Friday, August 8, 2014

Why I Reject the Minimum Wage

*Unfortunately, politics and economics are extremely linked. I HATE discussing about politics, which is why I have a blog, where I shall just dictate my own views. If I do not appreciate your comments, I will delete them. This is akin to having a discussion where one person puts their fingers in their ears and go LA-LA-LA-LA. That would be me. We all form our own personal beliefs on religion and politics, and I believe it is the same for economics.

There are 2 sides to this debate, but I choose to frame it this way: the humanitarian view VS the business owner view.


From the humanitarian viewpoint, they argue that people that are employed and working full-time at a job should be able to earn enough income to cover their basic expenses. They believe that there is a fixed dollar amount of basic expenses that an employed person in their society is required to spend, and hence their full-time income should cover these expenses.

Sounds like a simple enough argument, right? If everyone works, they ought to earn enough money to provide for themselves!


Now, comes in the business owner. In a free market with no minimum wage, employees compete among themselves for jobs, and offer their time and services in exchange for a salary. Free market competition ensures that the labour supply and demand meets roughly in the same ballpark figure. Slight standard deviations here and there, but it is roughly the same. As long as the labour that the employee provides and its eventual output costs are cheaper than any technological replacement, these workers have a safe job.

This technological replacement can come in many forms. Some are paradigm changers, others offer mere upgrades to the current process. The business owner does not care. To the business owner, as long as there is ANY alternative which offers the same output at lower cost, he will make that switch. This often come in the form of replacing manual human labour with machines or robots.

The decision for lower costs is for accountability to shareholders and adding value to customers, which justifies the economic relevance of such a business. It is simple logic: We don't invest in businesses that are not profitable, and we don't patronize businesses that do not give us value.

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As an Austrian supporter, I believe that the free market is usually right. It isn't always very accurate - the equilibrium changes as the world changes - but it makes sense.

Everyone that gets off their ass, goes to work every day and slog it out ought to earn a fair salary. Usually this means an income large enough to provide them with enough to get by. Self-sustainability. Fantastic. I love it.

However, if their job skills are so low and labour costs increases, how is it logical or feasible to remain hiring such a person? Continuing to hire such people instead of replacing them with machines is thinking with too much heart, and not enough head. Costs of business goes up and/or selling price increases. The business owners are slowly being squeezed out of profitability, or the consumer now has to deal with increasing prices for the same good or service. Usually it is a combination of both.

Some might argue, well businesses are so profitable anyway, can't they just suffer a hit in their profitability once? It will never be once. Now the rules of entire system has been changed. One wage hike will eventually lead to another. Either the business collapses and lays off everyone because it is no longer profitable, or again, the consumers are stuck with more expensive goods and services - the exact same ones offered before the wage hike, only with a price tag difference.


Having a minimum wage guarantees nothing. Yes, low skilled workers might earn more money - but only the ones that still have a job. Those that survived the restructuring and technology replacements might still have a job which pays slightly more, but much more people will now be permanently pushed out of a job. Of course, this is assuming that everyone rationally looks for the highest paying job that they can get with respect to the skills they have.

An example exception of this is the once famous PhD taxi driver in Singapore. It is not uncommon to hear stories of bank or corporate executives that have switched to a less stressful job. Yes, they have the skills for a higher job, but the other intangible benefits have pushed them to decide on the less stressful job. If a new technology replaces their current job, they still have the skills to be employed, likely from the same industry that they left. They have options, which makes them different. However, I don't suspect that this is not the norm.

The people who will be left jobless are the people with skills that no longer have meaningful value in the marketplace. Once technological costs becomes cheaper than the manual cost, that job will eventually disappear. A minimum wage will increase unemployment the moment machine replacements are cheaper than the labour market rate.


Ask yourself this: Would you rather order your fast food meal from a machine and pay $5, or would you rather continue the traditional way and pay $10 instead? This isn't a hypothetical situation, this is happening. It might only be going mainstream now, but when I was in Europe a few years back, I saw a few of these machines already.

Sometimes, technological costs does not need to become cheaper to be feasible, other costs can be increasing instead. This is the same reason why fracking is used in the oil industry today. Decades ago, it was way too costly to justify that method. With oil at $100 a barrel, it makes sense now. Decades ago, it was way too costly to justify replacing a human with a machine. With the cost of labour going up, does it make sense now?

To those that still support the notion of a minimum wage, you must be able to defend why it is justified for a person to be paid more than what is the fair value of labour. Not just low skilled workers, but any worker. Low skilled workers are just always in the limelight because they are fighting at the margins. Realistically, becoming obsolete by technology can happen to anyone, in any job. CEOs that are fighting against the minimum wage go on TV and say, "Why not pay everyone $1 million then?". They get dismissed by the TV talking heads that their hypothetical question is silly and insane. It isn't. It is the exact same principal, multiplied and exaggerated to show the logical flaw. Why have minimum wage at $10? Why not $50? Why not a million? We would all be millionaires then. When that happens, I'm going to dress like this guy.


My advice, regardless of minimum wage or not? Stay relevant and make sure that the job you do requires a unique skill, and continually improve your mastery of that skill. If you don't have a skill that has market value, I would recommend starting to pick one up.

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