The Minimum Wage

 In the USA, Joe Biden and the Democrats were trying to sneak in a huge increase of the federal minimum wage to from $7.25 per hour to $15. They were thwarted in the effort by an obscure senate procedure when an official deemed that the measure did not fit into a bill primarily about budgets. Now they will struggle to enact any increase, because they will need ten Republican votes. They only secured seven Republican votes to convict the ringleader of an attempted coup, so it is hard to see them gaining ten votes for very much at all.

 

The minimum wage is one of those policies that has gained credence over the last twenty years or so. Back in the days before the Great Wrong Turning around 1980, the effective floor in wages was set by generally low levels of unemployment and by active trade unions. Reagan and Thatcher destroyed the unions except in a few sectors, and the idea of unemployment has become more complex with the workforce being less defined than before, now including many more women, seniors, part-timers and gig workers.

 

Wage exploitation has always been present. When I was a regional manager for Shell’s petrol station business, we had a model used to make sure our station operators made a living but not an unreasonably good one, and that included a national recommendation for the hourly pay of cashiers. The more marginal stations would come to us for subsidies and we would often happily pay out, since we did not want them to cut costs or services too deeply and we wanted to keep our stations operating.

 

My region included many deprived areas including the valleys of South Wales, and we had several stations collected subsidies. One day I was visiting a station and happened to get into conversation with the cashier, who revealed that she was being paid about a third of our recommended wage. The station operator didn’t receive any subsidy after that, even though I had to stand up to some flak from his highly placed freemason friends.

 

When such practice became more widespread in the 1990’s, the left started advocating for national minimum wages. In the UK, it was one of Tony Blair’s signature initiatives. The right fought them tooth and nail, supported by analysis published in, inter alia, The Economist.

 

My favourite periodical argued, with some merit, that a minimum wage was a market distortion that would create the wrong incentives and ultimately cost jobs. If the differential between the lowest and the median wage in firms became too low, the incentive to work hard and be promoted would be reduced. Marginal firms would be unable to survive with higher wage bills. Firms would turn to automation, or offshoring, accelerating unemployment further. Disaster was predicted.

 

The arguments seem reasonable, but the facts generally proved otherwise. Unemployment did not spike. Automation and offshoring did happen, but the trend did not accelerate and is arguably better for innovation and for consumers anyway. Firms did go under, but new ones took their place. Differentials did not narrow because firms moved their whole wage structures to retain incentives. We should remember that this was the time when managers were awarding themselves 30% rises and stock options galore, so the incentive argument was always rather tenuous.

 

I have always felt the minimum wage argument to be more about human decency than economics. In the nineteenth century people worked for nothing, and we even had slavery. We still have human trafficking and exploitation, but surely our goal should be to reduce this, even if it distorts markets somewhat. Slave owners argued that plantations would become unprofitable without slaves, after all. There is surely a decent minimum that a human should receive for an hour’s honest labour. Unscrupulous employers will always try to squeeze wages if they can. Minimum wages are good things. If firms cannot survive while paying a decent human wage, society should not want those firms anyway: if consumers really do want or need such firms, they will pay more for their goods, as market economics dictates. If a consequence is higher unemployment, it is up to the welfare state to step in.

 

The right often argues in favour of tax credits instead of minimum wages. Under this system, a firm can pay below the minimum wage, and the difference is made up by the state via a sort of negative income tax. This has merit in some circumstances, but the right should listen to their own arguments. Tax credits are much more complex, much more open to fraud or exploitation or missing their intended beneficiaries, they have incentive issues and are a greater market distortion than minimum wages. Forget about it.

 

To their credit, The Economist has shown a recent trend of ditching some of its ideological positions and showing greater humanity, always guided by data. The minimum wage is one example of a policy they now generally support. Others include place-based support for the unemployed and some interventionist housing policies. In my opinion, it is an even better magazine as a result.

 

Now, what about Biden and the USA? I have a few suggestions for an optimal policy. Whether it stands any hope of becoming law is another thing entirely.

 

Firstly, I sympathise with an argument made by Republicans and some Democrats that the minimum wage should vary across the country. A fair wage for a fair hour’s work is universal, but it is easier to live decently on $10 per hour in Kansas than it is in San Francisco. I would propose a lower absolute national minimum wage, but with a mandated supplement based on a rental cost indicator by locality. This might even create a $20 minimum wage in San Francisco.

 

Second, why is the minimum wage not index linked so it rises automatically with inflation or median wages? Social security and some other benefits are index linked. Avoiding index linking is a clever trick by the right. The federal minimum wage has been $7.25 for a long, long time, during which it has progressively become less of a fair recompense for an hour’s labour, even in Kansas.

 

Lastly, let us not forget the egregious exceptions, most notably the minimum wage for tipped employees, which languishes at $2.13 per hour. Isn’t that a national disgrace? It is surely time to eliminate tips as an excuse for employers to treat their staff like chattel. Uber is trying and before the pandemic a few restaurants also joined a campaign to remove tips from the economy, or at least reduce them to a small, genuinely discretionary payment for exceptional service.

 

Highlighting the tipped minimum wage foreshadows the argument we will hear from employers. The pandemic has the restaurant industry on its knees. Demanding a potential tripling of staff wages will destroy it. There will no doubt be an onion handy to induce some tears as this argument is made.

 

Perhaps I would support a transition period of a couple of years for the tipped minimum to be abolished. But I would rather see fewer, well-run, quality restaurants offering fair wages to staff and not bullying customers with 15% tip standards than the inhuman mess we had before the pandemic. A tip should be discretionary. A wage should allow somebody to live with decency and not be exploited by their boss. This is simple humanity.