economist would assume that an associate taking a job at Wal-Mart has weighed the costs of employment with the benefits of it and found a net positive for himself in the transaction. Wal-Mart will have done the same. More on that presently; but first, this excellent quotation:
Let’s split the difference. Wal-Mart raises its prices by 3.5 percent, and executive pay and perks are reduced by $2 billion. That means that the price of a can of Chunky Soup at Wal-Mart goes from $1.49 per can to $1.54 per can. Would anyone really care? Several major grocery store chains routinely charge $1.99 or more for a can of Chunky Soup and no one appears to care at all.
What do you mean, they don’t care? Would Wal-Mart be Wal-Mart if people didn’t care that they offered lower prices on soup (and by extension, other goods)? Brain doesn’t even realize that Wal-Mart has established itself as a low-cost provider of goods; were it to compromise on that just to arbitrarily (in the true sense of the word) double its employment packages, then that indeed would “cripple the company.”
It probably bears stating that a crippled Wal-Mart could no longer be the “largest employer in the United States.” That’s a lot of people who’d be unemployed just to suit Brain’s sensibilities as to the kind of wages they should have been earning.
That brings me to the problem with the minimum wage. It is an arbitrary price floor imposed by the government because some people believe that others cannot make informed choices for themselves. The only people that a doubled Wal-Mart associate’s pay would help would be those few left.
Under the mutually beneficial arrangement described above, both Wal-Mart and the associate finds greater benefits than costs to his employment. This is an equilibrium that would be greatly upset by doubling the wages. The employee would be thrilled, of course ? but not Wal-Mart. Similarly, if you halved the associate’s pay, Wal-Mart would be happier with the arrangement, but not the employee. In either scenario, the likelihood of employment falls dramatically.
When the government arbitrarily ups the minimum wage on Wal-Mart et al., minimum-wage employees will benefit ? but only those who companies find still beneficial to them at the higher wage rate. The rest will be out of a job. But at least those people of Brain’s sensibilities who really care about the working poor will be happy.