The minimum wage is about work, not workers

“A market economy in which no human being will be condemned to do the work that can be done by a machine.”

“A market economy in which no human being will be condemned to do the work that can be done by a machine.”

- Roberto Unger, speaking at the RSA, Nov. 13, 2013 (YouTube, at 23:00)

The discussion about the minimum wage – how high it should be, or whether it should exist at all – typically revolves around workers. Raise the minimum wage to give workers a decent standard of living, or lower it to allow companies to create more jobs. In times when unemployment is high and wages have failed to keep pace with the rise in living costs, both are noble goals, but both approaches focus on workers: either employ more of them, or provide better pay for those already employed.

Lately, even free-market advocates such as The Economist have endorsed a rise in the minimum wage, citing fast-growing income disparities as well as the cost and risk inherent in changing jobs (which enables employers “to set pay below its market-clearing rate”). And the CBI has recently called for wages to rise in line with economic recovery.

Companies are permitted to buy a person’s time without paying that person the full costs required to live.

It’s also worth pointing out that many of those who earn the minimum wage also receive government benefits (such as housing/council tax benefits or working tax credits). Unless we now find quaint the idea that full-time work should allow a person to sufficiently fund their own existence,[1] the government is effectively subsidising employment costs. Companies are permitted to buy a person’s time without paying that person the full costs required to live.

Detractors would quickly point out that the minimum wage is full of unintended negative consequences. Most obviously, there is the fear that employers who cannot afford to pay a higher minimum wage would eliminate jobs, or that there would be a greater impetus to outsource, combine, or mechanise roles, or that consumer prices would rise and further damage the purchasing power of the working poor. These arguments all have counter-arguments, but I won’t get into them here (see here for a good discussion of a high-employment, low-wage economy).

For the sake of argument (most evidence does not support this), let’s assume even a modest rise in the minimum wage would have an adverse effect on employment rates. Why are we trying to protect jobs that are already so precarious, so in danger of becoming mechanised or eliminated that a small rise in labour cost per hour—perhaps just to the point of a living wage—would make them untenable? By keeping the minimum wage low, or even eliminating it, we’re just protecting the kind of work that has the littlest value to the employer (and, presumably, to the worker). Perhaps the jobs that would disappear if the wage floor were to rise are precisely those jobs that keep workers locked into a cycle of low pay, partially tied to public assistance, and without any substantial career or skills development. And many of these jobs will be eliminated eventually anyway.

If a higher minimum wage makes labour more expensive, companies will have to come up with roles that create more value.

Raising the minimum wage would benefit more than just workers. By demanding that employers pay more, what we’re really demanding is that they develop roles with sufficiently high productivity to justify the expense. In other words, if a higher minimum wage makes labour more expensive, companies will have to come up with roles that create more value. The minimum wage discourages business innovation by allowing low-cost, low-value work to flourish.

This may well mean automating rote tasks, but the upshot could be quite positive: a greater emphasis on skills development (either within a company or in education), innovation in how companies best utilise human talent, and drawing greater engagement out of employees by offering tasks that are more varied and stimulating than those that could be done by a machine. Indeed, the introduction of automated systems, which companies have thus far avoided because labour is so cheap, could itself accelerate company growth to the point that they are more globally competitive and can afford higher wages.

Perhaps the rise of computer systems has made us think that the best workforce is that which looks most like well-oiled machine. But we as people aren’t very good machine parts: we get sick, bored, disillusioned – and we generally like the feeling of accomplishing things. This may be one reason why productivity remains stuck in a rut despite the economic recovery. Bob Seger said it best…

[1] Apparently Milton Friedman did just that, according to The Economist: “He saw topping up the incomes of the working poor with public subsidies as a far more sensible means of alleviating poverty.”