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Getting Around to Responding to the Pro-Minimum Wage Pundits

June 6, 2013

How have wages gone up in the United States historically? Are labor unions and government the heroes of the story? Not even close.

First lets not presume to know what certain terms mean, lets get into the meaning of certain terms so we can really understand what’s going on here and be on the same page. Lets start with the term real wages which refers to how much a given dollar amount can buy; a $10 nominal wage in 1907 was a much higher real wage than was a $10 nominal wage in 2007. Lets now look at the term capital, which refers to forklifts or whatever equipment that make labor more productive. For example, a forklift makes it possible for a worker to move and stack far more pallets than before, and to reach heights that would have been impossible with his bare hands. In turn, the amount of goods the companies in these economies can produce rises. This is how wealth is created: we can produce more with the same or lesser amount of labor.

So as a result of investing in capital, firms can now produce many times more goods than before and at a considerably lower cost. These lower costs get passed on to consumers in the form of lower prices, better quality merchandise or a combination of both. The ordinary person’s standard of living increases, therefore, not because government takes from the rich to give to him or because labor unions “struggle” with employers to win him concessions, but because business firms can invest in machinery that makes it possible for more and more goods to be produced with fewer and fewer hands, thereby increasing the overall material goods available and rendering them less expensive over a period of time.

One of the problems why I believe that no matter how much we work these days it doesn’t seem to pay off economically is because cheap credit has raised prices on such goods such as cars and homes. It took the average North American two years to earn money to buy a car in 1908. I have to disagree with Tom DiLorenzo who cites that today to purchase a Ford Tauras would take 8 months of labor. I would say yes if that Taurus is a used car. However, for brand new cars these days you are talking about a persons annual salary and I believe this is thanks to the facilitation of purchasing cars and homes on credit which has raised the prices of these goods over time.

So I would say the problem is not that government needs to raise the minimum wage but that we as a society need to run away from easy credit. We also need to run away from the idea that it is the job of government to redistribute wealth. So we need to encourage the elimination of credit as an option to consumer purchases except in some emergencies and we need to understand and encourage the increase in the productivity of labor by investing the capital necessary to increase the output and thus increasing the ratio of consumers’ goods to the supply of labor which will make prices lower relative to wage rates and thereby raise real wages. The more those profits are taxed away, however, the less this beneficial process is able to occur. Taxes on business and capital are foolish and counterproductive just like taxing worker’s productivity via the income tax. Capital gains taxes hamper business investment, which is precisely what raises our standard of living. When raising the minimum wage, you are asking government to intervene in the economy which never works and you are also asking government to take from someone or somewhere some capital that will now be used to raise wages across the board while businesses suffer and people continue to overspend on credit which will require them to have to demand for a higher minimum wage again and again.

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From → Economics

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