Reason for a New Age

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    What you will expect to see here are discussions of politics and tangentially economics. This blog will do its best to present a rational look at the world of today, how the modern world came into place, and the issues that are currently being discussed in the public realm.
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The Minimum Wage

Posted by publius2point0 on 2010/02/20

For the sake of clarity, let’s say that the philosophy behind the minimum wage runs as such: A person who can find labor, works 40 hours a week, and produces something that sells well enough to maintain a solvent company, is being treated unfairly by that company if he is not making at least enough money to support himself.

This does seem fair enough. Our fellow is working at least as hard as anyone else. He’s not lazy, and he’s not working to create something that no one wants. If the company can’t afford to pay him enough for him to survive and still stay in business, that business either isn’t creating anything of sufficient value as to not be a drain on society, or the money is being horded at the center.

For instance, let’s say that we have a company which manages farms. It has ten employees (including the boss), but only produces 5 food units per day–less than is needed to support even the company’s employees. If each employee earns only 0.5 food units, he’ll starve to death. If the boss of the company pays himself 1 food unit, paying the others all ~0.45 food units, they’ll still starve, while he at least lives. In either case, the government needs to step in and support the workers, which means they must force others to trade (i.e. be taxed) against their own survival, for something which doesn’t produce anything of sufficient value to support the survival of anyone. That’s just a drain on the economy.

But say that the company does produce enough food to be worthwhile, say 10 food units exactly. If each employee makes exactly 1 food unit, the company is not a drain on society and so can be considered to be free to do whatever it wishes. If the boss decides that he deserves to make more than his employees, however, he must necessarily make them go below the below the rate of survival. Here we are left with a company which can be self-sustaining, but is choosing not to be, even though all of its employees (including the boss) are guilty of choosing a profession that is just on the edge of survival. Assuming that the government will indeed step in, using taxes to keep those workers alive, this company is still creating a drain on society by forcing the government to hire more tax collectors or to have more people manage registering and tracking those in the welfare net, all for the sake of one man who wants to run a business that can barely survive, but isn’t willing to take the personal sacrifice to keep his business afloat naturally.

But of course whether something makes sense logically and works perfectly on paper is of no consequence if it is not operating as intended in the real world.

Mankind is Shortsighted

There is one singular issue with the minimum wage, which is that human are shortsighted (on average). Past scales of the next year or so, we really aren’t very good at planning. Most likely it simply wasn’t an ability that was useful when we were still swinging on vines, and spending time thinking about it simply distracted from immediate worries in a negative and dangerous way. Regardless of the reason, it’s almost certainly so.

The minimum wage varies by state, some not even having it, but a good modern day average would be the Federal minimum wage at $7.25 per hour.

Let’s take our ideal cheap liver, named Richard, who works for minimum wage. He is willing to live with a roommate or 5, he uses the bus, he goes without TV, radio, books, or anything beyond the exact minimum he needs to survive. We’ll say that he finds an apartment for $300 a month, he has a $50 a month bus pass, purchases $250 worth of food, and has $100 in utilities and other minor fees. Theoretically, one can survive on $700 a month. At minimum wage, he will earn about ($7.25 * 40 * 52 / 12 =) $1256.67 per month, but minus taxes we’ll say that it’s more around ($1256.67 * 0.65 =) $816.84. This is perfectly enough to survive and still have extra money for emergencies or TV or whatever.

But, remember our salary needs to cover the basic expenses of survival for our retirement and our childhood as well–or we’ll have been a drain on society. The question isn’t whether we can survive from age 18 to 65, while we’re working, but whether we can survive from age 0 to 78.

With that extra $180 a month, working for the 48 years of age 18 through 65, Richard will be able to save up ($116.84 * 12 * 48 =) $67,299.84. His survival expenses for his childhood plus retirement is ($700 * 12 * (78 – 48) =) $252,000, i.e. not enough.

For a 78 year life, the national average, at $700 a month, we must earn a total of ($700 * 12 * 78 =) $655,200. With only 48 years to earn this sum during, that becomes a minimum hourly wage of ($655,200 / 48 / 52 /40 /0.65 =) $10.10. If we didn’t charge him taxes, of course, that 0.65 disappears from our calculation, and instead we only need a minimum wage of $6.56.

But, actually, we haven’t included medical costs. The average American costs around $6000 a year in health bills (mostly incurred at the beginning or end of our lives). For a 78 year life, this adds an extra $468,000. Doing that math over, minus taxes, Richard needs to earn ($1,123,200 / 48 / 52 /40 =) $11.25 an hour. We’ll assume that the taxed portion goes towards paying that $6000 a year health value plus his childhood and retirement needs.

Apparently, the US average minimum wage is $4 too low to accomplish its philosophical purpose. Many many companies are either acting as a drain on society, or are paying their employees an unfairly low value.

The question becomes, why is the US government requiring this random value of $7.25?

The most likely answer is that they are simply pegging the minimum wage to what the market minimum already was.

You see, you don’t really need to establish a minimum wage if people are already looking out for their own survival. If a company is only offering me half as much money as I need to survive, I don’t go to work for that company. Simply human sanity, theoretically, results in the same result as the law. And so, there will already be a market minimum minimum wage, based on what people think they need.

The problem is, is that most people simply look at their monthly income and monthly expenses, and finance based on that. They don’t plan ahead for their children’s birth and schooling, and they don’t plan ahead to their retirement. This means that they accept enough to survive in the moment, and subsequently, the market minimum wage gets set to that value. This leaves the government in a quandary. They can either simply make sure that the market minimum is at least the true minimum, to save people who don’t have basic human sanity, or they can establish a true minimum wage $4 higher per hour than the market minimum, possibly putting significant percentages of companies out of business as well as raising the bottom bar for wages that must be paid by small, start-up businesses, before they become self-sustaining.

Ignoring the issue of small, start-up businesses, we could say that certainly it would be bad for the government to immediately raise the minimum wage by $4, but it could raise it gradually over the course of several decades. But the problem then becomes that the sort of person who lives on minimum wage is generally not the wisest user of money. Given extra cash, he will most likely squander it, buying excess alcohol, a big speaker system, go to Vegas, etc. He won’t use that money to save up, nor will he invest it in new industries or some other useful pursuit. You can raise his taxes so that he is left with only enough to support himself day-to-day, but then you’re still charging every business $11.25 per hour for their lowliest employees and thus raising the bar on starting a new business.

New, smaller businesses must run near or under the rate of survivability for some time–possibly years. And unfortunately, the idea that the boss makes more than his employees is sufficiently set in society that even if the president of the company is willing to work for minimum wage, if he wants to hire any further managerial staff, he will have to pay them more than that.

Ultimately, by fault of the majority of the nation, you’re stuck supporting people through retirement, through childhood and schooling, regardless that you shouldn’t need to. Trying to avoid having to set up the overhead costs of managing this social net becomes silly. You’re just as well to set up a minimum wage that really is only for day-to-day survival. Any more than that and you are financing lottery tickets and alcohol. But you’re also better off not taxing that person at all. This simply raises their wage to no positive effect.

I suppose you could say that the added value caused by taxation balances out to counter those companies that aren’t making enough money to survive, but personally I’d say that the market can figure that out on its own sufficiently well that hindering small businesses isn’t worth it.

If we only needed to survive from week to week and we weren’t being charged taxes, we only need to make about $700 a month. Just to handle emergencies, we’ll raise that to $750. This would be only ($700 * 12 / 52 / 40 =) $4.04 an hour. I think you can appreciate that this would be a boon to the small business.

You might say that this value would simply be offset onto big business, but the truth is that all taxes eventually come down on those who have the money to spare. If someone isn’t making enough to live, you tax him, give that money straight back, and then tax another person to make up the amount the person is still deficient. If you never taxed the first person to begin with, you only need to tax the richer person at the same value as you did before to afford it.


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